Beyond the Demo: 2018 Could Be Year for Longer, Profitable VR Content

Xconomy San Francisco — 

René Pinnell says he and his wife Selena Pinnell were “blown away” by the virtual reality projects their friends were creating in 2014, so they looked for an entrepreneurial niche that would allow them to support such artists.

That year the couple, both trained in design, founded a startup in San Francisco, then called KaleidoscopeVR. Its first mission was to launch a Bay Area VR festival to showcase works in the new immersive art forms. That expanded into a 10-city tour in 2015, and a world tour in Europe and Asia in 2016, Pinnell says. It was a pivotal year when VR first became accessible to the consumer mainstream, as many manufacturers released their first commercial headsets, and media attention spiked.

Venture investing in virtual reality and augmented reality surged into the $2 billion range in 2016, according to a Crunchbase analysis. Worldwide spending in the sector reached $6.1 billion, International Data Corp. (IDC) reported. Since then, everyone’s been watching to see whether the dawning era of immersive technology would live up to the “hype” of that breakout year.

Pinnell says Kaleidoscope has been trying to help shape and catalyze the sector by expanding its mission in 2017 to include an online, membership-only marketplace, Kaleidoscope.fund, to bring immersive entertainment artists together with industry groups that might finance their projects, license their productions, or hire them. Kaleidoscope’s industry members pay $199 a month to get a look at immersive productions; selected VR/AR artists join at no charge.

Kaleidoscope, which recently moved to Portland, OR, also assembled a panel of 25 industry experts in September to assess the progress and prospects of of VR in the entertainment industry. Based on their insights, Pinnell prepared the group’s first Emerging Trends report, along with strategy recommendations for VR/AR artists and game designers for 2018. The panel, which Kaleidoscope calls the Leadership Council for Immersive Art & Entertainment, includes representatives from Amazon Studios, HTC Vive Studios, Paramount, Fox, Sony, and Hulu. Their consensus, Pinnell says, is that the sector could reach a turning point this year, when the early period of short-form experiments and low financial returns could give way to longer immersive works with potential profits.

More about that optimistic industry insiders’ forecast to come; but first, let’s look at the challenges.

Building the community of hardware makers, content developers, and consumers

For the past few years, both VR/AR hardware makers and artistic creators have been concentrating on audience-building, rather than making profits a priority goal. High-end headset makers HTC and Oculus, which was acquired by Facebook for $2 billion in 2014, steeply reduced their prices in mid-2017, both to attract more consumers to the new medium and also to compete with less expensive head-mounted devices such as Samsung’s Gear VR, which is powered by smartphones. As for VR filmmakers and virtual reality game developers, most have concentrated on short, demo-like VR sequences to showcase what they can do, rather than aiming to make money, says Pinnell.

Consumers have been slow to buy headsets in the mass quantities that would make VR content more profitable to create; yet only the allure of more content will spur audiences to buy headsets. So the nascent industry has inched forward, as many VR game and film creators sacrificed revenue to advance their products into distribution channels, thereby benefitting the headset makers, who in turn discounted their prices, which boosted the audience for content.

Early last year, IDC had predicted 2017 spending of $13.9 billion for AR/VR, but in November, it scaled that estimate back to $9.1 billion.

Not surprisingly, the growth record has been choppy for VR in particular, which has to overcome a physiological barrier to consumer acceptance. Some viewers get dizzy or nauseated when they watch. And the technology still faces the typical “chicken and egg” dilemma that plagued the early days of other media format revolutions, going back to the debut of television itself, and the later rise of consumer video players. The adoption of pricey new entertainment equipment always hinges on the amount of content available to consume with it.

That symbiosis, however, has been an advantage for VR artists, because headset makers such as Oculus and HTC are currently the biggest funding sources for content creators, according to the report by Kaleidoscope’s expert panel. VR content studios are less likely to rely primarily on venture capital firms for seed funding than typical tech startups.

VC funding in 2017 has been estimated at $2.1 billion to $2.3 billion for the sector—not a massive percentage jump over the prior year. But the amount of VC investment doesn’t tell the whole funding growth story, because a host of strategic players are betting money on the future of VR/AR—from media companies like Universal and Imax, to Google and other tech giants, to retail advertisers such as Coca Cola and Volvo, according to the Kaleidoscope panel’s review of the industry’s progress in entertainment fields.

IDC, in its November report, estimates worldwide spending of $17.8 for the entire VR/AR sector in 2018, and predicts more than 60 percent of that revenue will come from commercial uses such as retail advertising and manufacturing.

Pinnell estimates that in 2017, more than $1 billion was invested in the immersive technology field’s art and entertainment segment alone. (The total includes money spent on content licensing deals, which could also be defined as revenue.) That estimate didn’t take into account angel investments or VC firm money, which Pinnell doesn’t track. It’s based on conversations with his own industry contacts, and information he gleaned from steam.spy, which displays data drawn from the online video and VR game store Steam. Most of that $1 billion, however, went to big studios and production houses rather than to independent artists, he says.

A number of high-end VR films have been making their debuts on the established film festival circuit, and such consumer experiences can stimulate headset sales, Pinnell says. A notable pioneer among them, he says, is Arte Experience’s “Notes On Blindness: Into Darkness,” a VR short that accompanied the premiere of the documentary “Notes On Blindness’’ at the Sundance Film Festival in 2016. Both works are based on the diary of John Hull, a theologian who wrote about the experience of gradually losing his sight in 1983.

Kaleidoscope collaborated on a VR film to be presented at Sundance this year: “SPHERES: Songs of Spacetime,” a musical short based on the aftermath of a collision between black holes. The company also maintains distribution channels for its curated selections of VR works via YouTube, and on a digital channel formed in 2017 with Inception, a creator and distributor of immersive works.

How VR/AR artists can pivot toward profits in 2018

The key recommendation of the expert panel convened by Kaleidoscope in 2017 is that VR/AR developers should build on what they’ve learned and focus on lengthier projects that have the potential not only to draw revenues, but actually to yield a profit. That advice is based on the panel’s conclusion that the community of VR consumers may now form a critical mass.

“This past year, the industry grew at a slower rate than many analysts predicted. However, it has … Next Page »

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