Putting Reality Back Into Virtual Reality Forecasts

  • By P.J. McNealy
  • 07 Oct, 2016
Early Days and Overhype: Putting Reality Back Into Virtual Reality Forecasts

The word hype is defined by Webster’s as “to promote or publicize extravagantly.” Yes, analysts have been criticized historically over even overhyping an emerging market. We at DWR understand this criticism firsthand.

We also understand a phrase, courtesy of Columbia Business School Professor Eli Noam: “People have the tendency to overestimate the impact of change in the near term, and underestimate it in the long term.”

This is why we are attempting to put some reality back into virtual reality (VR) forecasts.

It is helpful to put parameters around buckets of VR, as well as Augmented Reality (AR), and the likely very long-term winner bucket, meshed VR/AR. The challenge is both fun and challenging: Are the buckets defined by operating system? By hardware? Tethered or wireless? By operating system? Experience genre? Price? Frame rate?

From our perspective, the timeframe for rollout of VR and AR solutions helps support definition more than any technological specification. There are two big buckets in the near term, meaning the next 24 months: First, AR, and second, VR, sub-segmented by the low-end, middle-tier, and high-end markets.

Third, the discussion of 25+ months can be found later in this document. Fourth, there is a discussion of a critical, undercovered aspect: the marketplaces for content tied to hardware solutions.

Fifth, and final, the forecasts: DWR takes its best shot at estimating the size of the VR hardware markets over the next four years.

FIRST: Augmented Reality—Easy category…for now.

AR is fairly straight forward: check back in the 2H of 2017 to see if the needle on unit penetration has begun to rise yet. AR holds huge potential in a wide range of scenarios, from healthcare to communications to education to gaming to broader entertainment scenarios, but the lack of hardware and applications are the current status quo. These are early days of an ecosystem being built.

We have seen early examples, such as using a Microsoft HoloLens with Skype, or playing a future version of its tremendous IP, Minecraft, to joining folks from the NASA Jet Propulsion Lab to visit the surface of the planet Mars. They are compelling, but the computational analysis (think big math processing) to bring AR from an example to a viable, reasonably priced consumer, educational or business model will take time. The pure math behind AR requires computational analysis that can first, scan a room or space; second, calculate an overlay of the AR app into that room/space, and then re-run both of those calculations should the person wearing the AR device actually move, requiring a re-scan/adjustment and changes to the overlay. And, the transfer I/O speeds today favor a tethered solution vs. a wireless solution.

The good news is that Moore’s Law works in favor of AR. Compute technology will continue to increase at a rapid pace, storage costs will come down, transfer I/O speeds will increase, and final retail pricing will come down from the current level of $3,000 per unit. This also means that, as transfer I/O speeds improve, the options for AR hardware increase.

But, to be clear, the computational capabilities needed push AR out of 2016 and likely into the back half of 2017. While there are multiple AR efforts afoot, they are early days. For example, Microsoft only started in early Spring 2016 to ship AR dev kits (PCs capable of programming AR apps). These are truly early days for AR.

SECOND: VR—A moving category, meaning, it’s moving and changing.

Let’s be clear: Oculus started its Kickstarter project on August 1, 2012. That date is not even four years ago, and it was 2013/2014 before other camps emerged from HTC/Valve, Sony, and Google, with off-shoots from companies such Samsung (Gear VR, based on Oculus). Yes, Google launched Google Glass in February 2013 ($1,300/pair of glasses), and has backed off of that specific area, but Google Cardboard continues to dominate the low-end of the market.

In other words, there has been a mad rush of investment in this area in the past three years, with roughly six platforms, and that is not including any future entries. It is likely that heavyweight companies such as Apple (purchased Metaio, an AR company and has filed patents for VR with an iPhone) and Amazon will become involved because this category will be too big to ignore over time. Google is invested in Magic Leap, too, which is likely focused on the VR and/or meshed VR/AR market. Further, Asia/Pacific mobile titans such as Tencent, Alibaba, Giant Interactive, Softbank and NCSoft are likely looming. LG, too, will likely fast-follow the footsteps of Samsung with a significant phone-based entry effort.

As a result, we can look at the next 24 months, and then speculate with everyone else for 36 months and beyond. Again, we are in Early Days, and the long-term impact is likely significant.

So what are the near-term categories? Four make sense:

1.    High-end PC, tethered

2.    Low-end mobile phone, head-mounted devices (Phone HMD)

3.    (Middle-ground) Console VR

4.    All-in-one head-mounted devices (A little further out…).

1. High-end PC, tethered

This means the Oculus Rift and HTC Vive, which means consumers have to spend at least $600 for the unit plus a $1,000-$2,000 PC capable of handling the high-end graphics, memory and I/O. This is the definition of a “high-end” experience to what DWR defines as a United States, mainstream audience: Joe Six-Pack in Middle America.

Joe Six-Pack is not buying a Vive or an Oculus. Joe Six-Pack this year is deciding if buying an Xbox One or Sony PlayStation 4 is the right call. Those two consoles launched in 2013 and have likely sold a combined 61 million units worldwide life-to-date. The price point on the consoles has come down to $299 (or even lower on short-term deals), and at this point in a typical hardware console cycle, Microsoft and Sony (and still Nintendo) are looking to last-generation console owners (PS3, Xbox 360, Nintendo Wii) to finally make the jump to upgrade to a “next-gen” Xbox One or PS4 console.

This is part-and-parcel with Joe Six-Pack having made the jump in the past three years to an HDTV, but have likely not bought in yet to a 4K TV. The Six-Pack family remains price sensitive and will look for discounts and bundles, but the bottom line is a high-end PC-based tethered VR experience is not on the 2016 Holiday Shopping List.

Will the Generation Me buyers rush to buy a high-end, tethered PC experience? Generation Me, also known as Gen M (18-to-30 years old), are social media champions, mobile device advocates, and are the reason for the future breakup of the current cable and satellite providers due to their a la carte behavior when it comes to media consumption. Gen M shows little interest in paying for subscriptions for music, TV and film and is more likely share passwords to streaming accounts.

They are mobile, meaning they use phones, tablets and laptops. They likely don’t own a high-end PC and see little value in purchasing one at this point. Would they buy an inexpensive, phone-based head-mounted device? Sure.

Or even better, they’re likely to use a Google Cardboard solution (as long as they didn’t buy the BIG Apple iPhone 6). It’s cheap and gets the Gen M’er into the experience. Perfect.

Alas, this demographic shrinks the total available market (TAM) for a high-end, tethered PC VR experience.

This is likely not new news to the management teams at Oculus and Rift. However, the splintering of the product for future products likely begins there. What that means is Valve, which is working with HTC on the Vive, understands the high-end PC gaming market better than any other company. They understand better what their TAM is and who their audience is, and may be perfectly content to serve what is a loyal, dedicated and paying high-end PC gamer market.

We also expect Valve to increase its number of partnerships to form other VR headset solutions. This may also include lower-priced VR solutions.

Oculus, however, was bought by the largest social media company on the planet, Facebook. While the goals of the two groups, Facebook and Oculus, remain independently focused, it is logical to expect that Facebook will want Oculus to grow bigger, wider, deeper, higher, and in any other dimension Facebook can imagine.

DWR has been engaged in voluminous discussions about “Why did Facebook buy Oculus?” with an inevitable response illuminated of “because Facebook wants social in VR!” We respectfully disagree. VR remains a tremendous long-term technology that has the capability of changing the landscape in many verticals. Facebook has a potentially dominant technology and future revenue stream in house, especially if Facebook should either face new competition or have a gradual decline due to numerous other quicker, more agile apps replacing single Facebook functions. Facebook’s biggest challenge is “death by a 1,000 cuts” as Gen M uses new apps to replace tools previously used on Facebook, one by one.

Oculus is critical to the long-term vision of Facebook as a whole and a nice additional potential revenue stream. This is a significant difference with respect to what HTC/Valve is doing with Vive.

