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Many virtual and augmented reality software startups, device makers and online services are positioning themselves to capitalize on the AR/VR market if and when it finally reaches critical mass. (GeekWire Photo / Todd Bishop)

Tim Harader has seen this story before.

When the digital media entrepreneur arrived in Seattle two decades ago, he was recruited by Microsoft to manage its new webcasts. At the time, internet video was hot, at least inside the tech industry. Companies like Microsoft and RealNetworks spent millions trying to fill the content pipeline for this new medium. But the quality wasn’t quite good enough, and there wasn’t a critical mass of broadband internet penetration.

These days, Harader is running Portal VR, a virtual reality arcade that he and his wife, Page Harader, opened last year in Seattle. As he sits on a couch inside the facility and watches excited customers strap on headsets and transport to different worlds, Harader draws connections between virtual and augmented reality in 2018 and what happened with internet video in the late ’90s.

“There was a ton of hype and a ton of money being invested in it, yet nobody was watching. Ultimately, it was not a sustainable business for content creators,” Harader explained. “It’s like VR for developers today — you’ve got quite a bit of content out there, but you don’t have that mass penetration of headsets that allows developers to make their money back.”

Tim Harader (right) inside Portal VR, the virtual reality arcade he opened last year with his wife in Seattle’s Ballard neighborhood. (GeekWire photo / Taylor Soper)

It took longer than many people expected, but today, digital video consumption is through the roof in many parts of the world, thanks to the proliferation of smartphones and wireless connectivity.

Does the same fate await the VR and AR world for consumers? Is it just a matter of time before everyone is wearing headsets? Or is this another hype bubble filled with empty promises about the future of computing?

“It’s pretty early innings,” said Michael Pachter, an equity analyst at Wedbush Securities. “It’s over-hyped relative to where it is in its life cycle, but the potential for a huge market is definitely there.”

Here’s what’s going well for virtual and augmented reality today:

New headsets: Facebook’s new $199 Oculus Go headset that debuted last month could be a game changer. Unlike many of its predecessors, the device does not require a smartphone or tethering to a computer. With the competing $399 Lenovo Mirage Solo also now available, this could be a big moment for VR. Analysts say the key to greater adoption is getting headsets into the hands of the masses.

AR is catching on: Pokemon Go became the first mainstream use of augmented reality in 2016. Now Apple is betting big on the technology. Last week it unveiled ARKit 2.0, the latest iteration of its AR developer platform for iOS 12 that lets engineers build AR apps and experiences on the iPhone.

Apple CEO Tim Cook is bullish about the technology, telling investors in November that AR “is going to change the way we use technology forever.” Startups like Streem, which lets home improvement professionals diagnose and quote a customer’s inquiry using augmented reality, are taking full advantage of the new capabilities.

A WWDC guest tries out SwiftShot, an augmented reality game, in the AR game room last week. (Photo via Apple)

Investment still pouring in: Total venture capital investment in VR companies swelled from $89 million in 2012 to nearly $2.4 billion in 2017, according to Pitchbook. There were 160 total VR/AR U.S. venture capital deals in 2017, up from 139 in 2016 and 108 in 2015, Pitchbook data shows. Tech giants like Microsoft, Apple, Facebook and others continue putting resources toward R&D.

Promising projections: Research firm IDC predicts that worldwide spending on AR and VR will reach $17.8 billion in 2018, up from $9.1 billion in 2017, and expects that growth rate to continue over the next four years. IDC expects worldwide shipments for VR/AR headsets to grow to 68.9M units in 2022, with a 5-year compound annual growth rate of 52.5 percent.

Early use cases: Location-based entertainment companies are finding traction, providing access to room-scale VR experiences outside of the home.

  • Seattle-area startup VRStudios has installed 64 of its VRcade systems across 14 countries in places like Dave & Busters and Universal Orlando.
  • VR training startups such as STRIVR, based in Menlo Park, Calif., are attracting customers in industries including sports and retail.
  • Haradar’s Portal is opening a location in Bellevue, Wash., this summer, expanding beyond its current site in Seattle’s Ballard neighborhood.
  • Education and collaboration are other potential uses cases. Microsoft’s HoloLens device is being used across education, government, retail, healthcare, manufacturing, and other industries.
  • Microsoft co-founder Paul Allen’s Vulcan recently opened a new attraction at the Museum of Pop Culture in Seattle called Holodome, a spherical room offering a 360-degree video, sound and haptic experience to small groups of six people at the same time.

