COVID-19 is impacting the lives of billions. Early-stage technology markets like virtual and augmented reality are trivial by comparison. However, AR/VR companies are dealing with knock-on effects both positive and negative. This analysis explores the potential future for AR/VR in the context of the silent cyclone we’re all going through.
Digi-Capital’s long-term virtual and augmented reality forecast is for the AR/VR market to reach around $ 65 billion revenue by 2024. However, the next two years are forecast to be impacted by COVID-19-related factors including (but not limited to) physical lockdowns, brick-and-mortar retail closures, essential ecommerce delivery limitations, supply chain disruption (supplier, manufacturer, distribution, wholesale, retail) and recession/depression economic impacts. Although these and many other factors have far greater implications, let’s define what we mean in relation to AR/VR:
Physical lockdowns: Much of the planet is in different stages of physical lockdown, making getting together impossible or illegal in many parts of the world. This is exacting a terrible toll, but it could turn out to be a net positive for AR/VR adoption and use. Families and friends catching up and socializing remotely, enterprise users collaborating within their own organizations and with others, and service providers carrying on business remotely where possible, are a few examples of activities where AR/VR could help. AR/VR use cases are in some ways only limited by the nature of the interactions (such as where they can be done virtually rather than physically) and the imagination of developers and users. So physical lockdowns could become a critical demand driver for AR/VR in the short to medium term.
Brick-and-mortar retail closures: The crisis has been devastating for physical retail, bringing the sector to a standstill and accelerating some long-term trends by years (if not decades). For brick-and-mortar stores that survive, their future appears to be fundamentally changed short-, medium-, and long-term. At first blush this could benefit AR/VR, but there are specific aspects which might not be as positive.
Essential ecommerce delivery limitations: Ecommerce trends appear to have been accelerated at an unprecedented rate by the crisis, which on the face of it could be positive for AR/VR. However, there are limitations being imposed on eCommerce deliveries in some categories by giants like Amazon, which could counter some of the benefits.
Supply chain disruption (supplier, manufacturer, distribution, wholesale, retail): Global supply chains across sectors have been optimized to keep customers happy and costs down. While the U.S.-China trade war had already begun to have an impact on global supply chains, the crisis has been far more significant. This is as true for AR/VR as any other industry.
Recession/depression economic impacts: Depending on which economists turn out to have been right, the world appears to be going into a recession or depression the likes of which is in living memory only for the elders in our communities. Of all the factors we’re looking at, this could prove most critical for AR/VR’s future.
AR/VR sector impacts
In the context of these five factors, we’ll examine the impact on major AR/VR business models across hardware sales, ad spend, ecommerce sales, enterprise (ex-hardware), app stores, location-based entertainment, and video.
AR/VR hardware sales
Physical lockdowns could be a plus for AR/VR hardware demand, as individuals and businesses look to stay connected during the crisis. However, brick-and-mortar retail closures might be a net negative for AR/VR hardware, as mass consumers beyond early adopters might not be able (or in some cases willing) to try before they buy. Arguably, this is a bigger deal for AR/VR headsets than familiar technologies like smartphones, tablets, PCs, and consoles. It is also too early to fully understand the long-term behavioral changes around trying on something in a retail store that is worn on the face.
Essential ecommerce delivery limitations (where applicable) might be negative for AR/VR hardware sales, as it is hard to argue that AR/VR headsets are essential items. Supply chain disruption (supplier, manufacturer, distribution, wholesale, retail) looks to have had an impact on specific companies’ AR/VR hardware supply chains in the short-term, despite other companies appearing to ramp up production during the crisis. And while recession/depression economic impacts might not have had a negative effect on short-term demand for specific AR/VR hardware sold out in Q1 2020, it is important to monitor whether or not this becomes a bigger factor as the year progresses.