This difference means that Facebook/Oculus has longer-term plans beyond being a high-end, tethered PC solution. That future likely involves moving the Rift technology a) down the value chain to lower-priced devices and b) non-tethered. But if you’re a groundbreaking technology company, you have to start somewhere. And Oculus started with a target market with $$$ – the high-end PC market, tethered.

2. Low-end, Phone HMDs

What we mean by low-end is the $99 and under, head-mounted display (HMD) units powered by a mobile phone. This means that the entry into VR means they have to own a mobile phone, and can attach it to a relatively cheap HMD. This is not a $700 solution requiring at least a $1,000 PC companion. This is a Google Cardboard or a Samsung Gear VR HMD, as well as the flood of knock-offs in this tier. (Do note that while a Gear could be $99, Cardboard is $15.)

 This is a market that could appeal to Joe Six-Pack, as long as Joe Six-Pack has been updating his/her phone. Google Cardboard makes VR sampling, for a lack of a better term, viable. NY Times subscribers who have one can experience some of the short clips made available on the website. Samsung Gear VR owners have a chance to purchase content, such as games, entertainment or experiences, through the online store. Gear VR has an early, first-mover advantage by having the broadest early library of content available for consumers.
Gen M phone users will use Google Cardboard, and likely more than a Samsung Gear VR give the roughly $5 vs. $100 price points. Based on DWR research, Google Cardboard is a cool, fun, short-session experience. Short-session, in this case, is typically under five minutes. [This contrasts with longer, more intense experience with, for example, on an Oculus Rift. This experience can be 20 to 40 minutes, with occasional breaks.]

This low-end, phone HMD is the “fat” part of the market, meaning the largest number of early adopters of VR. It doesn’t mean they’re paying adopters (paying $60 for a game or experience), but they’re interested in the technology.

3. (Middle-ground) Console VR

This is an interesting market slice because of the business goals of the biggest two companies involved, Sony and Microsoft, with Nintendo remaining a wildcard heading into its 2017 console platform launch. This is called the middle ground from a pricing perspective – not as expensive as a high-end tethered PC solution and not as cheap as the low-end Google Cardboard.

Sony pushes entertainment through VR, led by gaming

Sony has a corporate goal of making the Sony entertainment brand, the PlayStation, a massive, global success. Sony as a corporate entity has suffered much of the past decade, shedding business units, reducing products, selling real estate, and laying off long-time employees. Sony has been forced to reconfigure its business from the analog era to the digital era, and leading that charge has been the PlayStation 4. It is imperative to Sony that the PS4 be a success to continue, plain and simple. And the PlayStation Virtual Reality (PSVR) is a critical effort to drive sales of more units and usage of the current PS4 install base.
As a result, Sony needs PSVR to be a marketing hit. It will position PSVR, which launches in October 2016, as the only dedicated VR solution on the market. And Sony is correct—it is.

But, the one concern for Sony, and for every other VR solution on the market, is that it has to have to the best, non-nauseous experience on the market. Based on our research on DWR, short of heavily curating the content (games, experiences) flowing through the PSVR marketplace, Sony cannot prevent the likely consumer feedback/pushback that some VR experiences induce nausea. This is not an issue specific to Sony—it is a secular issue. We are in Early Days of this technology.

That said, we expect Sony to launch of limited range of experiences on PSVR this Fall. Sony should be given credit for pushing hard on VR, but must take steps to avoid reviews, for example, where the NY Times said:

So, expect or hope for Sony to learn from others: no “nervous eye twitch” inducing games. Again—Early Days.

The other subtle change Sony has made heading toward Holiday 2016 is broadening the PlayStation brand again back to entertainment, in lock-step with its November, 2016 launch of the PS4 Pro. Sony wants its brand to gain some of the shine the brand had in the 1990s and 2000s, when it stood to consumers meaning all things entertainment. Sony is currently running an ad campaign (including TV ads) for watching TV through Sony’s TV offering, PlayStation Vue. It is another prong for the PS4, in addition to the PSVR.
 So what will Microsoft do in VR?

Hello, Switzerland!

While we say that in jest, the reality is Microsoft sees the near-term jousting of low-end mobile HMD and high-end PC, tethered, and wants to stay above the fray while enabling multiple solutions in both VR and AR. We give Microsoft credit for not simply pushing all of its efforts behind Hololens and ignoring VR. The reality is their business strategy is not to be tied to just one VR or AR hardware solution, but to enable a variety of solutions.

Microsoft has already launched the Xbox One S console, which enables 4K streaming of video content and up-resolution for games. The next Xbox console, code named Project Scorpio, will have a full GPU and CPU upgrade which means it will support true 4K gaming when it launches (Holiday 2017).
So will Microsoft launch its own VR (or AR) solution? History suggests that Microsoft has sometimes launched its own hardware solutions (such as laptops or in the music space with the Zune or Windows Media Players, or even phones), but the corporate strategy has varied. Sometimes, Microsoft wants to seed a market. Other times, Microsoft has stepped up when partners have failed to spark or drive a market. Or, Microsoft has wanted to create a great solution to show its struggling partners a path to follow.

Microsoft created the Xbox hardware and several peripherals, such as multiple iterations of the controller, as well as the Kinect. Microsoft has learned, too, through successes and failures of when to cut bait or keep fishing. Our position is bifurcated—we would posit two points:

·      Microsoft will likely create an AR hardware product, and while gaming will be a facet of AR, the application and promise for AR—as seen by Google but not fully delivered on with Google Glass—will be fulfilled in multiple, non-gaming verticals, such as enterprise and communications.

Microsoft will likely partner with others such as Valve to make a VR solution that worked on the Xbox One and was fed by apps from both the Xbox Live Marketplace and Valve’s Steam service. Conversely, Microsoft will likely become one of several Valve VR hardware partners.
While there has been discussion of “mesh” technologies that combine both VR and AR experiences into one hardware solution, we don’t believe this is viable as a mass market solution before 2020.

For more on the benefits of morphing the Xbox One into Windows 10-enabled console, see the DWR piece, see the DWR piece entitled Digital Empire Building: The Business Model Case for Windows 10 and VR on XBOX One.

Does Nintendo have a role in VR in the future?

Our working assumption is that Nintendo focuses more on great consumer experiences and less on what the latest technology feature to come on the market might be. Nintendo has pioneered VR in video gaming through the Virtual Boy in 1995. Yup, 21 years ago.

In 2008, the TV markets shifted to 3D TVs with required proprietary, bulky plastic glasses. The lack of standards for the glasses, as well as wearing the glasses themselves, stunted penetration of 3D TVs. However, Nintendo rolled out its own flavor of 3D gaming through its Nintendo 3DS in 2011—without requiring any additional glasses. Again, Nintendo put its own spin on 3D technologies and in its own time frame that remained focused on the consumer experience of fun in gaming.
4. All-in-one HMDs—the new category

If you look at the two current market positions, $99 solutions or $2,000 solutions, this assumes that market dynamics will push forces two ways: the low-end up or the high-end down. Moore’s Law certainly backs this likelihood, complete, with price movements toward the middle of these two price points.

So this begs the question: Which price point moves to the middle fastest? This is likely solved by first answering the business model question: What business model exists in the middle ground? The razor/razor blade model will likely still be in effect, meaning companies will want to sell their hardware units at breakeven or a slight loss, while making up profits and margin on selling software/apps/games/entertainment solutions. This favors the low end in the near-term because of typical market dynamics.

This means that we could see standalone, or all-in-one HMDs, coming to the market in 2017. The technology is there for converting mobile phone technology into an HMD, and the price point is likely $499~$999, which places it in between Google Cardboard and an Oculus Rift.

In other words, in the middle of a wide middle ground.

The technology pieces needed for VR are morphing – Google is likely optimizing a version of its operating system with Daydream to help with I/O, battery life, and intense usage, and chipsets could be modified for the same types of upgrades. Then go a step further—take a mobile phone configuration and strip out all of the phone aspects to focus the chipset on a mobile VR experience, and this could be a scenario we see on the market in 2017. It likely wouldn’t be mass market volume due to manufacturing efficiencies and unit pricing until 2018-19, but it would drive, from a technological perspective, an all-in-one HMD solution.

