ONE

TWO

(Intel ad from the mid 90’s and an image of the recently announced Samsung Gear VR)

For those following trends in Silicon Valley, one might experience a sense of déjà vu recalling the mid-1990’s when Virtual Reality first captured the zeitgeist for its promise as an immersive portal into the nascent world of cyberspace. Twenty years later, the amorphous medium has transformed from a “not too distant future” captured in the low-resolution computer graphics and millenarianism of 90’s Sci-Fi films into a commercial reality. The the 2.4 billion dollar acquisition of the Kickstarter funded Oculus VR by Facebook and the recently announced $542 Million dollar Series B financing round for the VR/Augmented Reality start-up, Magic Leap (led by Google with Qualcomm, Legendary Entertainment, KKR, Vulcan Capital, Kleiner Perkins, Andreessen Horowitz and Obvious Ventures) suggests that large tech companies are committed to developing virtual reality platforms. The big question is how will companies like Oculus / Facebook and competitors like Google mobilize development of their virtual reality platforms?

The Oculus Platform

In his explanation of the acquisition of Oculus VR to investors and the public, Mark Zuckerberg characterized the virtual reality startup as pioneering a “new communication platform” that was part of “a long term bet on the future of computing”. In the same way that mobile phones have created a new form of ubiquitous computing, virtual reality may similarly add qualitatively higher levels of immersion in computing, enabling a new ecosystem of applications to develop. Whereas mobile applications make novel use technologies like embedded cameras, GPS and accelerometers, virtual reality apps can use technologies like positional head tracking and three-dimensional high-resolution, wide field view screens to create new online products and businesses.

THREE

Rather than building a business around selling hardware, Oculus VR and Facebook have focused on developing their “Oculus Platform” – a store for new virtual reality applications. Oculus VR / Facebook has partnered with Samsung to build virtual reality devices on top of existing mobile devices – which are rapidly increasing in screen resolution and processing power – and have expressly said that they will be pricing their virtual reality headsets at or below cost in order to grow the VR ecosystem. In other words, Oculus will subsidize virtual reality hardware in order to build a large developer and user base needed for a software ecosystem and app marketplace to develop.

To assist in the development of the virtual reality ecosystem Oculus is investing in developers subsidizing headsets as well as providing the tools to create new VR Apps. These include developer support forums, developer “best practice” manuals with clear guidance on the technical standards, and finally free software for updating apps as virtual reality hardware changes. Additionally, in its September “Connect” conference, Oculus announced an expanded strategic partnership with the game development platform Unity, providing free Oculus add ons for Unity Developers to further build a developer ecosystem. Although Oculus is assisting and subsidizing the development of third party apps, the company is also creating sponsored Oculus Apps that will raise the quality level of early consumer virtual reality experiences.

FOUR

In addition to building its developer base, Oculus VR / Facebook has decided to wait and let the virtual reality ecosystem to develop before releasing mass commercial products. The company has already released three different Developer Kit headsets (DK1, 2 & 3) with a consumer version yet to be officially announced. Oculus’ stated intention is to first develop a marketplace of high-quality virtual reality experiences before releasing mass consumer products, as they are concerned that the platform can be undermined by a lack of compelling content.

As the virtual reality app marketplace is growing, Oculus is also providing its own ratings of apps on its platform. Additionally, while the company is allowing the development of third party accessories, they are also building sponsored Oculus accessories. These moves allow Oculus to control the quality of the platform, creating a high quality experience for consumers that they describe as “good for everyone.” This discretion to control the platform can be a powerful tool for Oculus, allowing the company to define the parameters of its app marketplace leading to higher quality and potentially inreased market power.

In contrast to Facebook / Oculus, Google’s strategy for developing a virtual reality platform is less clear, and perhaps at an earlier stage of development. Although the company did launch Google Cardboard, a cheap cardboard adapter and mobile app turning all mobile phones into virtual reality devices, they have yet to be as public about their intentions in virtual reality. However, the company’s investment in exotic stealth technologies like Magic Leap’s digital lightfield displays, may signal broader ambitions in the virtual reality market. Currently, Google appears to be offering compatibility with Facebook, Oculus and Samsung products alongside its suite of products, suggesting that there is currently collaboration in virtual reality.

