Is VR a leap back in time for the games industry?

When we look back through the annals of time, there, etched in the history books will be “2016: The year of VR.” And what a year it’s been. We’ve already seen the Samsung VR launch to great applause, but with the imminent release of the PlayStation VR and Oculus Rift devices, the VR sector is about to shift into overdrive.

But VR is not exactly new. The concept of VR has been talked about for decades, but according to Moore’s Law, which predicts that over the history of computing hardware, the number of transistors in a dense integrated circuit doubles approximately every two years, it means that the technology is just reaching a level where it can fulfill the VR vision.

However, the VR bandwagon first started rolling in 2014, when Facebook acquired Oculus for $2 billion. More recently, Microsoft and Sony touted new VR-enabled hardware and there was suddenly the heady mixture of visionary financial success, a global distribution framework and a market that’s been waiting all of its life for this to happen. The perfect storm?

Well, Facebook, Microsoft and Sony certainly think so, and will undoubtedly have plans for how to make money out of VR. The analysts also agree, with Deloitte Global predicting that VR will have its first billion-dollar year in 2016, with about $700 million in hardware sales and the remainder from content. The majority of this is expected to come from video games, but while the hardware guys can clearly see a future, will the games themselves actually be a leap back to the past when it comes to the player experience?

Back to the future

To answer that, let’s travel back to the good old days, when, to make money from video games you just had to get two things right — marketing and distribution. No one knew how much value was derived by the player, because they offered a closed environment, so any notion of player retention or behavioral analysis was strictly for the birds, angry or otherwise.

Although this wasn’t always great for the players, it was a model with which investors and industry execs became comfortable. That was until the mobile games revolution, driven by the free-to-play (F2P) model, completely turned the industry on its head and democratized the entire player/publisher/developer relationship.

With supply vastly outstripping demand, players suddenly found themselves with the power of choice, able to ditch a game the second they became bored or frustrated. This forced publishers and developers to take player engagement and retention seriously for the first time; something which didn’t come naturally.

The winners are likely to be those who prioritize measurement and adaptation of the player experience.

They soon found that making money in F2P was a granite-tough business. In F2P, it’s common for 50 percent of players to leave a game after their first session, and less than 1 percent ever spend money, while the cost of paid new user acquisition has reached $4. However, while the revenue figures in the games industry continue to grow, according to Newzoo, at CAGR 6.6 percent over 2015-19 and the share of mobile will rise in that time from 33 percent to 44 percent, which monetization models will prevail and drive the long-term growth of VR, remains to be seen.

Which model will work in VR?

The F2P sector was created by smartphones and the instant anywhere capability to play games. This instant accessibility drives the session volumes that enable F2P to work on the wafer-thin margins that characterize the model.

Google Daydream has explicitly stated they will have global payments and distribution infrastructure in place to support in-app purchases within the VR environment from launch, but most industry commentators see the initial driving force for developers achieving ROI coming from a premium model that requires payment upfront.

Then there are ads — which on mobile are all about volume and interaction, which is why native ads are dying on the vine in F2P. Interstitials and rewarded video ads work well, as they fill the screen real estate to fully engage the attention and, in the case of rewarded ads, can be welcomed by players as an enhancement to the gameplay. In VR, this is likely to be different, with concerns over the number of sessions and session lengths that can be played on VR because of motion sickness. This brings product placement-styled native ads back into the picture.

So, unless an unknown means of monetization springs up, VR is going to have to mainly monetize on the same basis as premium games, starting the cycle over again — premium to democratization when the technology adapts to everyday life.

Fertile ground for innovation

For investors, it’s probably going to be the transformation of proven titles that have already made the console-to-mobile jump which are likely to provide the safe way forward. But even these are going to find the jump from a 2D screen to an explorable 360° environment heavy on development resource and a giant leap in terms of playability.

Static experiences, puzzle games, driving simulators and space/flight combat games, where the player is situated in some sort of cockpit as a form of natural grounding, are by far the best experiences I’ve seen so far. But I think the flow of proven titles to VR will be slow, which will leave a gap for the industry’s innovators to fill. As a result, we may see an indie renaissance and some much-needed innovation and dynamism in the sector, as we saw when PC and video games came to life in the 1980s and 1990s, possibly with more lightweight games that can monetize effectively by combining VR volumes on F2P margins, but without the user acquisition competition that’s around on mobile.

The premium model will undoubtedly be the way forward for most, but the lessons learned from F2P about player retention will pervade. This means that in the short term, the winners are likely to be those who prioritize measurement and adaptation of the player experience, while the world gets used to having this technology in their everyday lives.