The Virtual Revolution Is Here

AR/VR is starting to become a major technology trend with massive implications across global industries. Like many ground-breaking technologies, AR/VR has had its share of fits and starts since first being introduced in the 1990s.

New technologies tend to follow an S-curve of adoption, with an early period of low penetration as the technology is improving, followed by a growth take-off phase, where the technology breaks into mainstream adoption. Smartphone adoption was quite low through the early 2000s until the iPhone’s debut in 2007, after which market penetration rose to nearly 50% in a handful of years, according to Goldman Sachs. It was only after costs declined and content/platforms were created that adoption took off. Similar to the history of the smartphone, we believe a similar confluence of factors is happening today that could be the catalyst for an inflection point of major growth for the AR/VR industry:

Cost Declines, Performance Improvements – Technology costs typically decline over time while processing power increases, thanks to economies of scale, manufacturing improvements, and ongoing R&D. TVs, computers, and smartphones have all seen 5-10% annual cost declines over the past decade while simultaneously experiencing increases in the amount of computing power offered, a trend that seems likely to continue. AR/VR technologies typically use several components from the aforementioned industries; display screens, mobile processors, and memory. Research firm Tractica expects AR/VR hardware costs in particular to decline 15% annually for the next several years. As total cost to acquire declines, broad consumer adoption typically increases. At the same time, headset manufacturers are announcing upgraded hardware with 4k and even 8k resolution headsets with enough pixel density to make users forget they are in a virtual world.

Content & Platforms – Many early-stage technologies are hampered by the chicken and the egg syndrome; the success of the ecosystem depends on both the existence of quality content as well as hardware capable of driving the experience. Thankfully AR/VR appears to be overcoming this issue as content markets are ramping up. AR/VR consumer content and applications increased 72% in 2017, reaching $3.2 billion dollars, according to IHS Market. Much of this was made possible by enabling platforms within the ecosystem. Steam’s VR platform has become an important marketplace for VR content, while Apple and Google have both released AR development kits (ARKit and ARCore, respectively) that make it easy for developers to create mobile AR apps. Bank of America Merrill Lynch believes such AR content can drive an additional $8 billion of revenue for Apple.

Growing Adoption – As AR/VR technology costs have declined and capable hardware has become more ubiquitous, consumer adoption has already started to take off. AR apps on the Apple Store have seen 13 million downloads in the first six months since ARkit debuted, according to SensorTower. Numerous brands have already created AR/VR apps or experiences that have helped them connect with consumers, including IKEA, Pepsi, Coca-Cola, Lowe’s, Home Depot, National Geographic, NBA, TOMS, The New York Times, NBC, Marriot, McDonalds, and many more. To learn more about the growing use cases of AR/VR, please view our Insight on the topic here.

Longer-term, we believe AR/VR has the potential to fundamentally change the way society interacts with the digital universe, impacting almost every major industry around the world and hundreds of billions of dollars in revenue, including healthcare, education, and entertainment. Today, the groundwork is being laid for the Virtual Revolution and we believe investors should look torward to the future with anticipation.

To learn more about the AR/VR industry, please read our Primer here.