The excitement of Pokémon Go is still on but I think that for investing, virtual reality is not a good area to invest, instead augment reality is. Considering the checkpoints in the value chain, there is a difference between the two.
Each media needs means to work, the medium, the matter, content distribution, discovery of the content and monetization. Each of these has its own theory which depends on the medium. The different theory leads to a separate propensity to be managed by a small group of companies.
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By medium, we mean the way through the content/matter is presented to the user. So, for newspaper, printing press and paper becomes the medium. Similarly, network is the medium for internet. The act of getting to the user is not what is meant here rather than the means. Record labels may have the distribution function but Amazon and iTunes are the medium for distribution.
Radio industry has radio sets as mediums, distribution through radio broadcasts, radio shows as content and branded networks to facilitate sell advertising and content discovery. The cost of economies of scale of content discovery and ad sales would mean that the radio industry got dominated by the networks who were the owner of these things and the creators of the matter were not paid very well. The radio sets were subsidized automatically in order to build the audience targeted to create the economies of scale for the networks and break even business was of radio manufacturing.
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What happened later with television matches with this model and not have been a right place to invest. The networks were created by companies which already had complementary assets and also significantly the cash and political power for them to maintain dominance. As existed earlier, those who win don’t require a financing through venture type and companies that needed financing from outside were inevitably destined to go out of business.
Movie industry has developed differently. Movie studios dominated earlier, at that time and they were primary creators of content. The theaters were the means of distribution and not of studios. This is same as record industry. But because of the disaggregated nature of monetization & distribution, movies and music can be made outside of the studio system and occasionally made money. It is arguable that outside financing is a good bet, but the odds can be worse than VC if one knew what he was doing.
There were not any bottlenecks in the value chains and because of this, internet is different. Opportunities were there in all the sectors. Company startups like Cisco and AOL made money in the same medium along with monetization and content discovery & creation which lead to early concentration at discovery of companies like Google. For the content creators, it has also leaded to quite a tough environment.
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Content creation will dominate Virtual Reality’s value chain similarly like movies and computer gaming. The cost of creating Virtual Reality Content is going to be high so the content development is going to economically dominate distribution and discovery. High cost of content development would mean less popular content discovered through typical marketing and PR; word of mouth.
VR headsets need to be cheap because the reimbursing the content cost will require large audience. They can be subsidized initially but eventually the content developers will need them for high margin and low amount hardware. Scarce and expensive content will bend towards lowest common denominator in order to manage risks through portfolio approach like console computer games. This means that few large companies will dominate virtual reality especially those which enter from adjacent industries.
Augmented Reality is altogether different. Because uses of AR are different and content development will be less expensive due to the fact that it won’t be fully immersive environment so no single part of the value chain will dominate.
Augmented Reality is expected to be more similar to internet and its evolution. Content can be out there and get popular and fade but there won’t be any winner takes all in AR content. Because content is less expensive to make, content tool companies will be required. Because this will further lead to different types of content, hardware makers will do it well. It will be according to worker needs and specified & cheaper content will address more specific problems, so for customers, AR will be more valuable than VR. This will allow both hardware and content makers to have higher margins.
VC investments in virtual reality will end up doing bad as startups will outnumber incumbents. The AR market is wide open, on the contrary.
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