DWR’s position is that this is more likely in 2017 (or sooner), with a company such as Magic Leap entering the fray in this category. Further, by the end of 2017, could Oculus have created a cost-reduced solution with a cheaper PC to get the total solution below $1,000? Maybe, but Moore’s Law, again, suggests that this scenario is more likely 2018, short of Oculus launching an all-in-one HMD that doesn’t match up to current high-end PC specifications. This latter scenario would suggest an all-in-one HMD for Oculus in 2017 and possibly more accurately reflect corporate goals of market penetration for versions of the Rift.

THIRD: So what happens in 25+ months?

The rise of the New Entrants

One of the most likely disruptions to the VR market, beyond all-in-one HMDs, will be the rise of the new entrants. We believe there are a few, big companies out there who could enter the VR market: Tencent, Apple and Amazon. Here is the case for each of them:

·      Companies new to VR enter the market in 2017/2018, but not new companies: Tencent, Amazon and Apple. Adding VR and/or AR is a reasonable building block for Digital Empire Building for big (and getting bigger) players in the consumer space, hence:

o  Tencent has slowly been building multiple pieces of the food chain for VR from content to engines to mobile gaming, and likely have manufacturing partnerships lined up in China. Tencent has three major subsidiaries, Riot Games, Epic Games, and Supercel, as well as social layers such as QQ Chat.
With the evolution of e-gaming, led by Riot, the next logical step beyond filling The Staples Center for a tournament is to have it available for a small price via VR for all the fans who could not travel to Los Angeles. This is part of a larger entertainment expansion via VR, but easily crosses over to e-gaming.

o  Amazon, too, has been building multiple pieces from Lumberyard to content acquisitions, with payment systems, etc., already in-house. Amazon already has users, payment systems, games through FireTV, and infinite amounts of data on consumers. We could envision a headset that works in part with a future Kindle Fire TV and its apps universe. It would likely move beyond just games, too, just as it has diversified its video content as well.
One potential source for VR entertainment will be Amazon’s strategic acquisition: Twitch. Gamers today can subscribe to watch Twitch for following gaming experts, and subscribe and follow them on YouTube, too. Now, instead of watching a stream via Twitch, why not watch it in VR? We think this is a logical next step, especially given that VR capture cameras will rapidly come down in price over the next 24 months.

o  Apple. Of course. Will be a feature for an Apple iPhone? If we had to guess, we’d say no—rather a standalone hardware device tied to the App Store and Apple TV. We find it hard to see Apple not wanting to have a presence in this market, especially given Apple can waterfall VR hardware in typical Apple style—starting with a fully-priced high-end product.
The contra argument for Apple bears merit, in that Apple has the App Store, featuring content that makes either Apple’s operating system or hardware look fantastic—the best experience for consumers, best photos, best way to consume music, etc. The App Store is built to drive highly profitable hardware margins, north of 30%. So, if Apple goes down the VR route, it would likely need the VR hardware to be high margin, fed by the App Store, which could happen through Apple TV.

Looking to 25+ months from now is the part of any crystal ball is typically the most foggy. The working DWR assumptions include that in 25+ months…

·      Microsoft will have partnered with a company such as Valve for a VR solution for Xbox One, featuring both the Xbox Live and Steam
        marketplaces.

·      Microsoft will have rolled out a high-end, v 1.0 AR solution.

·      Sony will be bundling a price-reduced PS4 Pro with the PSVR.

·      Oculus will have a mid-tier priced PC solution.

·      Oculus will have partnered with non-gaming and entertainment partners in verticals such as health care, science, education and
        communications.

·      Both Oculus and Valve will have partnered with more hardware manufacturers for both high-end and eventually, mid-tier (priced) solutions.

·      Google Daydream likely holds the largest market share because it gains rapid adoption given the massive global install base of
         Android-based phones.

·      Samsung continues to promote Samsung Gear VR as a peripheral to its Galaxy phones, and eventually creates its own Milk Music-equivalent
        for VR apps in conjunction with the Powered-By-Oculus Gear VR marketplace today.

In 25+ months, we expect to see VR experiences and games redefined.

Right now, many developers are becoming comfortable with the features and capabilities of VR (i.e. getting scared by a shark while diving, vertigo-inducing cliff walking), but a truly, bottoms-up new transformed experience should arrive in 25+ months, hopefully sooner. Entertainment needs to be created in VR, not just ported over from a console or PC game, or having just a portion of a game be VR-enabled.

Today, gamers are used to either short-session mobile games, or long-session console games. Early on, VR will be more likely short-session games, but in 25+ months, we would expect to see the beginnings of long-session VR games.

FOURTH: One other key piece for VR – the marketplaces

The basic parts for VR include hardware, an operating system, and software/apps to drive adoption and usage. So what do VR marketplaces look like today? Fragmented.

A key question is “How does a consumer connect to a store, and which store?” There are currently islands:

·      The Samsung Gear VR, powered by Oculus, works with the Samsung Gear.

·      The Oculus Rift works with a slimmed down version of the Gear VR store, as well as with select Steam content.

·      The Vive works with Steam.

·      The Hololens will likely work with the Xbox Live Store, as well as other Windows 10-based stores.

·      Google Cardboard works the Google Play Store.

·      The Sony PSVR will work with the Sony Playstation Store.

That means there are six, mostly not-interoperable markets, which are signs of early days and fragmented markets, driven by competing operating standards and corporate goals. This is not helpful with driving consumer adoption and, rather, promotes consumer confusion. This is also typical of early days as consumer adoption can be stunted by confusion until a few big winners emerge and others fall off. We are 25+ months away from that shakeout beginning to happen, and the winners will have integrated, easy-to-use online stores or marketplaces to find a range of content.

What we are looking for is integrated markets – where a Valve-based VR device, connected to an Xbox One and running on Windows 10, can provide an easy experience for a consumer to access content from Steam or the Xbox Live Marketplace. This is a win-win; consumers win, and both Valve and Microsoft win. Microsoft has already gone down the route of launching its Xbox Play Anywhere campaign, and critical to that success is having a unified store for both Xbox One and Windows 10 gamer.

Fifth: The VR Hardware Forecast

Yes, this is what is called, “burying the lead.” However, this is not a simple subject and not a simple forecast, so the logic behind how markets could emerge is detailed in the prior pages. Additional color for parts to the forecast are included below.

This forecast was put together from a combination of discussions with industry participants this year. Segmenting the VR universe has been complex because the tiers that exist today will morph in the next three years, and not only will current participants in tiers likely move up or down with new products, but there will also be new entrants not yet directly involved in VR, but involved in other gaming segments in mobile, console or PC.

The total VR install base, based on low-end VR products, middle-ground console VR, and high-end tethered PC VR, is forecast to be at 8 million units in 2016, heading toward 150 million in 2020. Note that Google Cardboard is not included in this forecast, as we consider it a VR sampler, or introduction into VR at this time. We also believe that the new entrants, such as Tencent, Apple and Amazon, could add another 30 million units to this overall forecast in multiple tiers by 2020 — that 30 million unit number is not included in this forecast, but that forecast is available upon request to DWR.

Graph 1: Total VR Install base, 2016-2020

Source: Digital World Research, 2016

We are forecasting this growth because we foresee solid growth through consoles, the advance of VR with mobile phones, and lower prices at the high end in the next three years thanks to Moore’s Law. We also expect a standalone VR hardware market to emerge thanks to adjustments to both mobile operating systems, increased mobile battery power, chipsets optimized for VR, and the emergence of a few compelling VR market places. One of the single biggest drivers behind our forecasts, too, is the emergence of a killer VR app: a built-from-scratch experience that reimagines VR entertainment. We assume this new app(s) will come in 2018, helping drive adoption and generating additional consumer interest while a variety of price points emerge for consumers to adopt a VR platform.

