Charlie Fink and Stephanie Lamas report in Forbes:
Before it can be profitable, VR needs critical mass, compelling content, and affordable, high quality hardware. The market reached $2 billion in 2017, dwarfed by the $16 billion music industry, $39 billion in global box office sales, and $98 billion digital games market. Content development for VR is expensive, so that puts pressure on developers to continue building and improving after release, which is not affordable. Distribution platforms are likely to benefit most as opposed to selling content on an individual basis.
There is a debate around VR’s status as transformative medium or gimmick. Stakeholders use revenue and audience figures to measure success, though this is clearly premature. There are only 43 million global unique VR users in 2017, so the audience for any specific experience is small.
The market will reach just over $2 billion by the end of 2017, dwarfed by the $16 billion music industry, $39 billion in global box office sales, and $98 billion digital games market.
Adoption rates for different media show us that new communication tools follow the same trends as the ones that came before. Their revenue growth follows a predictable pattern: Slow to startup, and then a quick upswing when they hit an inflection point. If we use revenue as a proxy for where we are in the adoption of this medium, we are still clearly in the preliminary gap, although there is a growing number of indications that this will end soon. Venture activity is up. Relatively inexpensive standalone headsets are now coming to market. And the VR ecosystem continues to scale at a remarkable pace.Stephanie Llamas
Sources: Michael Felton, The New York Times; Pew Research Center; Gallup; U.S. Census
So the question isn’t if VR can monetize, but when and how. The answer isn’t straightforward, particularly because how companies earn revenue is not based on a medium, but instead that medium’s content and consumer preferences. Essentially there is no one size fits all method for any platform, and before VR companies can understand how consumers want to spend, they need to cater to how consumers want to consume.Stephanie Llamas
VR Monetization by Type
Free-To-PlayThe first step to knowing how VR should attack the question of monetization is to look at how its predecessors have done the same. Mobile games are an excellent example of how consumers determine which methods content creators will find success. Not only did it take mobile companies roughly half a decade to find the right model, consumers went from accepting the obligation to spend to demanding free content that gave them the choice. This is how free-to-play disrupted media’s traditional revenue models.
Angry Birds is arguably the first smartphone success, catapulting to $200 million in revenue and over 260 million users by 2012, just two years after its launch. During the game’s initial growth, consumers were just beginning to understand how to use smartphones but didn’t know yet how to consume content, let alone how they wanted to pay for it. In its first year, Angry Birds made $1 million from advertising in their free version of the app, but made six times that from paid downloads.
It makes sense that consumers would accept this type of monetizing since consumers have been conditioned by the console and PC gaming industries to pay for a full game up front. The frictionless e-commerce environment greatly lubricated this adoption. All users had to say is “yes” and the App Store seamlessly charged their credit card.A balloon of Red, from Angry Birds, is followed by a Spongebob Squarepants balloon along Central Park West during the Macy's Thanksgiving Day Parade in New York Thursday, Nov. 23, 2017. (AP Photo/Craig Ruttle)
However, upfront spending eventually presented a challenge both to consumers and game developer Rovio since consumers weren’t getting the chance to try content before committing dollars to it (so what if it’s not worth the cost?). And Rovio had a revenue ceiling, only able to monetize a player once per release. Rovio’s games revenue steadily declined over the following years once free-to-play began gaining steam. In 2014, Rovio’s entire catalog of games made roughly $90M. Meanwhile, free-to-play standout Candy Crush Saga made $1 billion that year on in-game spending.
Although free-to-play publishers don’t earn revenue from every player, players who want to customize their experience by, for example, moving through levels quicker, or eliminating ads, can pay to do it. In 2014, Clash of Clans, which remains a top 10 grossing app, only monetized 4.4% of players. But each paid an average of $25.35 a month, far more than consumers are willing to spend upfront for an app. It was the second highest grossing mobile game that year, earning $1.3 billion (more than half the entire VR market in 2017). It still makes roughly $100 million a month, with an accessible audience of roughly 2 billion worldwide smartphone users.