“Those practical application usages of VR will continue to grow and be the first place we see real utilization of it,” said Kirk Soderquist, an attorney at Perkins Coie who co-chairs the firm’s Interactive Entertainment practice.

Ready to rumble: A number of startups have laid the groundwork and are ready to capitalize on the technology if it starts to reach critical mass. In the Seattle area alone, there are dozens of venture-backed VR and AR companies that have been building for the past several years.

“We are all in a good place with our teams, tech, funding, and focus,” said Pixvana CEO Forest Key, a veteran tech entrepreneur whose Seattle-based company offers a platform for virtual reality creation and distribution. “We are bullish as an industry here locally.”

Alfred Blackman III plays a game at Portal VR, a Seattle-based virtual reality arcade. “The experience is awesome,” he said afterward. (GeekWire photo / Taylor Soper)

And here’s what’s not going well:

Headset sales: You probably don’t know many people who own a VR headset, despite all the interest and investment going into the technology. Although Oculus Go and the Lenovo Mirage Solo could help to change this, early headset sales figures “have been decidedly muted,” Ars Technica reported late last year.

Lack of adoption: A recent Perkins Coie survey found that user experience, lack of content, and cost are the three biggest obstacles to mass consumer adoption of VR and AR technology. “Everything is too hard to set up,” said Thomas Hayden, co-founder of 360 Labs, a Portland, Ore.-based production company specializing in 360-degree audio and video.

Source: Pitchbook. Click for larger image.

Chicken and egg problem: Developers can’t improve and iterate when there are no users. “You need users to learn and when the sample set is small, it’s hard,” said Anarghya Vardhana, principal at the Maveron venture capital firm, which has invested in startups such as Pluto VR and Against Gravity. “The companies are often beholden to the hardware and platform providers.”

Startup failures: While tech giants continue to spend millions on new AR/VR products, some smaller companies aren’t doing as well.

  • Startups such as Envelop VR, which made VR for business applications before shutting down last year, were too early.
  • Others like VR camera maker Lytro, which shut down after being acquired by Google in March, got too big, too soon.
  • “I recently sold a house just to keep the lights on,” said Justin Moravetz, founder of VR game development studio ZeroTransform.
  • The Information reported in March, “A shakeout is underway in the VR startup world. An early flow of investments by consumer marketers and film studios, enthusiastic about experimenting with VR for marketing, has dried up.”

General pessimism: Many agree that VR/AR was overhyped for the past two years. Some think it’s a sign that the technology won’t fulfill expectations. “Meanwhile, the alternative notion that VR might actually be a niche — rather than mainstream — tech doesn’t seem too far-fetched at all,” TechCrunch wrote in a story headlined “This VR cycle is dead.”

Where is Magic Leap? Known as the world’s most secretive startup, Magic Leap has raised more than $2.3 billion but its hardware remains mysterious, even seven years after launching. “The persistent secrecy has led to growing skepticism about the company’s ability to execute,” Bloomberg reported.

Where will it go?

Photo via Rec Room.

Even with those challenges, some VR enthusiasts are optimistic that the industry will reach an inflection point soon.

“Over the next 12-to-24 months, we’re going to see more headsets launch without cables and without external tracking cameras,” said Nick Fajt, CEO of Against Gravity. “These advances get us closer to VR’s ‘iPhone moment’ where the technology fades into the background and you’re left with an intuitive experience that just works. It’s on the horizon.”

Seattle-based Against Gravity is the company behind Rec Room, a popular community-based virtual reality game. Wired wrote a story in March about a couple who met in VR, became close in VR, and ultimately got married in VR.

“We just continue to be humbled and surprised by our community’s creativity,” Fajt said. “Every day they reinforce our belief that VR will change the way people communicate, play and create. So we remain excited to bring this formula to more and more people as VR expands.”

Key, CEO of Pixvana, which develops VR editing and production software, also referenced the “iPhone moment.” He said the market is still in its early days, and that the past two years feels like it did in the mobile phone era just before Apple launched its first iPhone. He said the “iPhone-level products” will ship in 2018 and 2019.

