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Industry Spotlight: Immersive Tech
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Trends for the future
Stocks I think will benefit
In this new segment, my aim is to work through various industries where I see potential investment trends - outlining the main players, the market dynamics and main points you need to know in order to make informed investment decisions.
One of the many important aspects of long-term investing involves identifying and acting on industry trends. As with many things, this is easier said than done. Not everything which seems a ‘sure bet’ at this moment will become the next big industry.
Part of investing in emerging industries is down to timing, part is down to technological change, part luck.
Over the time-frame of the Covid-19 pandemic, Immersive technology has experienced a multitude of favourable tailwinds - propelling the industry forwards exponentially. These tailwinds include hardware developments, commercial appeal, industry backing, metaverse talk, the shift towards remote working and the fact people want to connect in more authentic ways online.
In this Industry Spotlight I will aim to outline what this trend means for us, as investors, and how we can position our portfolio in order to benefit from this potential opportunity.
To start, let's take a broad look at the industry. Who are the main players? What is the technology involved? And how has the industry grown?
2. The hardware
To fully understand the industry, let's first take a look at the core hardware. This won’t be an extensive look, but more of an overview.
“Virtual reality is a complete immersion of experiences that completely shuts off the physical world.”
The idea of virtual reality has been around for a long, long time. With the first attempt at a headset coming roughly 70 years ago…
Invented in the 1950s, VR’s development has experienced peaks and troughs. The first VR head-mounted display (HMD) system, The Sword of Damocles, was invented in 1968 by computer scientist Ivan Sutherland and his student Bob Sproull. Meanwhile, the term “virtual reality” was popularised by Jaron Lanier in the 1980s. Ten years later, VR was used for training and simulation in the US military and the National Aeronautics and Space Administration (NASA). Mass production of VR systems began in the early 1990s, led by Virtuality, which opened dedicated VR arcades.
Since the 50’s, VR technology development has been moving at a snails-pace up until about the last 5 years where the technology used in VR headsets has become powerful enough to produce consumer-ready ‘tetherless’ (without the need for wires) headsets.
The first, and by far the most popular tetherless device was the Oculus Quest (owned by Facebook). The Oculus Quest was released on the 21st May 2019, with the subsequent model (creatively named ‘Oculus Quest 2’) being released on August 24th the following year. Both releases being almost perfect timing for a global pandemic.
Essentially, the Oculus Quest is powered by the equivalent of a powerful android phone - using the Qualcomm Snapdragon XR2 chipset.
Outside of Facebook, there is plenty of competition within the VR market. However most companies are focusing on higher-end VR experiences where you would need to be tethered to a powerful computer.
More recent developments include the launch of Sony’s PlayStation 5 and Microsoft’s Xbox Series X and Series S, which are expected to provide VR industry players new opportunities to make rapid strides in the consumer VR space.
Industry players are realizing there is a lot of potential in the enterprise sector and have swiftly forayed into the lucrative space. Major companies, such as Sony, Microsoft and Samsung, are committed to innovating VR headsets with immersive experiences in an attempt to bring VR into the mainstream. Prominent players in the global VR market include:
2.1.2. Leading players
If we split the market into distinct segments, there are some obvious leading players within the Virtual Reality sector…
At the moment there is one clear leader within this space - and that is Oculus (owned by Facebook).
Facebook is leaps and bounds ahead of almost every other player in the industry as they have been able to establish the ‘go-to’ consumer device for over the shelf casual VR gaming and entertainment.
The past two years have seen Facebook establish an ecosystem (the oculus quest store), much like the apple store, where gamers can go to access a library of games, applications and content. In my opinion, this alone will be more valuable than the actual hardware - i.e. the ability to lock people into the Facebook ecosystem.
The economies of scale Facebook has been able to utilise allows them to undercut the rest of the market, making it by far the most popular VR device.
The one downside is the potential privacy issues and the need to have a Facebook account in order to use the Facebook hardware. I could easily see someone like HTC coming in and eating up a significant chunk of market share once the technology becomes more commonplace.
Facebook has a first-mover advantage here, for sure.
This market segment is slightly more complex, and involves many more players jostling for positions.
Sony, Valve, HTC and Samsung each have popular devices available. Each offering similar specs in terms of resolution, comfort, controllers, haptic feel and cost.
One of the distinguishing factors I can see making a significant difference over the coming years is the introduction of the PS5 and the hotly anticipated PSVR 2. This could make high-end VR far more accessible to the average consumer - acting as a ‘bolt-on’ to the PS5 software/hardware stack.