As virtual reality ecosystems develop, there are questions about whether this initial collaboration across will be replaced by competition once the market becomes lucrative enough. For example, although the Oculus Platform is compatible with multiple mobile phone based operating systems, it is not yet clear whether the Apple store will allow the Oculus Platform app to run on iOS phones. Additionally, it is unclear exactly how Facebook / Oculus will monetize their virtual reality platforms once they attract a large enough user base to make it economically viable for developers to continue committing large resources towards developing virtual reality applications. Finally, it is unclear whether formal standards will emerge for developing virtual reality applications or whether there will be competition between different standards.

We may be seeing the rise of new computing and entertainment platforms that will create remarkable new collaborative possibilities as well as competitive challenges for the largest media and technology companies – stay tuned!

Links:

On Mark Zuckerberg’s statements regarding the acquisition of Oculus VR:

https://www.facebook.com/zuck/posts/10101319050523971

http://www.technologyreview.com/news/525881/what-zuckerberg-sees-in-oculus-rift/

http://arstechnica.com/gaming/2014/08/why-oculus-sees-virtual-reality-as-the-final-compute-platform/

Articles on the Oculus Platform and Developer Support

http://techcrunch.com/2014/09/20/oculus-platform/

http://www.roadtovr.com/oculus-rift-best-practices-guide-virtual-reality-recommended-age/

http://unity3d.com/company/public-relations/news/unity-technologies-and-oculus-expand-strategic-partnership

Links about Magic Leap:

http://www.technologyreview.com/news/532001/how-magic-leaps-augmented-reality-works/#

http://recode.net/2014/10/20/look-who-else-is-joining-google-to-back-magic-leap-the-secret-augmented-reality-startup

Recommended Virtual Reality 90’s Movies: eXistenZ and Strange Days


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Narrowing the Field: The Problem of Abundance in Online Content

As discussed in the TheLadders case, making a site free for users can easily become too much of a good thing. While in theory a traditional job site should be grateful to have as many users and as much content as possible (to attract paying job posters), in reality, the overabundance of undifferentiated resumes created by a free system like Monster.com threatens the reliability of the overall network. When faced with hundreds or even thousands of (often irrelevant) resumes, harried recruiters and HR types will simply abandon seeking out candidates. The information costs are too high.

Where is the line between encouraging user growth and curating targeted user content? If you charge nothing, quality suffers; if you charge too much, users will never join, a fatal outcome for any networked business. The insight from the TheLadders case was in part not to be afraid to target a niche user base with actual willingness to pay (the 100K+ job seeker crowd). While most job seekers would not pay $35/mo for the privilege of searching for jobs, many serious candidates would, given that the opportunity cost of remaining unemployed is much higher. Similar to the Xbox case, TheLadders also subsidized the side of the network which brought real quality: the job posters. By making it free for companies and recruiters to post (subject to the $100k floor), the network naturally sifted for quality. On the other side of the network, by forcing jobseekers to pay, the number of users was rationed down to only the most serious candidates.

This insight has possible application beyond simply the job search market. Though not truly a network platform in the traditional sense, literary magazines are employing similar methods to pre-sort their editorial responsibilities. Before the switch to digital submissions, literary magazines would generally read submissions by mail. The hassle involved in printing a cover letter, formatting it correctly, and addressing and stamping an envelope, naturally discouraged some individuals from applying (cf. the individualized application questions on TheLadders). Yet, with the switch to digital submissions, the marginal cost to the submitter of hitting “submit” again and again and again became perilously low. To reduce the mountain of reading required by their editors and also to encourage more thoughtful submissions by writers, magazines began charging writers small sums to be read. Paying someone to read your work may sound perverse but, from the magazine’s perspective, using a manageably small payment to sift your user-submitted data actually furthers the organization’s mission and creates a revenue stream to boot. In a somewhat different context, I know that there is a proposal to charge infinitesimal Bitcoin costs every time someone visits a website. For the average user, the cost would be completely invisible and de minimis (thousandths of a penny). But it could in theory discourage DDoS attacks by making it costly for the same user to visit the same site repeatedly.

