The reality of AR/VR business models


Image Credits: Lina Truman (opens in a new window) / Shutterstock (opens in a new window)

Tim Merel


Tim Merel is managing director of Digi-Capital.

More posts from Tim Merel

There is nearly as much confusion as there is excitement about augmented and virtual reality. While VR could be big and AR could be bigger (and take longer), there are more questions than answers out there. I’ll be doing a deep dive on one aspect of AR/VR every month. This month we’re kicking off with business models. AR/VR hardware sales, e-commerce sales, ad spend and mobile data/voice could drive more than 80 percent of all AR/VR revenues. Things might look a little different than what you expect.

Business models are hard to figure out during platform shifts, but can play out to great success (as in the case of mobile over the last decade). AR/VR is the fourth major platform shift (after PC, web and mobile). CEOs need to decide how to play. At the end of the day, business models come down to installed bases, use cases and unit economics, so let’s dip our hands in the virtual money pot and see what comes out.

Hardware sales

Facebook paid $2 billion for Oculus. Magic Leap took $1.4 billion from Google (and others). Apple bought Metaio. Plus major commitments from Microsoft, HTC/Valve, Sony, Samsung and other heavyweights. Serious folks. Not their first rodeo.

But hardware is hard to win. So why this much interest in an unproven early-stage hardware market? Looking at the future through the lens of the past helps, and that’s what is happening here.

Apple owns global mobile hardware profits in the market it created, making it the most valuable company on the planet (mostly). Google has taken MVP as well, but increasingly relies on advertising sold using other people’s mobile devices — even though it owns Android. Facebook learned valuable lessons from how mobile played out, including its early fumble and spectacular recovery. Hardware is the strategic high ground during platform shifts, and these guys know it.

AR/VR could have an installed base in the low single-digit hundreds of millions by 2020, ranging from low-end VR Cardboard up to premium AR Magic Leap (and everything in between). With long-run unit prices from free up to something equal to top-end smartphone prices, hardware sales could drive more than $4 of every $10 spent on AR/VR by 2020.


Ignoring hardware is not an option for established leaders and new insurgents. Hardware sales could be the one business model to rule them all in AR/VR, and early investment looks like smart money.

E-commerce sales

Alibaba led Magic Leap’s $793.5 million round at a $4.5 billion valuation, with vice chairman Joe Tsai joining the board. Alibaba and Tsai are amongst the best and brightest in China (and the world). Why would a Chinese e-commerce company throw hundreds of millions of dollars at a Florida hardware startup with no sales?

E-commerce sales (goods and services, not in-app purchases) could take almost $2 of every $10 spent using AR/VR in five years’ time. Alibaba, Amazon, eBay and a range of new startups will be able to sell stuff to folks in totally new ways. Some of this might cannibalize existing e-commerce/m-commerce, but AR/VR could also grow e-commerce’s share of all sales.

Advertising sales

For app and content developers (not selling hardware, goods or services), advertising sales could be the most valuable business model at around $1 of every $10 generated by AR/VR. The first AR advertising unicorn emerged this year with Blippar, and that’s before the head-mounted display market hits its stride.

As advertising formats emerge, from virtual banner equivalents to full-blown, native AR/VR formats like The Martian VR Experience, AR/VR advertising could follow the path blazed by web and mobile. With one-third of global advertising and half of all Chinese advertising in web/mobile in 2016, platform change means serious business for advertisers. AR/VR advertising is more immersive than any rich media (when done right), and ad spend should follow the eyeballs.

Mobile network data/voice

Mobility will drive installed base for AR/VR.

For VR, installed base will be driven by price, with mobile VR solutions trending down from $99 to free. Free is the most compelling price point, despite high-end VR giving a more complete experience (for now). (Note: PlayStation VR will be the other volume driver for VR installed base, again due to price plus PS4’s existing installed base.)

For AR, mobility is even more fundamental than for VR. AR devices that can’t make phone calls or access cloud-based services all day out of Wi-Fi range won’t be able to replace smartphones in the long run. AR devices that don’t help mobile networks make money from data/voice won’t be cross-subsidized by the telcos — a key to mass adoption. We’ve pushed hard for AR hardware makers to prioritize cellular capability and longer battery life on roadmaps for this reason.

Mobile network data revenue from AR/VR could be golden for the telcos. YouTube estimates that each frame of 360 video requires 4-5 times the bandwidth of traditional video. High-resolution, high-frame rate, stereo images and data could drive some applications even higher in terms of bandwidth requirements; someone has to pay for all that data. AR/VR data could be the catalyst to break mobile networks out of their current annual revenue growth of less than 2 percent — so it’s a big deal.