Currently, in order to have a good tethered experience, you would need to own a powerful gaming PC - which most do not have/cannot afford.
2.2. Augmented Reality
Whereas virtual reality replaces your vision, augmented reality adds to it. AR devices, such as the Microsoft HoloLens and various enterprise-level "smart glasses," are transparent, letting you see everything in front of you.
These AR devices are designed to act as a bridge between the physical and digital worlds and allows for freedom of movement whilst projecting images over your physical environment.
The concept of AR extends to smart devices which includes AR apps and games, such as Pokemon Go which uses your phone’s camera to track your surroundings and overlay additional information onto the screen.
The information displayed can be as simple as a data overlay showing weather, time or speed. Conversely, the projections can be as complex as 3D holograms which the user can interact with. Below is a video from 2019 which is a useful demonstration on the current ‘vision’ for enterprise AR.
Some might perceive the lesser levels of immersion as a disadvantage compared to Virtual Reality, which is fair. For example, While VR completely covers and replaces your field of vision (FOV), AR apps only show up on your smartphone/tablet screen. Additionally, the HoloLens can only project images in a limited area in front of your eyes (small FOV). It isn't very immersive when a hologram disappears once it moves out of a rectangle in the middle of your vision, or when you must stare at a small screen while pretending that the object on that screen is in front of you.
The Augmented reality landscape is, just like Virtual Reality, very much in the emergent phase. We could argue some companies are ahead of others in terms of product development or market share, however these dynamics could easily change in the near future.
More than likely we will see the big players like Facebook, Microsoft, Samsung, Apple and Snapchat hoover up smaller companies in order to add to their product offering.
There are two broad classes of AR apps: marker-based apps and location-based apps. Marker-based apps use predefined markers to trigger the display of AR overlays on top of the image. Location-based apps use the GPS, accelerometer, or compass information to display AR objects on top of physical ones.
Splitting Augmented reality into distinct sectors, we can see various leaders:
Enterprise (professional use):
Microsoft has established their intent to lead the way in terms of Augmented Reality hardware and software within the enterprise market. Their Hololens glasses, along with the Microsoft Mesh software gives them a big advantage moving forwards.
Though less of a use-case right now, there is real potential for Augmented reality to carve a niche in the entertainment/gaming sector. This may manifest in several different ways:
The use of apps on our phones to bring live events (sporting or otherwise) into our homes. BT pioneering this area.
The use of headsets such as Magic Leap to add a physical layer to esports (e.g. video below)
The use of Augmented Reality headset and mobile technology at physical events (e.g. escape rooms).
...and many more.
The competition level here seems more ‘grassroots’. For example, the list of the top AR headsets includes a bunch of names you (and I) most likely never have heard of.
This use-case is fairly nebulous in that it’s unclear what the final product or use-cases will look like. Most likely, once the technology has sufficiently developed, the best general-use AR headsets will be capable of all the basic functions such as simple real-time overlays (giving you directions etc.), allowing you to capture and share images/videos, play music and video-call with friends.
In comparison - at the moment, we have a bunch of different companies specializing in different use-cases. For example, Snapchat is developing image/video-capture glasses, Microsoft is developing AR glasses for collaboration, VuziX is developing live video streaming glasses and Magic Leap are developing glasses for entertainment/gaming.
My personal belief is that facebook will be the first to develop a working model of AR glasses that can achieve basic multiple use cases. Only last week they announced their ‘AR’ glasses which they have been developing with RayBan.
2.2.2. Leading Players
The main software being used within VR development falls into two main buckets - Unity or Unreal Engine. You can use both for VR development, and it’s mainly a matter of personal preference as to which engine you go with.
AR is a bit more complex at this stage. Mostly you can still use the core game engines to do most of the grunt-work, however specific bolt-ons will be needed. Simplifying this massively, these bolt-ons are called SDK’s (Software Development Kits). Examples include:
Apple AR kit
Spark AR Studio
Google AR Core
In addition to this, Snapchat are making real strides at enabling simple AR development in order to create a user-generated library of AR content. This is called Lens Studio.
3. Use cases
Virtual reality enables training for situations never before possible. The addition of full ‘immersion’ helps improve concentration and therefore retention.
A PWC study shows 40% of VR-learners saw improved confidence compared to classroom learners and 35% improvement over e-learners to act on what they learned after training in VR.