For my final project, I hope to apply this insight to an educational gaming platform. One of the biggest problems in using a flashcard website or app like Cram is that there are simply too many options, with varying quality and relevance. Being able to narrow the field and to deliver targeted content to students (say, the exact vocab that will be tested on Friday) could dramatically improve the value of such platforms. If anyone is interested in collaborating, feel free to reach out to me in class.


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Battle of the Consoles

Sony and Microsoft are back at it again with the releases of the PS4 (retailing at $400) and Xbox One (retailing at $500), respectively this November.  In advance of the all-important holiday shopping season both companies have rolled out aggressive marketing campaigns to solidify each console’s competitive position.  Sony and Microsoft spent a combined $120 million during 2012 to market previous generation consoles (PS3 and Xbox 360) and 2013 marketing spend could potentially double to support the launch of each new console.  The actions of Sony and Microsoft suggest that early mobilization and adoption are critical to gaining a favorable market position. Despite the frenetic push to establish PS4 or Xbox One as the dominant platform, the market for gaming consoles is no longer a winner take all market. The total unit sales figures of previous generation consoles support this conclusion. The PS3 and Xbox 360 were essentially at parity with PS3 has selling 80.6 million units to date (released in November 2006), and Xbox 360 has selling 79.4 million units to date (released in 2005). In fact, the Nintendo’s Wii console (released in November 2006) has outsold both consoles with over 100 million units to date.  Although network effects are still prevalent, multi-homing costs have been reduced while consumer demand for differentiated products has increased.

Lower multi-homing costs. Consumers have shown a high propensity to own multiple consoles driven by price decreases over the life cycle of a console (PS3 was discounted by 50% less than two years after release), as well as increasing success of platform exclusive video game franchises such as Halo and Call of Duty. As a result customers feel more compelled to purchase both platforms due to the reduced overlap for more popular exclusive titles.

Increasing demand for differentiation. Customer preferences have shifted dramatically since the release of the previous generation consoles. The proliferation of gaming on mobile devices has increased the viable platforms for gaming. As a result, overall traditional video game sales declined 40% to $7 billion in 2012. While Microsoft and Sony have historically touted similar advanced gameplay features and technical specifications, the PS4 and Xbox One promote vastly different value propositions to the customer. Sony has attempted to position the PS4 as a console for “hardcore gamers”, while Microsoft has attempted to make the Xbox One a ubiquitous home entertainment hub with the ability to integrate multiple features (cable, audio, wireless, etc.).

Network effects. Given the industry’s structure as a two sided platform, with developers and gamers on either end, networks effects have been critical for gaming consoles. Developers have shown a willingness to produce games for multiple platforms. As spending increases on consoles developers will likely push for non-exclusive contracts to maximize potential revenues. Long-term the impact of network effects will be reduced.

Early sales results suggest that no clear winner will emerge in the near-term. The PS4 sold one million units following launch in North America, while the Xbox One sold one million units after launching in 13 countries. Although first week sales have been strong, it’s unclear how strong sales will be going forward. Since peaking at 150 million units with the PS2, sales of total unit sales subsequent consoles have continued to decline. As opposed to spending to become the dominant console Microsoft and Sony should focus on how to limit disintermediation given the accelerating growth of mobile gaming.

http://www.nytimes.com/2013/09/30/technology/a-shrinking-list-of-blockbusters-dominates-video-games.html?pagewanted=2&_r=0

http://adage.com/article/digital/xbox-playstation-prep-bruising-ad-spending-battle/242141/

http://www.vgchartz.com/article/250980/playstation-3-lifetime-sales-overtakes-the-xbox-360/

http://www.vgchartz.com/analysis/platform_totals/


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It is a common misconception that free mobile apps are not viable businesses. I beg to differ, and point to several free social gaming apps as primary supporting examples.