Mobile network voice revenue for AR/VR (voice with mobile Quality of Service, not VoIP) will largely cannibalize existing mobile voice revenues rather than add new revenues for the telcos. They’ll be there, but this isn’t new money.

In-app purchases

For mobile developers, in-app purchases are one of the core business models. Top-grossing mobile charts are dominated by free apps, and even premium console/PC games markets see downloadable content as a major business model. The AR/VR free versus paid app question is yet to be answered, but users have been trained that digital content is mostly free. Younger users, in particular, rarely pay for content, so there’s no putting the free genie back in the bottle.

In-app purchases should be a major business model for AR/VR developers, whether through speed-ups/virtual items or additional services. There will be a premium apps market (see below), but in-app purchases could play as big a role in AR/VR as they already do in the mobile and web markets.


Netflix, Amazon, Hulu, Spotify and others proved how effective subscription business models can be for web/mobile. AR/VR content and SaaS players are set to offer services that folks will happily subscribe to every month (although these might come at the expense of other platforms). Higher levels of service and ad-free services could drive AR/VR subscription revenues, although more innovative models may arise.


The enterprise market is well-served by AR players like Microsoft, Meta, ODG and DAQRI, as well as a range of VR service/solution providers. With use cases across military, medical, education, architecture/construction, maintenance and beyond, enterprise sales will be a driver for both AR and, to a lesser extent, VR.

Replacing traditional desktop/laptop machines might take some time, but business users will be able to improve productivity in specific areas. With HoloLens now on the International Space Station, AR/VR will reach new heights for enterprise users (pun intended).

B2B sales from AR/VR services/solutions providers will also be part of the mix. B2B revenues will come from areas like graphics engines (Epic’s Unreal Engine at the high end to bundled, free services like Amazon Lumberyard with AWS), facial animation (Cubic Motion), gesture recognition (Leap Motion, Gestigon), 3D model distribution (Sketchfab) and more.

Premium apps

Premium apps will have a role to play in AR/VR, despite the potential dominance of free apps. The higher-end the user experience, the greater the potential for paid business models. High-end VR games could see the highest proportion of premium apps, leveraging an installed base of console/PC gamers accustomed to paying up to $60 for their fun. Non-games AR/VR consumer apps more broadly could see a lower proportion of premium apps, similar to the paid share of mobile apps today.

There’s virtual gold in them thar hills

Back when Angry Birds’ 99-cent app ruled mobile, few predicted Supercell’s and King’s in-app purchase business models would dominate today. So while long-term business models could look different than those we’ve explored, AR/VR entrepreneurs don’t need to reinvent the virtual wheel. They get to augment it.

In the coming months we’ll be digging in all over the place, so feel free to reach out if your company is doing something special (no guarantees on covering you, it’s a big market). Topics will include AR/VR video, commerce, social, voice/messaging, data, enterprise/B2B, advertising, space (I’ve been talking to NASA), games, theme parks, user interfaces, optics, processing (CPU/GPU/VPU), audio, platforms, tracking/sensors, venture capital, countries (U.S., China, others), pricing and users.

More TechCrunch

After Apple loosened its App Store guidelines to permit game emulators, the retro game emulator Delta — an app 10 years in the making — hit the top of the…

Adobe comes after indie game emulator Delta for copying its logo

Meta is once again taking on its competitors by developing a feature that borrows concepts from others — in this case, BeReal and Snapchat. The company is developing a feature…

Meta’s latest experiment borrows from BeReal’s and Snapchat’s core ideas

Welcome to Startups Weekly! We’ve been drowning in AI news this week, with Google’s I/O setting the pace. And Elon Musk rages against the machine.

Startups Weekly: It’s the dawning of the age of AI — plus,  Musk is raging against the machine

IndieBio’s Bay Area incubator is about to debut its 15th cohort of biotech startups. We took special note of a few, which were making some major, bordering on ludicrous, claims…

IndieBio’s SF incubator lineup is making some wild biotech promises

YouTube TV has announced that its multiview feature for watching four streams at once is now available on Android phones and tablets. The Android launch comes two months after YouTube…

YouTube TV’s ‘multiview’ feature is now available on Android phones and tablets

Featured Article

Two Santa Cruz students uncover security bug that could let millions do their laundry for free

CSC ServiceWorks provides laundry machines to thousands of residential homes and universities, but the company ignored requests to fix a security bug.

16 hours ago
Two Santa Cruz students uncover security bug that could let millions do their laundry for free

OpenAI’s Superalignment team, responsible for developing ways to govern and steer “superintelligent” AI systems, was promised 20% of the company’s compute resources, according to a person from that team. But…

OpenAI created a team to control ‘superintelligent’ AI — then let it wither, source says

TechCrunch Disrupt 2024 is just around the corner, and the buzz is palpable. But what if we told you there’s a chance for you to not just attend, but also…

Harness the TechCrunch Effect: Host a Side Event at Disrupt 2024

Decks are all about telling a compelling story and Goodcarbon does a good job on that front. But there’s important information missing too.