As of November 2017, all of the top 10 grossing mobile games in both the App Store and Google Play are free-to-play games. Free-to-play even dominates on PC with MOBA League of Legends continuing its long standing reign as the highest grossing game worldwide, earning over $2 billion in 2017 alone. The game doesn’t even promise players they can pay to win. In-game currency that players buy with real money (Riot Points) can only be used to purchase items that do not directly impact performance (such as cosmetic items), and only currency earned by playing matches (Influence Points) can be used to buy things like power boosts.FILE - In this Sept. 23, 2014 photo, Robert Morris University Illinois freshman, Alex Chapman, left, is critiqued by assistant coach Jose Carrasco as he practices playing the video game "League of Legends" with their collegiate teammates at their on-campus training facility in Chicago. The small private university is offering hefty scholarships for players of "League of Legends," which has become one of the most popular esports games for organized team competitions nationwide. Experts say 50 U.S. colleges have formed varsity gaming teams that offer at least partial scholarships over the past three years, and many have hired coaches and analysts like other sports teams. (AP Photo/M. Spencer Green, File)
But can free-to-play work for VR? The short answer is, not yet. Publisher CCP is one of the first, and only, companies to use in-game transactions in their VR games as of 2017. However, this wasn’t enough to sustain their popular games on the platform, causing them to shut down two of their studios and refocus development on non-VR PC and mobile games. Because only a small percentage of players spend money on any given free-to-play title, the user base needs to be sizeable. League of Legends doesn’t just make more money than any other PC game, it has the most players with 84 million average monthly users.
Not only does free-to-play require a user base that VR doesn’t have yet, it is only as effective as its payments process. Part of the reason players spend in games like League of Legends is because it takes less than a minute to acquire Riot Points. Likewise, the only way VR content can earn free-to-play revenue is with frictionless payments. Companies like Payscout and Worldpay have created solutions that promise a seamless checkout experience with support from Mastercard and Visa. Now that major providers are thinking of ways to facilitate payments in VR, the only thing that’s missing is the volume of users needed to make free-to-play work, and experiences with enough content and replayability to keep users coming back for more.
Advertising
While free-to-play monetization is a fairly new concept, many media have taken lessons from their predecessors, focusing primarily on ad-subsidized content, subscriptions or upfront purchases. These models are pretty straightforward. Consumers can either 1) agree to tolerate ads in exchange for subsidized or free content, or they can 2) pay to avoid advertising altogether, possibly getting access to premium content as well. YouTube, for instance, relies on advertising to subsidize their service, while music streaming services Spotify and Pandora offer both ad-subsidized and subscription services. Meanwhile, iTunes provides a marketplace with paid content that consumers purchase upfront, download and keep forever.
These tried and true models are becoming less relevant as consumers pay for customizable services. For instance, cord cutters are tired of paying for channels with predetermined programming schedules, especially sports channels, which over-inflate the cost of a subscription, even if viewers don’t want them. Consumers have agency when it comes to how they spend on media, so tolerating ads is no longer a given. That means companies must accommodate to the monetization preferences of the consumer, not the other way around.
Of course, free doesn’t always mean free. But you can pay more for a better experience. Sometimes free still just means free, but it’s mostly thanks to advertising. YouTube provides more than 1 billion users a completely free service that exclusively earns revenue from advertising.
But more services are giving consumers the option to pay their way out of ads, which is why YouTube has created an ad-free subscription service called YouTube Red. Other streaming services like Netflix offer no (or minimal) advertising for a premium subscription, which earned the service $8.8 billion in 2016 as a result of this kind of demand.
This isn’t necessarily a global trend. Chinese mobile users are more permissive of ads if it means completely free content. Whereas in the United States, 7% of mobile players purchased in-game content in 2017, the same goes for just 4% in China.
Before VR can entertain the ad-based model, it needs ads to support content. Most brands that are using VR are doing it as a way to show they can create innovative content, oftentimes publishing their own full experiences. IKEA, Gatorade and the Hawai’i Tourism Authority are among the brands that have created independent pieces of content, some of which they’ve actually monetized. This, however, does not fall in line with the ad-based model since brands aren’t paying to advertise in other content. That’s because advertisers largely rely on impressions, and, again, the VR audience isn’t there yet.
