Investing: Opportunities abound in virtual reality

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on February 5, 2018 - February 11, 2018.

Battle Summoners was a critical learning curve for Seo and his team

VR gaming entered the public consciousness somewhere in the early 2010s with Oculus and gained mainstream attention a few years later. > Seo

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Virtual reality (VR) is going to become a mainstay in the gaming industry in the next few years and there are opportunities to get invested before VR gaming hits critical mass, according to former Oculus VR co-founder and South Korea country manager Dillon Seo.

He cites an April 2017 report by Greenlight Insights, a US-based VR market research firm that says the industry is set to become a major global marketplace by 2021, hitting US$74.8 billion in global revenue.

After Oculus’ multi billion-dollar acquisition by Facebook Inc in 2014, Seo — who went on to found VoleR Creative, a South Korea-based VR game development company — tells Personal Wealth that VR’s ability to create some of the most immersive gaming experiences is beginning to attract a mainstream consumer crowd.

Coinciding with the rise of VR is the world’s first-ever video game-themed exchange-traded fund (ETF). The ETFMG Video Game Tech ETF (GAMR) is listed on Arca, the New York Stock Exchange’s ETF listing venue. Created by ETF Managers Group in 2016, it has been performing well of late. GAMR saw year-to-date returns of 8.03% (as at Jan 26), while 12-month returns stood at 64.69%.

Unsurprisingly, the VR gaming ecosystem is well represented in its holdings. A cornerstone of VR gaming, according to Seo, is display and optics technology and one of GAMR’s more interesting holdings is Carl Zeiss Meditec AG.

A leading manufacturer of tools for eye examinations and medical lasers, Germany-based Carl Zeiss is also famous for equipping phone manufacturer Nokia with its well-regarded optics technology. In recent years, however, Carl Zeiss Meditec has gained prominence for being one of the early movers in mobile VR gaming when it released the Zeiss VR One headset in late 2014.

The company continues to be active in the VR gaming sector, and at the recently concluded CES 2018 in Las Vegas — one of the most prominent consumer electronics expositions in the US — it introduced its latest Zeiss VR One Connect system. The system can connect a smartphone to its VR headset and then tether the entire system to a gaming PC. The solution features two wireless controllers, a USB cable as well as the software meant to run video games on the VR headset.

Seo reckons display technology for VR is going to be a growth area for leading display and optics manufacturers, especially since the world is gradually becoming more lukewarm on display technology for smartphones, tablets, desktop monitors and television.

“For about five years, leading display manufacturers did not make major innovations to their displays or increase the resolution of their screens because television, PC and handheld display technology had reached a level of sophistication such that consumers no longer cared about these small increments in display quality. These manufacturers are now faced with the prospect of diminishing returns,” he says.

This does not bode well for players in the sector, he says. “This means that the competition will catch up to the sector incumbents, with the former eventually being able to sell the exact same technology for less.”

Profit margins are then going to decrease because even though display and optics manufacturers still have the capability to innovate, there is decreasing demand for these innovations.

Over the last few years, however, leading display and optics manufacturers have started latching on to VR gaming technology. “VR gaming entered the public consciousness somewhere in the early 2010s with Oculus and gained mainstream attention a few years later. However, a major complaint has been the lack of image quality and resolution in these VR headsets.”

VR headsets rely on a fisheye lens that magnifies images that are otherwise very small. This is how the VR headset creates a large field of vision for the wearer, despite the headset itself being relatively compact.

Blowing up these images in VR headsets, however, comes at a significant cost to image quality. “The VR headset images retain less than half of the quality of a regular smartphone or tablet display.”

With a new multi billion-dollar business opportunity in sight, optics and display manufacturers have a renewed impetus to innovate and improve on image quality. “With customer demand now increasingly focused on improving VR image quality, there is new demand for display manufacturers to innovate and shift to this new consumer business,” Seo says.


VR opportunities in chipmakers

VR image quality, however, is just one part of the equation. While VR headsets are finding their way into more living rooms, they are only as good as the processing power in the PC or smartphone they are tethered to. “VR headsets make very large demands of your PC or smartphone’s central processing units (CPUs), graphics processing units (GPUs) and mobile application processors (APs).

“So, companies that manufacture CPUs, GPUs and mobile APs are getting into a race to create ever more powerful components with which to render higher quality VR images,” says Seo.

Notable chipmaker counters held by GAMR include Advanced Micro Devices Inc (AMD), Nvidia Corp and Intel Corp, all of which have made forays into VR gaming. Giants in the multi billion-dollar gaming graphics card sector, these chip manufacturers have begun to create microprocessors to support VR headset gaming.

In fact, in January this year, Intel and AMD announced the eighth-generation Intel Core processor, married to AMD’s Radeon RX Vega M Graphics card — a system that the companies say comes with a slew of high-end VR capabilities for content creators and gamers alike.

California-based chipmaker Nvidia enjoyed a stellar 2017 with its share rising 81.3% over the course of the year, according to data by research firm S&P Global Market Intelligence, as the company beat analyst projections on earnings estimates throughout last year.


A virtual success

Dillon Seo, Oculus VR co-founder and former South Korea country manager, remains coy on exactly how much he took home from its monster acquisition by Facebook Inc in 2014. Two years after the 

US$2 billion buyout, however, Seo decided that the time had come to part ways with Oculus. He walked away in March 2015 with what he would only say was a “comfortable eight figures”.

He then wanted to create compelling VR gaming content — a major goal was to develop games that would go on to become critical hits.

Flush with his exit money and sensing the potential in VR games, he decided to set up VoleR Creative in September 2015, a VR game development company. He and his team spent the next two years developing a VR game from scratch. An early access version — Battle Summoners — debuted on cloud-based gaming marketplace, Steam, in May last year. “This was a fantasy card game that we had developed for VR gaming platforms and the reviews were quite positive,” he says.

“However, this game was also a learning experience for us. What we discovered was that while people really enjoyed the game, it simply did not get enough traction because the online VR gaming market at the time was not yet big enough for us to generate a return on our investment.”

Seo and his team then changed tack and began creating content for the budding location-based entertainment subsector of VR gaming. Essentially a VR version of the “escape room” concept, VoleR Creative is now being engaged by various escape room operations in South Korea to create engaging VR content for them. This, he says, has proved to be a more successful strategy.

As for his longer-term plans, Seo intends for VoleR Creative to continue mastering VR game development and, in a few years, be acquired by a larger game developer.