The annual VR shipments this year will be mostly driven by the low-end, highlighted by Samsung Gear VR, with Google’s Daydream platform having a big impact behind the forecast starting in 2017. We are forecasting just over 7 million units shipped in 2016, growing to nearly 50 million units shipped in 2020.

Table 1: Annual VR Shipments, 2016-202

Table 2: Annual VR Shipments, by Tier, 2016-2020

By tier, we expect the low-end segment to account for the largest percentage of the VR install base in 2016 at 70%, and ticking down to 54% over the next four years as the middle-ground console VR space gains traction.
 Low-End Mobile VR Tier—A Deeper Dive

When looking more closely at the low-end VR tier, this is going to be the biggest path to consumer education and experiences around VR. We are forecasting 5 million VR units shipped in 2016, increasing to 30 million in 2020.

We are forecasting numbers based on the impact on two likely leaders, Samsung and Google. This forecast does not include a meaningful impact from LG, and the Google Daydream forecasted numbers could prove conservative. Further, a wildcard to this market is Asia-Pacific, led by China, because there are already easily 75+ knock-off low-end mobile headset manufacturers, but they will still need a phone and a marketplace to drive what we consider to be meaningful VR shipment growth. One forecast that is now being worked on is next tying hardware to app purchase and usage, driving the overall VR market in multiple verticals, in which China’s adoption rate of all VR low-end mobile devices may prove more important in our view.

Graph 2: Low-End Mobile VR Shipments, 2016-2020
It is our position that Google Daydream is going to be a significant product for Google and a bigger “hit” than Google Glass. After talking with multiple developers, the excitement around Daydream is high, and we are forecasting a ramp that may prove conservative. Again, we are forecasting for a baseline with upside.

Middle-Ground Console VR Tier—A Deeper Dive

The middle-ground console VR tier will likely be a significant avenue for consumers to play in VR. We forecast under 1 million units in 2016 (they start shipping in October) and could reach up to 12 million units in 2020. This forecast does not include any meaningful VR units for Nintendo with the NX at this time (see the Second section above for more).

If Sony has an install base of roughly 25 million PSVR units in 2020, and Microsoft has an install base of nearly 15 million VR units, this could mean roughly a tie ratio of 24%~31% to our forecast for all PS4 consoles and XBOX One consoles by 2020. We believe these are reasonable ratios.

In forecasting tie ratios, it is important to note that come 2017, Sony will have the original PS4 install base, the PS4 “slim” install base, and a new PS4 Pro install base. The performance of PSVR will be optimal on the PS4 Pro, but still possible on earlier PS4 consoles. This also means that the tie ratio for PS4 Pro owners will likely be higher with PSVR than PS4 original console owners. Part of the value proposition of buying a PS4 Pro is for full HD gaming and full HD streaming (Netflix, etc.), and owners of 4K TVs being enabled for a great experience.

It is possible, too, that either/or/both Sony and Microsoft could bundle in VR solutions with console shipments in 2018~2020, which would tick our numbers up.

For the XBOX One forecast, there is a similar challenge – the XBOX One, the XBOX One S, and next year’s launch of the XBOX One Project Scorpio. While the S current supports HD streaming, the holiday 2017 launch of Project Scorpio will enable full HD gaming and full HD streaming, similar to the PS4 Pro.

The other enabling technology advantage for Microsoft is running full Windows 10 on the XBOX One Project Scorpio, which means any PC-enabled VR solution, such as the Valve-HTC Vive or Facebook’s Oculus, could theoretically run on an XBOX One. This means the potential partners for VR for Microsoft are broad and why we have forecasted an inflection point in units for this tier in 2018.

Our breakdown forecast of PS4s and XBOX Ones, and tie ratios by console tiers, can be supplied upon inquiry to DWR.

Graph 3: Middle-Tier Console VR Shipments, 2016-2020
We forecast a 5% tie ratio for PSVR early in this adoption cycle, and could prove conservative if Sony can ramp manufacturing in 2017 beyond our numbers. We also forecast Sony to continue its significant lead, nearly 2x, of the PS4 install base over the XBOX One install base.
The table below shows Sony’s forecasted marketshare lead in console VR, which is reflective of its continued dominance in this hardware cycle.
High-end Tethered VR Tier—A Deeper Dive

The high-end tethered VR market is the driver of early excitement in this market, with Facebook spending $2 billion on acquiring Oculus and starting a modern-day Gold Rush with VC investors backing multiple VR efforts. While the segment has grown rapidly in the past four years, the high-end, while expensive with $1,500-PCs and ~$799 VR setups, have had some early success as manufacturing has ramped.

We forecast nearly 1.5 million high-end VR shipments in 2016, rising to 10 million units in 2020, driven by Valve and Oculus. We forecast an install base for high-end VR at nearly 30 million units in 2020.

The two main variables for growth in this tier are pricing and partners. Oculus has already cut its price on the Rift headset, and the faster the units can be price-reduced through volume manufacturing (and Moore’s Law), the faster the high-end VR tier can help morph into middle-tier units in the next four years.

While Valve has partnered with HTC for the Vive VR headset, we believe Valve will be aggressive with adding additional hardware partners and help fuel usage of its online marketplace (app store), Steam. Note that Steam is not simply an online marketplace, but it is a VR-friendly location to find new content that works with both the Vive and the Oculus Rift.

Graph 4: High-End Tethered VR Annual Shipments, 2016-2020
Depending on how rapidly Valve adds partners, and adds a mid-tier priced solution, could mean this forecast is conservative. Also note that we forecast an inflection around the launch of the XBOX One Project Scorpio box as well.
The other factor for VR adoption, especially in the case of Oculus, will be the expansion of VR beyond gaming and entertainment. Longer term, while Valve is focused on gaming, Oculus remains focused on multiple verticals beyond gaming such as health care, education and communications. If a non-gaming vertical should gain significant momentum before 2020, the Oculus forecast could prove conservative.
The excel model for these forecasts is available upon request to DWR.                                          >> Download the Printable PDF Here

Digital World Research Reports

By P.J. McNealy 08 Nov, 2017

So is this it? With the launch of the PS4 Pro console last Fall and this week’s launch of the Xbox One X console, two of the biggest, fastest, strongest, -est consoles in console video gaming history, is this it for the concept of video game consoles and cycles?

The easy and quick answer is “Yes,” but the realistic, informed and more lengthy answer is “no.” The hype for an iterative console upgrade will be intense this holiday season, especially given the market dynamics that the console maker currently in third place in sales this calendar year in the U.S. is now all-in for pushing the value proposition of its new console.

But first, for just a moment, if the answer is “Yes,” then it is due to the current TV upgrade cycle of 4K-ready TV sets, which could reach 30% to 40% penetration in the U.S. through holiday 2018 given how much price points have come down on new 4K TVs. What better to pair with a 4K TV than a new video game console that enables full 4K gaming and 4K UHD Blu-Ray and 4K streaming content in the form of TV or film-length content? There is your value proposition for a new console this holiday, into 2018, and beyond...until 5K and 8K arrive next. THEN, you will need another new console, but who knows? They could be built into a TV by then. However, that’s the last you’ll read about 5K and 8K in this piece.

The more interesting answer of “No” requires a deeper dive, with a look at current trends and cycles, historical cycles, and a glimpse into future cycle scenarios.

So what is the Xbox One X and does it matter? If so, why?

The Microsoft Xbox One generation of consoles includes the original Xbox One (launched in 2013), the Xbox One S (2016), and now the Xbox One X (Nov. 7, 2017). Microsoft is launching the X in lock-step with 4K TV pricing coming

By P.J. McNealy 12 Jan, 2017

While the market is currently focused on the Xbox One and PS4 consoles, there is a case to be made that a year from now, the upcoming Nintendo Switch could be the top-selling console in CY 2017. Three factors:

1.     What is the case for the Switch?

2.     What is happening with Sony and Microsoft?

3.     What else could influence dollars to the segment? VR? Mobile?

1. What is the case for the Switch?

Nintendo announced its upcoming new console, called the Switch and is scheduled to launch in the first quarter of CY2017. While there has been early criticism, as expected, of how the console looks, history shows that software drives hardware sales, and Nintendo has the most top-10 most popular IP in console history, with IP such as Mario, Zelda, Donkey Kong and Super Smash Bros. These are multi-generational games, meaning that the big IP typically launch once per hardware console cycle, and are multi-family generational titles. There are many 40-to-60 year old parents who grew up playing Nintendo games, a tradition shared by many 15-to-39 year olds also understand.