First, it is important to establish what specifically I’m referring to when I say “free social gaming apps”. In particular, I would point to social gaming companies such as King, Team Lava and PopCap Games, whose titles include the likes of Candy Crush, Bubble Mania, and Plants vs. Zombies, respectively. These mobile social gaming companies typically consist of a portfolio of games that are relatively quick and inexpensive to develop, and are targeted primarily at casual gamers (read: middle-aged women).

While it is true that the vast majority of mobile social games are available for free to download from the app store, it is not true that these companies don’t generate revenue. Quite the contrary, these companies often generate absurd amount of revenue, very commonly on the order of tens and hundreds of millions of dollars. How, you ask? Primarily through micro-transactions, i.e., incentivizing their users to make very small (e.g., $0.99) but frequent purchases throughout game play, primarily to advance throughout levels the game, acquire better social status within the game, or purchase virtual goods, such as weapons, that will help the gamer perform better. When a game has millions of daily active users, these purchases add up in a meaningful way. Furthermore, given the low cost structure of mobile social gaming businesses, most of the revenue drops to the bottom line. In fact, it is typical for these types of businesses to have EBITDA margins in excess of 70%, which is mind-blowing considering the absolute dollar amount of revenue these businesses generate.

Here comes the catch, though. Mobile social gaming companies, above all, absolutely need a large active user base in order for the micro-transactions to present a meaningful contribution to revenue. As one could imagine, though, the act of acquiring users has become increasingly difficult as the number of the offerings in the app store has increased exponentially. Simply put, the app store is an extremely crowded marketplace, with the vast majority of downloads going to those companies that already have a large and satisfied user base that has enabled them to rise to the coveted top of the app store rankings.

So, the next logical question is, how does an unestablished mobile social gaming company go about getting to the top of the rankings without spending an arm and a leg on marketing? The answer I would offer is that it is nearly impossible. If you’re lucky, you have a friend who works for Apple who can get your app featured. Until a few years back, your other alternative was to pay shady companies to utilize automated “bots” that downloaded your app enough times to make it rise seemingly organically through the ranks (Apple has since cracked down on companies who employ these practices).  Nowadays, it is no coincidence that a few, select companies with multiple titles dominate the top-ranked list in the app store.

By this point, you understand that customer acquisition is incredibly important to these mobile social gaming companies. But customer acquisition is extremely difficult to do cost-effectively. I have observed that the gaming companies that are most successful truly understand and have mastered the relationship between customer acquisition cost and customer lifetime value. By this I mean that the most successful gaming companies have realized that once they pay to acquire a customer (i.e., have them download the game), they need to do all they can to not only up-sell that user via micro-transactions within the game, but also cross-sell the user to other titles within that company’s portfolio. Once they have acquired the user one time, they need to maximize the exposure that user has to all the other mobile games the company has developed in order to get that user not only to micro-transact as much as possible, but to keep that gamer playing the games they have produced (and not those of competitors) once they get bored with the original title they downloaded (which is, incidentally, a big issue: social gamers typically play a particular title for less than 3 months, i.e., customer lifetime is very short). Team Lava has done this cross-selling particularly well with their numerous titles. Another interesting and successful tactic I have seen King (the makers of Candy Crush) do is require gamers to ask Facebook friends for help in order to earn more lives in a game (in lieu of paying a micro-traction fee), which make the virality of the game much higher.

In summary, despite the fact that free, mobile social gaming apps face unique challenges, I do believe that these companies have the opportunity to be really attractive businesses, and I’ve been impressed by the way in which I’ve observed specific companies navigate these complexities to create compelling, sustainable businesses.

 


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