There do exist VR ad networks like Immersv, and even analytics platforms like Retinad. These tools will make it easy for brands to get involved once they see potential ROI. It’s inevitable since advertising has permeated every entertainment medium we currently use. Once VR adoption in the U.S. hits a third of households in 2019, there will be enough content, impressions, and engagement for brands to justify venturing into this new territory.
Subscriptions
Subscriptions in general are joining free-to-play as a way to drive continual earnings versus the limited revenue that comes from upfront purchases. Essentially, it’s the difference between allowing consumers to “borrow“ versus own the content. With the introduction of streaming media, subscriptions are increasingly becoming a compromise between providers and consumers, giving users access to a library of content on demand in exchange for continued revenue.
Subscriptions and free-to-play are the main drivers for the development of content-as-a-service (as opposed to the traditional model where content has been seen as a product). This requires providers to serve the needs of their consumers by continuously updating content in order to keep them paying (e.g., game levels, video libraries, application functionality, etc.). Since products are paid for upfront, providers do not need to give continual updates because they have already made as much as they can off of each consumer.HTC Vive
"Arcade Saga" is one of the most popular VR games available through Viveport. Subscribers pay less than $10/month to access hundreds of VR titles.
Currently, there is not enough content to fully support the types of distribution channels that can benefit from subscriptions. For instance, although much of the content on an application like Hulu doesn’t appeal to everyone, subscribers can still find enough to justify a monthly cost. However, VR distributors like Jaunt and Littlstar have limited catalogs, making it hard for users to find content that keeps them satisfied each month. Once they do, subscriptions can still present a challenge to the creators themselves since creatives are not paid on a per user basis. Currently, subscription payments do not cover the production costs for most VR content, so this model has provided limited opportunities for industry stakeholders.
Subscriptions have more immediate potential for games than video content. A major complaint for VR players is that games can be too expensive for the limited amount of gameplay they can provide. But production costs are so high, those prices are the only chance creators have to recoup their costs. Viveport, for instance, allows gamers to subscribe to the platform and receive access to a rotating catalogue of games for one flat monthly fee. As players have more titles to try, this will be a way for them to do so economically, no matter how long or short the game’s content.
LBVR
Added fees to tickets like experiences in museums are one of the few monetization models that are both accepted by consumers and apply well to VR. Location based VR (LBVR) currently has a more straightforward path to VR monetization than at home content, which is why it is the second highest grossing VR software segment this year. What threatens its success, however, is its ability to scale.
A theme park is one of the few environments made for VR. The tradeoff for high priced entry and hours of standing in line is a world of rides that taps into multiple senses to boost adrenaline and dopamine for a short, but meaningful period of time. This is amplified by tying popular intellectual property into the rides and theme park, transforming a visitor’s entire environment into something of an alternate reality (remind you of something?). Theme parks were able to pioneer 3D and 4D experiences because they have the space, money, and demand, which then indirectly boosts revenue. So VR can naturally integrate the uniqueness of its experiences into the uniqueness of a theme park’s environment.The Void
In The Void's free roam VR "Secrets of the Empire" users don backpack PCs so they can move around inside the virtual world under their own natural locomotion.
However, VR-only experiences that rely on direct per minute revenue, such as arcades and VR-on-wheels (traveling vehicles with VR experiences), face many more challenges. The first is that the current generation of headsets often require time and assistance to put on. This coupled with the fact that most VR experiences are solitary means a limited number of people can cycle through. Far less than a theme park’s turnover. This is solvable as the hardware gets easier to use, but it will take time.
Second, the overhead can be tremendous. IMAX VR in New York City currently occupies 2,900 square feet of space and offers around ten experiences inside 10’ x 10’ pods. Each experience can cost anywhere from $7 to $15 with most accommodating only one or two people at a time. Attendants have to clean and reset each experience between users, which takes a considerable amount of time, limiting the number of sessions allowed each day. After factoring this in with the cost of rent, construction, and hardware, IMAX has admitted that VR is a loss leader for them. If that’s the case for a lucrative corporation like IMAX, smaller companies have a much bigger hurdle to overcome if they want to operate LBVR at scale.IMAX
The IMAX Centers in Los Angeles and Manhattan are slicker than those in the local mall, but they too use the HTC Vive.