Nintendo IP is often family friendly, and again, has the easiest path for a family to just pick up controllers in the Living Room and just play. No family sits around the Living Room with four Xbox One or PS4 controllers, or connects on four Amazon Fire Tablet, or on four Apple iPads. This family gaming is a Nintendo tradition, and neither the Xbox One nor PlayStation 4 have focused on this aspect of multi-player family gaming software with any significance. Remember—when the Xbox One launched, it was focused on being an entertainment platform, while the PS4 was focused on the hard-core gamer market. So Nintendo will focus elsewhere—the family demographic with familiar, fun, friendly software.

Nintendo sets itself as being the likely choice the second-console-in-the-house position. The Xbox One and PS4 are just over three years old since the November 2013 launches. Assuming that the Switch is priced at $299 or less, Nintendo has the opportunity to launch a swath of big first-party games for the March and June quarters of 2017, and have the third-party publishers (Electronic Arts, Ubisoft, Activision, Take-Two, etc.) target September and December 2017 quarters to launch. The extra six-to-nine months are likely critical to third-party publishers for development time. This means the value proposition of buying a second console—with lots of first-, second- and third-party software available by Holiday 2017.

It is worth noting, too, that the public support for the Switch is notably better than for either the Wii or WiiU launches.

Why would the business model case for Nintendo fail? Likely one of two reasons: 1. Supply constrains inventory to the point of frustration for consumers and limits market share. 2. History repeats itself and Nintendo fails to roll out a continual flow of big IP after the launch of the Switch, leaving the channel short of marketing opportunities to push the new console.

 

2. What is happening with Sony and Microsoft?

Both companies are in new ground for Holiday 2016. The fourth quarter is typically the strongest hardware sales period, and Sony is pushing the new, updated version of its console, with the PS4 Slim ($299) and the PS4 Pro ($399), while Microsoft is pushing its Xbox One S. They vary in power (both CPU and GPU), and 4K streaming vs. 4K gaming, and consumers already know about the next Xbox One (Project Scorpio), slated for launch in Q4 2017. Again, it is an upgraded box over the Xbox One S, with full 4K gaming and 4K streaming, as well as likely enablement of a host of Virtual Reality/Augmented or Mixed Reality offerings.

The corporate goals for the companies, as a result of these hardware rollouts, show divergent paths: Sony has one goal and one goal only: to sell as many PS4 consoles as possible as the PlayStation business is the core of the company moving forward. This means that Sony has been very aggressive, with multiple bundles or discounts through partners such as GameStop, Best Buy, Target, Amazon and Wal-mart. Microsoft switched its goal to enable alignment between the underlying operating system to be Windows 10 for the Xbox as well as for tablets and PCs. This means Microsoft can enable cross-play among devices, opening up its ecosystem to more partners, including on the VR/AR/MR front. It also then appeals to developers who might want to code once, distribute anywhere in the Win10 ecosystem. Hence, this holiday, Microsoft has been happy to sell Xbox One S boxes, feature 4K streaming, and really focus on gaining share in Holiday 2017.

Could both Sony and Microsoft generate problems for Nintendo in CY 2017? Sure. It could come from a break-through title in VR that speeds up consumer adoption (and spending) on VR equipment, or it could be in the form of a killer, brand-new IP that sparks console sales (such as the original Halo launch), or it could be from either Sony or Microsoft being aggressive for either an exclusive licensing deal (such as for the next Grand Theft Auto), or going the merger and acquisition route (such as Microsoft buying Valve). These are all scenarios that could dim Nintendo prospects in 2017.

3. What else could influence dollars to the segment? VR? Mobile?

It has been a popular argument to say that Nintendo has lost market and wallet share due to mobile gaming, and it has been largely true of the declining cycle of the Nintendo 3DS handheld systems. However, the role of mobile gaming has largely been short-session engagements, or a car back-seat babysitter. It has not replaced the Living Room family experience, and that is why the Switch launch could be impactful to the overall gaming market.

Will VR/AR/MR take dollars from a Switch launch? The answer is likely no, but with some assumptions, such as Sony not having a killer PSVR game launched in 2017 (see https://www.digitalworldresearch.com/Virtual-Reality-Forecasts for our recent VR piece). If it does, it could erode some potential dollars at the margins for Nintendo. If the Samsung Gear or Google Daydream View sell incredibly well in 2017, those are likely incremental, small dollars (most headsets are either bundled or cost under $100). And at the high-end of VR, there is likely not many households making a buying decision between an $800 VR solution (assuming they have a compatible PC) versus a $299-or-under Switch.

By P.J. McNealy 07 Oct, 2016
Early Days and Overhype: Putting Reality Back Into Virtual Reality Forecasts

The word hype is defined by Webster’s as “to promote or publicize extravagantly.” Yes, analysts have been criticized historically over even overhyping an emerging market. We at DWR understand this criticism firsthand.

We also understand a phrase, courtesy of Columbia Business School Professor Eli Noam: “People have the tendency to overestimate the impact of change in the near term, and underestimate it in the long term.”

This is why we are attempting to put some reality back into virtual reality (VR) forecasts.

It is helpful to put parameters around buckets of VR, as well as Augmented Reality (AR), and the likely very long-term winner bucket, meshed VR/AR. The challenge is both fun and challenging: Are the buckets defined by operating system? By hardware? Tethered or wireless? By operating system? Experience genre? Price? Frame rate?

From our perspective, the timeframe for rollout of VR and AR solutions helps support definition more than any technological specification. There are two big buckets in the near term, meaning the next 24 months: First, AR, and second, VR, sub-segmented by the low-end, middle-tier, and high-end markets.

Third, the discussion of 25+ months can be found later in this document. Fourth, there is a discussion of a critical, undercovered aspect: the marketplaces for content tied to hardware solutions.

Fifth, and final, the forecasts: DWR takes its best shot at estimating the size of the VR hardware markets over the next four years.

FIRST: Augmented Reality—Easy category…for now.

AR is fairly straight forward: check back in the 2H of 2017 to see if the needle on unit penetration has begun to rise yet. AR holds huge potential in a wide range of scenarios, from healthcare to communications to education to gaming to broader entertainment scenarios, but the lack of hardware and applications are the current status quo. These are early days of an ecosystem being built.

We have seen early examples, such as using a Microsoft HoloLens with Skype, or playing a future version of its tremendous IP, Minecraft, to joining folks from the NASA Jet Propulsion Lab to visit the surface of the planet Mars. They are compelling, but the computational analysis (think big math processing) to bring AR from an example to a viable, reasonably priced consumer, educational or business model will take time. The pure math behind AR requires computational analysis that can first, scan a room or space; second, calculate an overlay of the AR app into that room/space, and then re-run both of those calculations should the person wearing the AR device actually move, requiring a re-scan/adjustment and changes to the overlay. And, the transfer I/O speeds today favor a tethered solution vs. a wireless solution.

The good news is that Moore’s Law works in favor of AR. Compute technology will continue to increase at a rapid pace, storage costs will come down, transfer I/O speeds will increase, and final retail pricing will come down from the current level of $3,000 per unit. This also means that, as transfer I/O speeds improve, the options for AR hardware increase.

But, to be clear, the computational capabilities needed push AR out of 2016 and likely into the back half of 2017. While there are multiple AR efforts afoot, they are early days. For example, Microsoft only started in early Spring 2016 to ship AR dev kits (PCs capable of programming AR apps). These are truly early days for AR.

