Virtual reality – the creation of a fully immersive, digital environment using specialised hardware and content – is not a new concept. For decades, so-called ‘VR’ has generated hype as ‘the next big thing’ in entertainment, but never quite succeeded in reaching its potential. It's been held back by a lack of technological experience and expertise and the absence of high-quality content to market new VR-enabled headsets. Not to mention the fact that VR was synonymous with the esoteric world of computer whizzes and gaming nerds – unappealing, perhaps, to the average consumer.
But VR is suddenly enjoying a new lease of life and, this time, it looks more likely than ever to sustain. The VR market exploded in 2017, with revenues soaring over 350 per cent year on year to $3.9bn (£3bn), according to PwC. And sales momentum is forecast to continue, with an estimated compound annual growth rate of 40 per cent to $21bn in 2022.
The industry’s current impetus stems largely from the development of a new range of consumer-friendly headsets by the world’s biggest tech giants. Facebook (US:FB) acquired Oculus VR – a maker of specialist VR hardware – in 2014 for $2bn, and subsequently marketed the ‘Oculus Rift’ device for general consumption. Other behemoths including Microsoft (US:MSFT), Alphabet (US:GOOGL) Samsung and Sony’s Playstation have also created headsets, targeting a wider, more mainstream audience.
And while the initial wave of these devices – including the Rift – required a connection to a PC, games console or smartphone, the latest versions – including the ‘Oculus Go’ and the ‘Mirage Solo’, developed by Google and Lenovo – are standalone. Moreover, the ‘Go’ costs just $199 – cheaper than its predecessors. Historically, vast expense played a significant role in preventing headsets from enjoying mass-market proliferation.
So how can private investors buy into the emerging VR space? Public hardware developers are largely listed in the US and Asia Pacific regions. But it may be preferable to invest in these huge, well-diversified tech companies for whom VR is just one of several business areas. It would certainly minimise the risk should this new generation of devices and services fail to live up to expectations.
Meanwhile, new hardware has brought the need – and the incentive – for better content. It's here that the London market holds more opportunity. The sheer breadth of these content creators’ specialisms reflects the fact that VR is transcending the realms of entertainment and media, expanding into education, training and even medicine too.
Before going any further, we must also highlight another, related emerging technology: augmented reality. AR entails the overlaying of digital figures onto real-life backdrops – as demonstrated by the popular smartphone game, Pokémon Go. For some, AR’s long-term prospects and applications could be more lucrative than those of VR.
Gaming
While VR’s potential uses have become more varied over time, it is traditionally synonymous with gaming – conveniently, a burgeoning mini-sector on London’s junior market. Video games developer Frontier Developments (FDEV) has a VR-specific version of its game Elite Dangerous, while one of Mercia Technologies’ (MERC) portfolio companies, nDreams, also operates in this space. Other listed games companies could also benefit from VR if it reaches its expected heights, for example Keywords Studios (KWS) and Sumo (SUMO).
VR music
Have you ever missed out on tickets for a once-in-a-lifetime concert, or simply found that they were prohibitively expensive? Thanks to EVR (EVRH), such disappointments could be a thing of the past. Its ‘MelodyVR’ app allows users to watch performances from home at a fraction of the usual price, simply by donning a VR headset. Since its flotation in May 2016, EVR’s shares have climbed more than 1,000 per cent – implying significant shareholder confidence. The company has also successfully raised nearly £40m since flotation.
And yet, this is the first time that we have been able to describe EVR as a revenue-generative company. Indeed, MelodyVR remained in the testing phases for months, while the group signed deals with major music labels and rights holders as it waited for a sufficiently buoyant VR headset market to materialise. It finally launched in May 2018, in tandem with the Oculus Go device. Following its initial roll-out in the UK and the US, MelodyVR has since expanded into eight further European countries.
Of course, it’s difficult to anticipate how music fans will respond to watching 'real' concerts virtually. It's early days but EVR says that post-launch, initial engagement has been positive. Meanwhile, Investec is forecasting for revenues of £1.1m in 2018, and £24.4m in 2019, although the broker does highlight the potential for execution risk at this initial stage.
Beyond music, other stadia events are also beginning to offer VR content. For example, football fans can watch this year’s FIFA World Cup from Russia in virtual reality, via BBC Sport’s VR app.
Immersive learning
Elsewhere, classrooms could benefit from VR, allowing students to transcend the two-dimensional illustrations of the worlds they learn about at school. The same is true of corporate learning environments. VR Education (VRE) is Aim-traded and provides a platform for educators to create their own custom VR content. Its Engage business, which is currently still in development stages, allows customers to create a multi-user virtual scenario against backdrops such as the surface of Mars or the seabed.
Engage focuses on the home schooling and distance learning markets, but the group has also worked with Oxford University in relation to medical training. Moreover, aside from Engage, the group offers 'showcase experiences' including 'Apollo 11' – a recreation of the first manned mission to the Moon in 1969 – and a visit to the shipwreck of the Titanic.
The company is very small. Indeed, while we only have historic numbers pertaining to the year prior to its March 2018 flotation, these reveal sales of just €0.6m (£0.5m) for 2017, with pre-tax losses of €0.6m, against €0.5m and €0.1m in 2016. Its market capitalisation sits at just £34m.
Museums go virtual
Other learning environments are also being enhanced by VR. Learning Technologies (LTG) comprises a portfolio of corporate e-learning businesses, one of which is 'Preloaded', and specialises in making games and immersive experiences with "purpose". Preloaded’s latest initiatives have included VR learning experiences at London’s Science Museum and the Modigliani exhibition at the Tate Modern, while it also worked with the BBC and Google earlier in 2018 to produce the "BBC Earth: Life in VR" experience.
VR comprises just one part of LTG’s overall learning business. This might appeal to those investors yet to be convinced by the market’s prospects, and who want to buy into a larger company with a wider geographic reach. The group recently made its biggest-ever acquisition, purchasing cloud-based talent management platform PeopleFluent for $150m and consequently transforming its US presence.
<boxout><title>The broker's view<title>
AR has more potential than VR
It isn’t that AR has a greater opportunity than VR, it’s that VR is just a subset. If we think about VR, it is the complete, 100 per cent immersion in a virtual world blocking out the real world. Take that 100 per cent to 99 per cent and you are arguably now in AR. AR allows for digitised objects, text-based or images, to be overlaid onto the real world.
Within VR, industries such as entertainment, training, and education spring to mind. Within AR, you can assist lives everywhere. From advertising, to education, to training, to healthcare, to improving our productivity. As an example, if a mechanic is about to work on a vintage car he has never worked on before, AR will allow him to see the car’s real engine but overlay it with arrows or instructions guiding him on how to fix it there and then.
The one private company people may have heard of is Magic Leap, which is creating AR hardware and has raised over $2bn. While a lot of work is being done in the US, one of the largest companies in the world is in London – Improbable. Last year, it raised $502m from Softbank in the largest-ever venture round for a private British company, valuing it at more than $1bn. Improbable focuses on large-scale cloud simulations that enables virtual worlds of “unprecedented scale and complexity”. EVR also recently launched its MelodyVR music platform that allows consumers to ‘be on stage’ or ‘go to’ sold out gigs, with music labels Universal, Sony, Warner, and others. Other of interest include VR Education.
Imagine the future: a consumer is walking down the street wearing an AR headset. He could be assisted with overlaid directions, shops could remind him what is inside before he enters, real billboards could be personalised and if someone falls in the street, first aid instructions could appear on screen, ensuring a higher chance of recovery. There's a lot of potential out there.
James Lockyer is a technology analyst at Peel Hunt