While repetition drives broader utilization and operational costs go down, direct earnings from LBVR will not be a sustainable business model. That doesn’t mean it never can. Once companies can stagger visitors in a single experience so multiple people can be inside it at the same time, and hardware gets cheaper and easier to operate while staying immersive, more revenue opportunities will be accessible. Arcade operators and suppliers like Bandai and Namco have been holding the torch for VR for the past twenty years, and are now introducing unattended VR entertainment that might meet their per square foot revenue needs.
No one has figured out how to profitably deploy and scale VR in public places like malls and movie theaters. As cool as it is, no one has proven the per minute VRcade model will work. An archaic monetization model that is rarely used anymore for entertainment. Low end operators with Vive setups seem to be running their locations as lifestyle businesses, but no one is getting rich. In early 2018, Dreamscape Immersive, Zero Latency and Nomadic VR (which will be mobile) are going to try. Their free roam VR installations are nothing less than spectacular as they use the real world to stand in for what users see virtually. For instance, a user can feel like they are walking a virtual plank by having them walk over an unsteady piece of wood. Dreamscape may be able to charge as much as $3 a minute at peak for an indescribable free roam VR experience made by some of Hollywood's greatest talents.
But it is a bold assertion that investors believe the product is so compelling it can overcome traditional retail barriers like marketing, labor (this is very labor intensive), throughput, and utilization (too few seats Saturday, too many seats the rest of the time). To succeed at scale, free roam software will have to be distributed like movies, with cross platform distribution to all retail locations of operators like The Void, Zero Latency, Dreamscape, VRStudios, Nomadic and anyone who can afford one of their generic theater setups. It could be a new movie business, but because this could take a good long while there is a better case for failure in the near term than success
Conclusion
Just as it’s not a matter of “if” but “when” VR hardware will penetrate the mass market, the same goes for its software revenue. The market is going back to basics, with upfront purchases (e.g., game purchases on the Steam marketplace) and subscriptions (e.g., Viveport) being virtually the only way to make money right now. While some have tried offering free content with microtransactions, like game publisher CCP, the VR audience is not sizeable enough to sustain free-to-play’s small conversion rates.
There are a few reasons why in-game transactions haven’t worked. First, there are no pervasive frictionless payment solutions. There are several payment providers trying to create solutions for this, but their tools have yet to be widely integrated. Second, content development for VR is extremely expensive, so creating content that requires consistent updates puts pressure on developers to continue building and improving after release, which is currently not affordable.
In terms of subscriptions, content distribution platforms are likely to benefit most as opposed to selling content on an individual basis. This is a model consumers are used to when it comes to video entertainment. It is most likely that Netflix and Hulu, which have stated they are creating VR content, will continue with this model, and smaller services will need to follow suit to compete.
However, when it comes to complex cinematic VR, like that of Baobab Studios and Felix+Paul, one off purchases will be akin to purchasing a DVD or video download. If they can make content that is re-watchable, and provides the highest quality of video entertainment, users will see the value of owning the content in the same way they do traditional cinema. The same goes for episodic content, but it will need to be compelling enough for viewers to get hooked so they continue to buy episodes and seasons.Baobab Studios
From Baobab Studios "Rainbow Crow"
So will VR ever be able to monetize? This question has been asked about every new media before it, and will continue to be asked about new media after. It’s easy to get down on VR because its uptake has been slow, but it has already become transformative in ways that are often invisible to the average consumer. Developments in enterprise applications such as education, medicine, manufacturing, and design show huge potential that will inevitably share innovative solutions on a global scale. And there are capabilities that aren’t even fathomable yet. No one in the 1980s could have known we would have smartphones that are as powerful a computer, as thin as a cracker, and as popular as television.
VR could not have existed without the media innovations of the past 100 years, because it incorporates virtually all of them. That’s what makes it possible for it to be a viable product. But before it can be profitable, VR needs three things: Critical mass, compelling content, and affordable, but high quality hardware. Once the industry can achieve that, the money will come.
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