SECOND: VR—A moving category, meaning, it’s moving and changing.

Let’s be clear: Oculus started its Kickstarter project on August 1, 2012. That date is not even four years ago, and it was 2013/2014 before other camps emerged from HTC/Valve, Sony, and Google, with off-shoots from companies such Samsung (Gear VR, based on Oculus). Yes, Google launched Google Glass in February 2013 ($1,300/pair of glasses), and has backed off of that specific area, but Google Cardboard continues to dominate the low-end of the market.

In other words, there has been a mad rush of investment in this area in the past three years, with roughly six platforms, and that is not including any future entries. It is likely that heavyweight companies such as Apple (purchased Metaio, an AR company and has filed patents for VR with an iPhone) and Amazon will become involved because this category will be too big to ignore over time. Google is invested in Magic Leap, too, which is likely focused on the VR and/or meshed VR/AR market. Further, Asia/Pacific mobile titans such as Tencent, Alibaba, Giant Interactive, Softbank and NCSoft are likely looming. LG, too, will likely fast-follow the footsteps of Samsung with a significant phone-based entry effort.

As a result, we can look at the next 24 months, and then speculate with everyone else for 36 months and beyond. Again, we are in Early Days, and the long-term impact is likely significant.

So what are the near-term categories? Four make sense:

1.    High-end PC, tethered

2.    Low-end mobile phone, head-mounted devices (Phone HMD)

3.    (Middle-ground) Console VR

4.    All-in-one head-mounted devices (A little further out…).

1. High-end PC, tethered

This means the Oculus Rift and HTC Vive, which means consumers have to spend at least $600 for the unit plus a $1,000-$2,000 PC capable of handling the high-end graphics, memory and I/O. This is the definition of a “high-end” experience to what DWR defines as a United States, mainstream audience: Joe Six-Pack in Middle America.

Joe Six-Pack is not buying a Vive or an Oculus. Joe Six-Pack this year is deciding if buying an Xbox One or Sony PlayStation 4 is the right call. Those two consoles launched in 2013 and have likely sold a combined 61 million units worldwide life-to-date. The price point on the consoles has come down to $299 (or even lower on short-term deals), and at this point in a typical hardware console cycle, Microsoft and Sony (and still Nintendo) are looking to last-generation console owners (PS3, Xbox 360, Nintendo Wii) to finally make the jump to upgrade to a “next-gen” Xbox One or PS4 console.

This is part-and-parcel with Joe Six-Pack having made the jump in the past three years to an HDTV, but have likely not bought in yet to a 4K TV. The Six-Pack family remains price sensitive and will look for discounts and bundles, but the bottom line is a high-end PC-based tethered VR experience is not on the 2016 Holiday Shopping List.

Will the Generation Me buyers rush to buy a high-end, tethered PC experience? Generation Me, also known as Gen M (18-to-30 years old), are social media champions, mobile device advocates, and are the reason for the future breakup of the current cable and satellite providers due to their a la carte behavior when it comes to media consumption. Gen M shows little interest in paying for subscriptions for music, TV and film and is more likely share passwords to streaming accounts.

They are mobile, meaning they use phones, tablets and laptops. They likely don’t own a high-end PC and see little value in purchasing one at this point. Would they buy an inexpensive, phone-based head-mounted device? Sure.

Or even better, they’re likely to use a Google Cardboard solution (as long as they didn’t buy the BIG Apple iPhone 6). It’s cheap and gets the Gen M’er into the experience. Perfect.

Alas, this demographic shrinks the total available market (TAM) for a high-end, tethered PC VR experience.

This is likely not new news to the management teams at Oculus and Rift. However, the splintering of the product for future products likely begins there. What that means is Valve, which is working with HTC on the Vive, understands the high-end PC gaming market better than any other company. They understand better what their TAM is and who their audience is, and may be perfectly content to serve what is a loyal, dedicated and paying high-end PC gamer market.
By P.J. McNealy 06 Oct, 2016

So kudos to Vizio, who sold out to LeEco for $2B. This is a great example of #DigitalEmpireBuilding in action where a company chooses to buy instead of building to grow its empire in the digital landscape. In this case, it’s an American company selling its TV hardware sales business to a Chinese company that wants in-roads into the U.S. market.

Here is why this matters: it is an inflection point for a Chinese consumer electronics company gaining a foothold into the U.S. distribution channels to market TVs to a U.S. consumer, thereby taking on the two incumbents, Korea-based Samsung and L.G..

The race to add blocks in #DigitalEmpireBuilding here means that LeEco:

-Now has a range of products such as phones and TVs to sell to U.S. consumers, with potential distribution partners lined up thanks to Vizio’s current distribution partners.  LeEco is also involved in funding electronic car research.

-Has access, specifically, to the growing Vizio footprint at retail both in bricks-and-mortar and online. Note that Vizio, just a few years ago, had limited distribution in channels such as clubs/warehouses, but as its TV products improved with competitive pricing, it’s footprint grew. This means that consumers today can buy a Vizio TV from Best Buy, Target, Wal-Mart, Costco, BJ’s Warehouse and, of course, Amazon.

-Now has a brand to possibly sell in China, where the growing middle class is moving to the coastal cities such as Shanghai and buying up consumer electronics (see: TVs, phones). Couple this brand with LeEco’s stated goal of creating original TV and Film content for the Chinese market. Think big content delivery network (CDN)–China big, and LeEco is building out the end points of hardware.

- Oh yes–don’t miss that LeEco is yet another Chinese company with VR hardware. This particular segment will only get noisier over the next three years.

Keep in mind the historical perspective of TV sales in the past 15 years in the U.S.–the Japanese brands, Sony, Panasonic and Sharp, dominated the landscape until they were overtaken by the Korean-based manufacturers in Samsung and LG, largely driven by a huge currency advantage. Vizio was the outlier in the market over the past five-plus years–a U.S.-based company with no manufacturing capacity, but a keen ability to negotiate for quality TV panels in a time where panel production volume was in flux in Japan, Korea, and with Chinese manufacturers coming online.

This means that there is more competition to control consumers both inside the home and while mobile — touchpoints are critical.

-Microsoft understands this already (see our piece on Windows 10).

-Apple is aiming for it and we expect to hear more in early September.

-Google is squarely in every aspect of this arena and its likely next big move is to revamp the phone OS for verticals such as VR. Stay tuned.

-Amazon keeps rolling out new hardware solutions (see: Echo, Tap, and Dot) to meet consumer needs.

-Facebook — while not involved in hardware per se, is clearly moving down the CDN path. See: Facebook Livestream.

Don’t forget–this list includes DirecTV/AT&T, now Verizon/Yahoo/Fios, Dish/SlingTV , Comcast/Xfinity, and a list of other content/service providers such as Netflix, TIDAL, etc. Every company mentioned saw the Vizio news and took note, and many are already trying to figure out the next building block to be built–or sold–as companies compete for the U.S. consumer market.


By P.J. McNealy 24 May, 2016

Digital Empire Building: The Business Model Case for Windows 10 and VR on XBOX One

KEY ASSUMPTION: new version(s) of an Xbox One console is launched and runs the full Windows 10 Operating
System, enabling new forms of entertainment on the console such as Virtual Reality (VR).

What is the business model case for why Microsoft would do this?

In short, they hope this will help them sell more Xbox Ones.
And, in a broader context, Microsoft is repositioning itself. It no longer ties to its Windows Operating System, and wants
to be a company that has offerings wherever consumers are on as many devices and, in a logical, contextualized
integration.

For example, while Microsoft has been exiting the hardware business of mobile phones, it has been enabling the mobile
version of Microsoft Office available on as many operating systems as possible, such as Apple iPhones.
Migrating, or evolving, the operating system for the Xbox One console is part of the road map for Microsoft to provide
more entertainment experiences for consumers. Conversely, Microsoft is positioning itself away from its main current
console competitor, Sony, with its somewhat vertically oriented entertainment platform in the Sony PlayStation 4 (PS4).
While enjoying likely nearly 2x the market share for console install base over Microsoft, Sony is rolling out its VR
solution this Fall, PlayStation VR (PSVR). At this point, the use case for Sony PSVR is likely limited to the PS4 console.