Madrona Venture Group investors watch Pixvana’s pitch in virtual reality. (Photo via Pixvana)

Pixvana has raised $20 million from investors including Paul Allen’s Vulcan Capital; Microsoft Ventures; Madrona Venture Group; and Hearst Ventures. Key said the investment climate has cooled in the past year because venture capitalists want to see more headset sales and overall increased activity.

“Companies that have good teams, some product-market fit, or tech in areas that will likely be able to scale with the market are continuing to raise money and are heads down developing tech,” he noted.

Seattle investors are split on the future of this emerging technology. Matt McIlwain, managing director at Madrona, said his firm remains optimistic about VR and AR despite the fact that some of its related investments haven’t worked out.

“While there is still a question of ‘when’ for some aspects of the technologies and standards in VR/AR, we have high conviction that these areas and the related multi-sense interactions will alter so many aspects of our lives in the future,” he said.

Others aren’t so sure. Chris Devore, managing director of Techstars Seattle and managing partner at the Founders Co-op venture capital firm, isn’t searching aggressively for new VR/AR bets.

“We’ve looked at a bunch of stuff in this category but have struggled to get to conviction that the market is really ready to take off,” Devore said.

Voyager Capital’s Erik Benson made headlines in 2016 when he said there were no near-term VC opportunities in VR/AR. Two years later, Benson said he still hasn’t seen a venture-class investment opportunity in the market. “However, there seems to be a lot of good lifestyle businesses in VR outside of gaming,” he noted.

Perhaps it will just take more time. “We’ve always believed succeeding as a company in the VR space would be a marathon, not a sprint,” said Todd Hooper, CEO of Seattle-based live streaming VR startup VREAL.

GeekWire reporter Taylor Soper tests out the HaptX glove. (Photo via HaptX)

Jake Rubin, CEO of HaptX, maker of VR haptic gloves, said VR has been following the Gartner hype cycle. He said the industry is poised to move from the “trough of disillusionment” to actual market adoption.

“I think the biggest winners in this space will be startups that can build a near-term business by solving real problems in the enterprise market, then introduce a consumer-facing product once the market timing is right and the product has been sufficiently refined and cost reduced,” Rubin said.

Others say many people are underestimating how VR/AR will completely revolutionize the way we interact with computers.

“Most people have no idea how massive of a change this is going to be,” said Forest Gibson, co-founder of Seattle virtual reality chat startup Pluto VR. “At least as big of a jump from ‘no computers’ to ‘computers.’ We are talking about a fundamental shift from 2D computing where apps live on screens, to spatial computing where apps live in the space around us.”

John Vechey and Forest Gibson of Pluto VR.

John Vechey, co-founder of Pluto VR who also founded PopCap Games, compared the state of the industry to “that mid-90s period of the internet where it was ‘the next big thing’ and ‘barely relevant’ in equal parts.”

Mischa Jakupcak, CEO of Zoo Break Productions.

“The biggest challenge is that consumer adoption is going to be slow until it suddenly isn’t, and that many technologies will seem fragmented until they’re suddenly not,” Vechey said. “That means it’s hard to show incremental success in the way that you can with more mature markets, and hard to build an incrementally growing business model. That also means it’s harder to maintain funding levels and invest in the appropriate levels of R&D.”

Count Mischa Jakupcak among those that are bullish about the possibilities and confident that they will come to fruition. Jakupcak is an award-winning producer, writer, and director who runs Zoo Break Productions, a Seattle-area studio that makes VR films.

She admits that VR today is “unhygienic, cumbersome and psychologically isolating by nature.” But Jakupcak believes that the technology will help create new ways of experiencing stories, characters and worlds.

“When it does explode, as I believe it will, our understanding of entertainment will be altered irrevocably,” she said.

Harader, the Portal VR co-founder, thinks it will take a decade or more before VR/AR goes mainstream. But he’s confident that with improvements in hardware, software, and connectivity, movies like “Ready Player One” will become reality.

“It’s one of those things where nobody will be doing it until everybody is doing it,” he said. “You don’t want to be that person wearing a headset when nobody else is. But at some point there will be a sea-change and everyone will be wearing one. It will be like ‘Wall-E,’ with everyone focused on the screen in front of them — for better or worse.”

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