An example of a UK-based company specialising in VR training for hazardous situations is a company called Digitalnauts. They help to create realistic environments which would be hard to replicate without danger in real life.
3.2. Remote work
As we have discovered over the past year, remote working is becoming more common and yet still remains a struggle for the vast majority of people. Without the element of human connection and collaboration, many jobs have suffered.
VR and AR devices aims to enable collaboration between colleagues in disparate locations.
Microsoft are targeting this market with their Hololens 2 technology and Microsoft Mesh software stack.
Another interesting product is VuziX’s AR glasses - allowing users to benefit from experts watching and instructing from around the world.
At its core, immersion sells. Due to this fact, we are beginning to see more and more examples of immersive experiences within advertising.
"67% of media planners and buyers want AR/VR ads in digital marketing campaigns"
Greater levels of immersion result in warmer leads.
An immersive experience results in a better connection to the product/brand.
Similar to the training use-case, VR and AR prompt emotional responses due to the feeling of ‘presence’. Studies have found we are more likely to retain information when emotion is triggered.
Innovation is still young in this field, but it’s looking promising that immersive technology will be used to optimize learning and retention?
Another unintended impact of the pandemic (although a trend that was well underway beforehand) is the normalisation of shopping from home. I can safely say I shop from my phone or PC far more often than I will go into any shop nowadays.
Being able to try on outfits using AR filters will be a game-changer.
You might even have an avatar with your exact sizing - allowing you to visualize the outfit. Hinting at the beginnings of a metaverse-like avatar of yourself, or a ‘digital twin’.
3.6. Health and Fitness
As a generalisation, the wearables market has been heavily driven by activity and fitness tracking use-cases. This has (and likely will) continue moving forwards.
For the most part, it makes sense. We already know the use-case exists in a select few Cycling and Swimming goggles - mainly presenting information on the screen such as performance data. In the future we should expect much more from this industry.
For example, when Facebook launched the Quest 2, they emphasised their focus on using VR for fitness.
“Sports consumers have a higher propensity to spend on new and innovative devices that may help them improve their sports performance, and so this vertical is an important proving ground for new devices”
On the customer side… Imagine walking into a store and having an AR overlay telling you exactly where to go to find a certain item.
This is possible, and closer than you might think.
On the seller side, augmented reality is being used in warehouses to improve efficiency.
“Fortune Business Insights forecasts that the global market for VR gaming will reach $45.2 billion by 2027 (from $5.1 billion in 2019).
This translates to a compounded annual growth rate (CAGR) of 31.8%, compared to a CAGR of only 5.3% for the overall gaming console market over the same forecast period.”
VR gaming is gaining traction. Facebook are propelling it into the mainstream with the Oculus Quest 2. Many of these games seem clunky and gimmicky at the moment, however there are some gems such as Eleven Table Tennis which is perfect for Virtual Reality.
AR gaming is clunky and mainly limited by the current hardware (Smart phones).
Immersive technology could tap into the booming E-Sports industry - adding a layer of physicality to traditional e-sports.
VR is perfect for 3D collaborative design work.
The element of presence and perspective adds something you simply cannot get in person.
There are many different companies focusing on VR design tools.
Gravity Sketch - based in the UK - is one of the front-runners within the industry.
Dynamic visualization of a building/site will be an invaluable tool for architects.
You will be able to get a 'feeling' for the design, which is not currently possible.
Same goes for the construction industry.
Digital twins will be important here.
Immersive tech will change the way we consume Sport, Theater, Music, TV & Films.
We’re already seeing this play out, with one of the most well-renound theatre companies in the world (the Royal Shakespeare Company) having recently put on a live immersive performance using motion capture technology. This democratizes Theater.
Similarly with sport - BT Sport have started using AR as an option to overlay football in the UK. It’s fairly simple in its current form, but as more statistics and layers are added, the more value it brings to the viewer. These additions of Augmented Reality can add extra narratives that the viewer would otherwise not have had.
Other industry verticals, including aerospace, healthcare, military, gaming, and retail are also investing in immersive technology in order to take advantage of the potential for growth.
For example, Alaska Airlines is testing virtual reality headsets on selected flights between Boston and Seattle and Boston and San Diego. The airline has partnered with French company SkyLights to test the new headsets as a potential in-flight entertainment option. It is the first airline in North America to test VR at 35,000 feet.
The immersive sector is predicted to add Billions in value to the global economy. But how much exactly?