So let’s say there is a Windows 10-based Xbox One in 2016--six implications could include:

1. Opens the door for VR hardware companies onto another platform. This means that a VR company such as
Oculus or HTC could create a version of their respective VR hardware, the Rift and Vive, to run on a future Xbox
One. Remember—the Oculus Rift is currently shipping with an Xbox One remote and runs on Windows 10 PCs.
The new Xbox One could also run a version of Microsoft’s home-grown Augmented Reality (AR) solution,
HoloLens.

a. Given that development kits for HoloLens only started shipping in the past few months, CY2017 is a
  reasonable timeframe for HoloLens to make its Windows 10 (and Xbox One) full debut.

2. Microsoft becomes “Switzerland” for all entertainment forms. Microsoft could position itself as an interactive
entertainment platform that enables multiple forms of VR and AR, something Sony will likely not able to
promote. The mantra becomes that an Xbox One has it all—console gaming, TV and film services, VR/AR, social
and communications layers, music services, photos and a built-in transactional layer. And, Microsoft builds it
from its traditional building blocks, software, cloud storage and services.

3. Microsoft gets big VR/AR marketing hook vs. Sony. Microsoft wants to position itself as the leading choice for
VR and AR. This is of utmost importance for Microsoft as it tries to continue to grow its market share and make
inroads against Sony with an eye on the long view.

This will become evident this year at the industry trade show, E3, in Los Angeles in mid-June. Sony is expected
to strongly promote PSVR, and Microsoft will likely have an answer to counter Sony’s VR messaging.

4. Microsoft evolves Xbox One with Windows 10 roadmap. Microsoft can update/evolve the Xbox One in lock
step with Windows 10 updates for the PC/laptop/mobile market. This, in many ways, announces the end of the
traditional “console cycle” of having an Xbox to Xbox 360 to Xbox One. The Xbox One becomes the one for the
future in Redmond. This point should not be overlooked—assuming that the Xbox One can be updated for an
extended time period, will Sony be able to do the same for the PS4?

  a. Is there a Sony PS5? This is Sony’s biggest long-term question. We will likely see an updated version of
  the PS4 this holiday (much like a new version of the Xbox One), but Sony’s future consoles aren’t tied to
  a larger OS upgrade cycle.

  b. Sony’s other near-term future will be to likely lock up exclusive content, such as games or at least launch
  windows/preferred platforms for big franchises such as Activision’s Call of Duty. This could also be the
  year when Take Two’s big franchise, Grand Theft Auto, also gets locked up again for the next installment.
  Having these franchises would help reinforce Sony’s marketing position that it’s the console focused on
  true gamers with the best games on PS4.

5. Appealing aspects for developers. A developer today making a video game has several primary business model
decisions to make, starting with a platform choice—will the game be made for console(s)? Mobile? PC? Having a
game that can easily run as a console game on an Xbox One as well as a Windows 10 PC/mobile device should
help entice some developers into a “make one game, run in many places” appeal.

  a. However, with other middleware tools and engines such as from Unity or Amazon’s Lumberyard, the
  ability for developers go cross-platform is becoming easier and more automated.

b. This then pushes Microsoft to offer additional incentives to developers, such lowered royalty rates, cloud
  services, ad support, etc. But to be clear, having a game nearly instantly on Xbox One and Windows 10
  devices is still a positive.

6. Appealing possibilities for consumers. Microsoft has been pushing for enabling digital content for consumers to
be consumed anywhere, anytime, on any platform. Having interoperability between hardware (console vs. tablet
vs. laptop vs. PC) and coupled cloud services has been a big, long-standing corporate goal for Microsoft (and
every other big company, to various degrees, such as Amazon, Apple, Google, Facebook, Samsung and LG). This
transition to a Windows 10 Xbox One is one more building block for Microsoft to making their vision more of a
reality—Digital Empire Building. And, it sends an ease-of-use message to consumers about potential—about
future products working seamlessly.

Two yet-to-be determined factors for consumers? New Xbox One and VR for Xbox One prices.

a. There will likely be multiple Xbox One models to choose from over time as Microsoft manages multiple
  stock keeping units (SKUs) in the retail channel. A VR-enabled Xbox One should have a higher bill-ofmaterials
  (BOM), meaning likely higher retail price than the current $299 pricing. The BOM vs. retail
  pricing will likely still follow the razor/razor blade model, where Microsoft sells the razor (the Xbox One)
  at cost or at a slight loss while making its profits from selling its blades (software and services) through
  the box.

b. The Oculus Rift currently costs $599, plus a relatively new PC that will cost in the range of $1,000 to
  $2,000. Simple math says the PC, tethered experience is expensive for early adopters. That is not console
  pricing math. This means that there could be a new version of an Oculus that strikes a middle ground--a
  cheaper Oculus with a more expensive Xbox One? Still tethered? The same challenge exists for the Hive.

c. Moore’s Law will suggest that parts pricing (affecting the BOM) will drop significantly over the next 18
  months, which means any significant ramp of a VR-on-console (specifically the Xbox One) is really
  2017, and the 2H of CY17. This would also keep VR offered via the Xbox One in near-lock step with the
  Sony PSVR rollout this Fall and into CY17 (assuming Sony ships less than 1MM PSVR units in CY16).

d. It is worth repeating: console install base and VR/AR are long-term critical initiatives for both Sony and
  Microsoft, and the “console war” will continue long after this upcoming holiday, no matter which
  company has sold more consoles.
By P.J. McNealy 24 May, 2016

CES 2013: The TV Manifesto

The Battle for the Living Room is OVER—the War for the Consumer is ON!

The reality has begun to sink in: The home is part of a larger war involving engagement of the consumer -- and companies battling just to dominate consumer engagement in the living room are going to lose the bigger war. The end-game is clear: Companies must engage the consumer both in the home and mobile and have devices that are not location-locked.

This shift in targeting consumers while mobile or in the home was the most significant takeaway from CES 2013. Before the show, the expectation was for thinner, greener TVs with better user interfaces to be the show highlights. Coming out of the show -- while the TVs are bigger, thinner and greener – numerous TV companies highlighted their improvements in their TV set user interfaces (UI). However, this focus means that they are still targeting the battle for the living room, and are not well positioned in the larger consumer war.

This is a significant shift that has taken place in the past 20 years, when TV manufacturers and consumer electronics (CE) companies ruled the home and the consumer.

Just 20 years ago, when analog devices such as VHS players were dominant in living rooms, and devices were not connected to the Internet or to each other, the CE companies were household brands – Sanyo, RCA, Sony, Panasonic, Magnavox, Philips, Zenith.

Starting a decade ago, PCs started appearing in the living room and the race to put connected devices in the hands of consumers began. With clunky connected solutions (remember the rack-mounted Media Center Edition PCs from Microsoft?) creeping into the living room, the concept of“tele-webbing” was born.

The race to connect the consumer in the living room was on, and the device with the pole position? The TV.

So what did the TV industry do to respond? They began putting Ethernet jacks in their premium TV sets five years ago, and just three years ago, major retailers such as Best Buy were proudly promoting that every 40” or larger TV would come with an Internet connection.

To go with the Internet connectivity, the TV manufacturers needed a compelling, easy-to-use UI. However, UI was not a core competency for any global consumer electronics company. Most of the UIs were simple and limited to some form of electronic programming guide (EPG) licensed from Rovi (who bought the patent portfolio to most TV EPGs). Adding a new, interactive UI was not a strength of any CE company. Most of the UIs shown at CES over the past three years were clunky, and the big upgrades were more focused around adding a web camera for Skype, service partners such as Netflix or Hulu, or being able to see YouTube videos or check a Facebook page. The upgrades were largely iterative.