Pitch Deck Teardown: Goodcarbon’s $5.5M seed deck

Slack is making it difficult for its customers if they want the company to stop using its data for model training.

Slack under attack over sneaky AI training policy

A Texas-based company that provides health insurance and benefit plans disclosed a data breach affecting almost 2.5 million people, some of whom had their Social Security number stolen. WebTPA said…

Healthcare company WebTPA discloses breach affecting 2.5 million people

Featured Article

Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Microsoft won’t be facing antitrust scrutiny in the U.K. over its recent investment into French AI startup Mistral AI.

18 hours ago
Microsoft dodges UK antitrust scrutiny over its Mistral AI stake

Ember has partnered with HSBC in the U.K. so that the bank’s business customers can access Ember’s services from their online accounts.

Embedded finance is still trendy as accounting automation startup Ember partners with HSBC UK

Kudos uses AI to figure out consumer spending habits so it can then provide more personalized financial advice, like maximizing rewards and utilizing credit effectively.

Kudos lands $10M for an AI smart wallet that picks the best credit card for purchases

The EU’s warning comes after Microsoft failed to respond to a legally binding request for information that focused on its generative AI tools.

EU warns Microsoft it could be fined billions over missing GenAI risk info

The prospects for troubled banking-as-a-service startup Synapse have gone from bad to worse this week after a United States Trustee filed an emergency motion on Wednesday.  The trustee is asking…

A US Trustee wants troubled fintech Synapse to be liquidated via Chapter 7 bankruptcy, cites ‘gross mismanagement’

U.K.-based Seraphim Space is spinning up its 13th accelerator program, with nine participating companies working on a range of tech from propulsion to in-space manufacturing and space situational awareness. The…

Seraphim’s latest space accelerator welcomes nine companies

OpenAI has reached a deal with Reddit to use the social news site’s data for training AI models. In a blog post on OpenAI’s press relations site, the company said…

OpenAI inks deal to train AI on Reddit data

X users will now be able to discover posts from new Communities that are trending directly from an Explore tab within the section.

X pushes more users to Communities

For Mark Zuckerberg’s 40th birthday, his wife got him a photoshoot. Zuckerberg gives the camera a sly smile as he sits amid a carefully crafted re-creation of his childhood bedroom.…

Mark Zuckerberg’s makeover: Midlife crisis or carefully crafted rebrand?

Strava announced a slew of features, including AI to weed out leaderboard cheats, a new ‘family’ subscription plan, dark mode and more.

Strava taps AI to weed out leaderboard cheats, unveils ‘family’ plan, dark mode and more

We all fall down sometimes. Astronauts are no exception. You need to be in peak physical condition for space travel, but bulky space suits and lower gravity levels can be…

Astronauts fall over. Robotic limbs can help them back up.

Microsoft will launch its custom Cobalt 100 chips to customers as a public preview at its Build conference next week, TechCrunch has learned. In an analyst briefing ahead of Build,…

Microsoft’s custom Cobalt chips will come to Azure next week

What a wild week for transportation news! It was a smorgasbord of news that seemed to touch every sector and theme in transportation.

Tesla keeps cutting jobs and the feds probe Waymo

Sony Music Group has sent letters to more than 700 tech companies and music streaming services to warn them not to use its music to train AI without explicit permission.…

Sony Music warns tech companies over ‘unauthorized’ use of its content to train AI

Winston Chi, Butter’s founder and CEO, told TechCrunch that “most parties, including our investors and us, are making money” from the exit.

GrubMarket buys Butter to give its food distribution tech an AI boost

The investor lawsuit is related to Bolt securing a $30 million personal loan to Ryan Breslow, which was later defaulted on.

Bolt founder Ryan Breslow wants to settle an investor lawsuit by returning $37 million worth of shares

Meta, the parent company of Facebook, launched an enterprise version of the prominent social network in 2015. It always seemed like a stretch for a company built on a consumer…

With the end of Workplace, it’s fair to wonder if Meta was ever serious about the enterprise

X, formerly Twitter, turned TweetDeck into X Pro and pushed it behind a paywall. But there is a new column-based social media tool in town, and it’s from Instagram Threads.…

Meta Threads is testing pinned columns on the web, similar to the old TweetDeck

As part of 2024’s Accessibility Awareness Day, Google is showing off some updates to Android that should be useful to folks with mobility or vision impairments. Project Gameface allows gamers…

Google expands hands-free and eyes-free interfaces on Android