The augmented reality (AR) and virtual reality (VR) market has the potential to grow by $162.71 billion during 2021-2025.
Ark invest predict AR to reach $140B in revenues by 2030
Ark also predict revenues from virtual worlds to grow from $180 billion today to $390 billion by 2025
PWC predict VR/AR will boost the global GDP by ~$1.5T by 2030 over a variety of different use-cases.
An interesting side note: lets say, for example, AR technology were to improve efficiencies within the healthcare industry (healthcare expenditure was worth ~$8 Trillion in 2018, probably more like ~$10 Trillion in 2021) by even as little as 0.5%. That could have a global cost saving impact of around $425Billion. There is plenty of potential here.
According to a survey by Yeti LLC on "The State of Virtual Reality", conducted among product developers at US-based companies, 85% of them either already have VR projects underway or will incorporate so within one to two years.
According to Transparency Market Research - In terms of revenue, the global immersive technologies market was valued at $ 81.82 Billion in 2020, and is expected to cross $2.6 Trn by 2031, expanding at a CAGR of ~38% during the forecast period.
Microsoft Inc. owns the largest amount of AR/VR patents, with a total of 10,014 patents spanning 3,080 patent families (could well be more by now).
According to Statista - 44% of consumers under 40 have used AR technology for shopping.
5. Trends for the future
*Note - these are just MY predictions*
Within the next decade, augmented reality will become a core tool for almost every industry (as outlined in the Use Cases section).
5G/6G will accelerate the adoption and development of Immersive Technologies.
VR/AR technology will be a direct window into the first instances of the ‘Metaverse’.
Remote work/collaboration will become commonplace, making these technologies the norm.
VR will lag behind AR due to fewer short-term use-cases, but will ultimately be capable of ‘full immersion’ within the next 10-20 years. I.e. you will struggle to distinguish between reality and Virtual Reality.
Haptic technology will play a large role in the success of VR/AR technology.
6. Stocks I think will benefit
Because of the relatively emergent nature of the immersive technology sector, it’s very difficult to be wholly confident in these investments playing out as I envisage. Below, I have outlined several companies I believe will benefit from the trend towards AR/VR.
These are current leaders in the immersive sector in one way or another, which I predict will remain dominant in the sector:
Picks and Shovel
Then we have the picks and shovel plays. You can think of these as the building blocks by which the AR and VR industry will be built upon. Only thing to note here is the fact that the AR/VR industry is a small subsection in relation to the scope of some of these businesses.
You could even go slightly higher-level picks and shovel by looking at manufacturers of AR projecting technology or screen technology, but I think this area has a tonne of development ahead.
Epic Games (not public, but could expose via Tencent, which owns 40%)
Then we have some slightly lesser-known AR/VR picks. These are companies who may be focusing of specific technologies within the immersive ecosystem such as haptics or AR screen displays:
Lementum (AR screen hardware)
Immersion Corporation (haptics)
Vuzix (AR for business)
Microvision (projecting images onto glass)
Autodesk (AutoCad will directly benefit from AR adoption)
ETSY (introducing AR within retail)
HiMax (integrated circuits for digital displays, chips)
Tobii (eye tracking)
WiMi Hologram (AR advertising)
Miriad (AR advertising)
7. Risks to consider
Global chip shortage - a global shortage in the availability of hardware needed to produce AR/VR devices will lead to higher development costs and therefore higher prices pushed to consumers - therefore leading to slower adoption rates.
Early days within the industry - It’s still too early to know whether this technology will take off in the future as I predict. Also, the companies leading the space at the moment aren’t necessarily going to be the leaders in 10-15 years time.
Technology usability is a long way off - take Augmented Reality for example, if you have used an AR headset you will know that the ‘vision’ of AR (as portrayed in film and TV) is far away from the ‘reality’. Here’s a video to show what I mean. And this isn’t to say it’s not good… The current ‘state of the art’ in terms of AR technology is mind-blowing, however it’s still a way off being fully commercially ready.
In summary, the line between digital and physical is becoming more and more blurry as this industry continues to develop alongside other key technologies.
The lofty predictions for high growth within the Immersive Technology sector are not unwarranted. The pandemic has been a real boost to consumer experimentation and has opened many peoples eyes regarding what is possible - accelerating the development of the industry.
The next decade will see these technologies become integral within many different industries. The potential is huge, so it's worth keeping an eye on how this industry develops.