At this past CES show, much of this remains unchanged with respect to iterative additions. However, in the meantime, while the TV industry slowly moved toward capturing additional consumer eyeball time with non-TV content, the PC and mobile industries have moved significantly faster.

As expected, software and UI companies in the United States are familiar with software upgrade cycles, which are typically faster than hardware upgrade cycles. Those cycles, coupled with the computing power increases, pricing curve decreases, and the emergence of feature phones into smart phones, have driven consumer behavior become more mobile, and not just in front of a PC. The emergence of tablets, with 8” to 14” screens, have also enabled more mobile computing.

Because consumers today are now familiar with being able to communicate, socialize, consume, purchase or entertain with devices such as phones or tablets, the pole position of the TV as the center of a consumers’ entertainment world has diminished.

While the TV and consumer electronics industry has tried to move into the digital world, the mobile world has taken advantage of the transition of analog to digital to move entertainment out of the living room and onto alternate devices.

As a result, consumers have become familiar with watching TV on a TV while “second screens” in their hands are typically phones, tablets or notebooks. This means that the opportunity that the TV industry had just a decade ago has been lost to the phone, tablet and laptop industries.

The silver lining for the TV and consumer electronics industry? The opportunity to partner and avoid the risk of being further marginalized as the “dumb” screen.

Table 1: Current and Future Consumer Leaders (traditional CE manufacturers in blue, PC/software/mobile companies in yellow, other companies in green)

By P.J. McNealy 01 Nov, 2013

The ultimate goal for Microsoft with its new Xbox One entertainment console? Living room domination through Input One into the back of your TV set.

There is nothing subtle about the Xbox One input/output slots: it wants you to pass through the output cable from your satellite/cable box en route to the home stereo or directly to the TV. Microsoft is hijacking the stream with the intent of a win-win for Microsoft and the consumer.

By controlling the TV viewing experience, combined with some neat, fast-switching technology that allows users to flip quickly between, for example, Skype and watching TV, or to have one pinned to the right side of the screen, Microsoft has developed some fun and new things that users can do.

The integration of Kinect using audio, or punching buttons on the Xbox One remote, can work well (as well as lead to some fun competition between siblings shouting out random Xbox One commands). Since the TV feed is a pass-through, there is no picture degradation, either.

If every Xbox One owner plugs in their TV signal through the Xbox One, then it will be an astounding victory for Microsoft and a landscape-changing differentiator from the Sony Playstation 4. The likelihood? Hmmmmmmmmm. If this were to happen, then Microsoft would be winning the battle for the living room, as part of a larger war to control the consumer in the digital age at home or while mobile, led by Surface tablets, Windows Phone, and its Smart Glass application for iOS and Android devices. [For more on this subject, see the DWR piece: The Battle for the Living Room is OVER and the War for the Consumer is ON .]

However, the Xbox One falls short on the integrated experience because the TV experience is closer to using a basic cable box than a more current DVR. And this is not a technology issue – the Xbox One could do it – but a business model issue. At the end of the day, does Comcast, Verizon, Time-Warner, Dish or DirecTV want to cede control of the user interface and interaction to Microsoft? While BSkyB did as an experiment in the U.K. and Ireland back in 2009 with the Xbox 360, it doesn’t appear than any U.S.-based providers are on board yet.

Why does the experience fall short? The Xbox One voice commands allow you only partial access to the functions of your DVR. You can not record anything through Xbox One commands – users have to find their regular box remote. Have a DVR with recorded shows? You can not use Xbox One commands – users again have to find their regular box remote. And using the voice commands on Xbox One? They work well for movie playback, and some TV, but for watching sports, it is cumbersome and lots of extra work. For example, watching an NFL football game on 15-minutes delay and having to skip through ads, is too much talking. You will be grateful that you did not name either your child or your dog “Xbox.”

Viewing TV is typically a passive, lean-back experience, and having to say “Xbox” followed by a command every time can be laborious, followed by using the command “Stop Listening” to get the overlay screen to disappear on the right side. Simply put, having a traditional TV remote control in hand is easier, often faster, and quieter.

While this integration of voice, TV viewing and an entertainment console is in its infancy, Microsoft deserves full credit for being the best of an emerging market – smarter boxes that use voice, gesture, and button mashing for an improved entertainment experience. And, being a living, breathing, connected entertainment console means that Microsoft could update the software so that more commands are available.

For Microsoft to truly anchor itself in the living room, there are two likely future versions of Xbox One:

1.    Ships with a conditional access card – after a partnership was put in place for Microsoft to become a service partner provider to any of the cable or satellite companies. This would require a deep partnership, and this is a time when competition for boxes in the living room is coming from companies such as Sony, Apple, and Google. Game on!

2.    The cable/satellite model is broken and true, over-the-top access becomes the norm. This means that any IP-addressable box (think any box connected to the Internet) could deliver the same content currently being distributed over the air or through satellite and/or cable.

The launch of Xbox One reminds me of a line from the Lord Of The Rings: Fellowship of the Ring in 2001, when Sam tells Frodo “If I take one more step, it'll be the farthest away from the Shire I've ever been.” With Xbox One, Microsoft has gone the farthest it has ever gone with TV, but has more steps to take.

Beyond TV, Xbox One does many things well, starting with gaming. We have broken down Xbox One by areas key to consumers.

Xbox One as a gaming console : Check! Gaming is fun and the new controller works well, highlighted by the improved rumble features. New games are easy to find in the store, quick to load and play, and the lineup. The graphics for the launch titles look great as expected, and Microsoft has a launch lineup that hits the major gaming genres.

To the dismay of GameStop, not having a game disc to insert is a really nice feature for consumers. Going disc-less is now an option for Xbox One owners (and PS4 owners). This option helps consumers avoid having to chase down discs, empty cases, scratched discs…all the benefits of going digital that consumers are already familiar with thanks to the music industry.

Microsoft has a solid launch lineup, has a big exclusive in Titanfall coming from Electronic Arts and Respawn Entertainment in the first half of 2014, and has already announced the next and widely anticipated installment of its Halo franchise.

Xbox One as a Skype portal: Big points here for Microsoft with the integration of Skype, which is captured beautifully by the camera in the Kinect sensor. The picture is wide, in HD, looks great, and the audio sensors work well even when two cousins are busy yelling at two other cousins on Skype across the country.

This app will see some significant usage and is a significant differentiator for Microsoft over the competition.

Xbox One as a movie services portal : Check the boxes – well done. Netflix. Amazon Instant Video, Vudu, Redbox…all the major providers. It will be interesting to see if the trend from the Xbox 360 continues – heavy video consumption such as movies by Xbox One owners – enough to account for more than 50% of total usage? Sony and Microsoft are clearly two of the biggest Netflix partners on the planet, and it stands to reason that this will continue.

Microsoft has done a nice job with the integration of movie content with service providers. When searching on a movie, the movie service options are shown for a particular movie, and users can quickly select the service they use and get right into the movie.

The integration with Microsoft Smart Glass looks promising, but the movies will have to be rented or purchased from the Microsoft store, not from a service provider such as Netflix or Amazon. It is unclear if this will change in the future. The goal of having a tablet integrating with the Xbox One interface on the TV works well, and is aligned with consumer behavior of being on a second device while watching TV.

Kinect voice commands work quite well for movies, such as with Amazon Instant Video. It is easy to pause, play, fast forward, etc.

Xbox One as a TV services portal : Check the boxes: Hulu Plus, HBO Go, ESPN 3, Fox, NFL Network, Netflix…the list goes on and it is highly adequate. The Xbox One, much like the Xbox 360, gets you what you need on this front. This lineup of TV services is critical as more and more over-the-top experiments take place.

Kinect voice commands works well, too, with typical TV show playback.

Xbox One as a music player : Simply put, the Xbox Music service isn’t enough. Microsoft re-upped its licenses with the music labels, so Xbox Music continues to exist. Consumers can’t use more popular music services such as Pandora or Spotify on Xbox One at this point and hopefully, this will change. Further, no integration with iTunes or any home music collection you have on your network. This is disappointing.

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