BDO Knows: Technology

February 2017

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While 2017 Belongs to Virtual Reality, the Future Belongs to Augmented Reality

By Jakob Sand

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I want to start by making a prediction: The year ahead is going to be all about virtual reality (VR). OK, “all about” was to get your attention (guessing it worked—especially if you work with augmented reality, AR). Still, VR will dominate the news, VR products will fill store shelves—and the VR industry will likely make more money than AR too.

However, funding and deals are areas where AR will start to climb into the driver’s seat during 2017.
Part of the reason is that AR looks set to overtake VR in terms of market size, and in the medium-to-long term, it has a much broader potential impact on our lives than VR does.

Here is why.


Two new kinds of realities

Virtual Reality involves systems that immerse you in a fully computer-generated environment. Anywhere you look, everything is computer graphics. To achieve this full immersion, you need a headset, and over the last couple of years, you have suddenly become spoiled for choice. Companies like Facebook (Oculus Rift), Google (Cardboard and Daydream), HTC (Vive), Sony (PlayStation VR) and Samsung (Gear VR) all offer VR headsets.

Augmented Reality refers to a mix of computer-generated graphics and our physical reality. The two meld together, so to speak. The best-known examples are perhaps heads-up displays (HUD) in cars and modern fighter planes, as well as Google Glass. There have also been some experiments with AR contact lenses.

Apart from Microsoft (HoloLens) and Google (Magic Leap), the main producers of AR equipment are generally less well-known than their VR counterparts.


Gaming means VR comes first

If you went into an electronics store, you would quickly find VR equipment far more available than AR. The main reason is that VR systems are more mature than AR systems. While VR is already in stores, many AR systems are still working their way towards full-scale mass production after completing very successful trials.

Looking at the market, 2016 has, in many ways, been a breakout year for VR: After much hype, VR finally made its commercial debut, with Facebook, HTC, Samsung, Sony and several other tech companies leading the initial launch.  And while last year’s VR sales didn’t quite take off as quickly as many analysts had predicted, the market is still ripe for growth in 2017. According to a recent International Data Corporation (IDC) study, worldwide revenues for the AR/VR market are expected to grow from $5.2 billion in 2016 to more than $162 billion in 2020—representing a compound annual growth rate (CAGR) of 181.3 percent over the 2015-2020 period.

The main driver behind this growth projection is computer games, followed by fully immersive entertainment experiences.

2017 will see the emergence of the first games that fully take advantage of the new possibilities VR introduces. VR could open up gaming to a wider customer segment, similar to what we saw in 2006 when the Wii console rocketed Nintendo’s sales and stock value into the stratosphere.

Next in line will be fully immersive entertainment. Think 360-degree film experiences, etc. For example, imagine being able to follow a snowboarder down the side of a mountain, and having the experience of actually being on that slope. After gaming and entertainment comes VR films and similar new ventures.
While VR does have lots of potential outside of entertainment, the entertainment space is the most conducive to getting funding. This seems to limit the advances in VR outside of entertainment.

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Starting gun sounds on the AR revolution

Turning to AR, it can initially be difficult to see how it can match or surpass VR’s fast growth—especially when considering that IDC projects AR sales for 2016 to be lower than those for VR.

Low expectations are partially due to the disappointing launch of Google Glass. Nevertheless, one thing that slipped below the radar at the time of Google Glass’s flop was how the product kick-started a wave of AR startups that have since been developing their solutions. While company names like Daqri, Blippar and Aurasma are not household names today, they could well become so in the coming years.

It is worth noting that many large tech companies are investing in both AR and VR through funding startups and M&A. Google has invested heavily in the AR startup Magic Leap, while Twitter has confirmed that it is working on AR/VR. Apple continues to keep its developments a secret, but there have been many indications that it will soon launch AR/VR products, which will, in part, be built on its acquisitions of AR startups Metaio and Flyby Media.

They will all be competing for customers in a market that analysis from Digi-Capital predicts will reach $90 billion in revenue by 2020.

Many new companies are entering the VR/AR race. A report from Woodside shows that the number of AR companies receiving funding has been steadily rising since 2010, with 2015 being the best year yet. At the same time, CB Insights data shows that the level of funding for AR companies has been rising, beating their VR “cousins” over the last three years.


Why AR will “win”

So why is technology with a smaller, less mature market going to “win?”

The reasons are threefold: One has to do with AR’s wide portfolio of possible applications; the second involves business opportunities for the complementary technologies associated with AR; and the third comes down to market developments.

AR’s greatest strength is its ability to overlay our reality with useful information. This has applications across many different industries.

To give a couple quick examples:
  • In factories: AR can instantly display status data for a machine, including its repair history and other statistics. It’s also possible to use AR for on-the-job training.
  • Healthcare: AR can display real-time patient data in front of a surgeon during an operation.
  • Education: AR can enable student interactions by creating things like in-school projections that can help bring lessons to life.
  • Engineering: AR can show an on-site projection of a building layout and enable conflict resolution before construction.
  • Real estate: AR can show how a house will look on-site before construction begins.
These are just a few examples. Other areas where AR has multiple use cases include entertainment, architecture, retail, the military, gaming and live events. The possibilities are endless.

Then there are the synergies between AR and complementary technologies. Industry 4.0 and the Industrial Internet of Things both mean an explosion in the amount of data produced and available to companies. Turning that data into meaningful and useful information is going to require artificial intelligence (AI) and machine learning, technologies that are progressing by leaps and bounds. That leaves finding a way to interact with this information where it is relevant—and that is where AR will play a central role.

Many companies are aware of these developments, which is partly why we are seeing so many new startups emerge and get funding. A rule of thumb is that there is an 18-to-24-month gestation period between startups getting funding and releasing their first products, joining an already rapidly growing ecosystem of AR hardware and software solutions.

Many of these products will start to hit store shelves in 2017. In turn, the number of possible use cases will rise as the competition for customers increases, drives down prices and encourages more innovation. In short, it looks like a perfect positive circle for AR.
 

Jakob Sand is a partner at BDO Denmark and leader of the Global TMT Corporate Finance and Technology teams. He can be reached at jks@bdo.dk.

To speak with a BDO Technology leader in the U.S., please contact Aftab Jamil, national leader of BDO USA’s Technology practice, at ajamil@bdo.com.