Digi-Capital’s existing forecasts for AR/VR hardware sales were relatively conservative for 2020/2021 already, with an uptick forecast if and when Apple launches smartphone tethered smartglasses by late 2022 (as discussed previously, only Tim Cook and his inner circle really know the answer to that question). Yet there still appear to be significant negative implications for AR/VR hardware sales in the short-term. As both the course of the crisis and supply chain normalization are hard to determine at this stage, Digi-Capital is taking a negative position short-term and a neutral-stance medium-term on the impact of the crisis on AR/VR hardware sales.
Ad spend
Mobile AR advertising has seen much of relevant ad spend going towards traditional ad units viewed around user generated mobile AR content (such as filters and lenses on messaging platforms), rather than just mobile AR ad units. It’s worth noting that this does not mean that sponsored mobile AR filters and lenses are not a significant part of the mix going forward. By comparison, VR and smartglasses advertising are a relatively small part of the mix.
Physical lockdowns look at first blush like they should be positive for mobile AR advertising, as mobile messaging use has seen a significant uptick since the crisis started (when compared to 2019’s weekly average, TikTok usage in the first week of March grew by 130% for a weekly total over 3 billion hours, with increases in both user numbers and average time per session). This provides more eyeballs and relevant advertising inventory. However, the closure of bricks-and-mortar retail has dramatically impacted the spending power of an entire category of advertisers across the board (not just mobile AR advertising). Similarly, essential eCommerce delivery limitations (where applicable) and supply chain disruption (supplier, manufacturer, distribution, wholesale, retail) could see more advertisers withdraw across industries. It’s hard to justify advertising products and services that can’t be delivered or supplied to customers.
By far the largest negative impact for AR/VR ad spend is recession/depression economic impacts. Most companies continue to be significantly impacted by the crisis, advertising budgets have been cut by many advertisers and messaging platform holders like Facebook are seeing their short-term advertising revenue forecasts downgraded.
While the crisis impacts all media advertising, not just mobile AR/VR, Digi-Capital is taking a negative stance on AR/VR adspend due to the crisis in the short to medium-term.
Ecommerce sales
Physical lockdowns and bricks-and-mortar retail closures look like a catalyst for ecommerce sales in general, and AR/VR in particular. Mobile AR enabled ecommerce also looks like it could become a primary beneficiary, due to the high active installed base of mobile AR and the ability to virtually showroom products using mobile AR at home during lockdown. This makes mobile AR ecommerce’s ability to increase customer propensity to buy by up to 11-fold look like a potential force multiplier. Yet the data on ecommerce impacts from COVID-19 have shown mixed results, so any uplift could be limited.
Essential ecommerce delivery limitations (where applicable) could put a dent in eCommerce companies’ ability to capitalize on the opportunity. This could have a stronger impact if ecommerce categories like home furnishings and decoration (a leading category for mobile AR ecommerce) are deemed non-essential. Similarly, supply chain disruption (supplier, manufacturer, distribution, wholesale, retail) could limit the range and volume of products for sale. Last, but by no means least, the economic impact of a recession or depression could have a negative impact on consumer and enterprise confidence and demand for eCommerce sales more broadly.
With countervailing factors in play, Digi-Capital is taking a broadly neutral position on AR/VR ecommerce sales in the short- to medium-term.
Enterprise (ex-hardware)
Physical lockdowns look like a plus for AR/VR enterprise software and services, as companies try to find ways to get their internal and wider external teams to communicate, collaborate and find a path forward during the crisis. The crisis has the potential to become an accelerator to existing trends for enterprise AR/VR adoption.
Bricks-and-mortar retail closures aren’t a big factor for enterprise AR/VR, but essential eCommerce delivery limitations and supply chain disruption (supplier, manufacturer, distribution, wholesale, retail) could become issues. If companies can’t get the new tech to their teams and relevant supply chains are disrupted, enterprise demand might not be met by supply.
However, recession/depression economic impacts are a much bigger factor. Even though CIOs are prioritizing spending on technologies supporting remote work, many IT budgets have been cut and nonessential tech projects cancelled. As discussed before, enterprise augmented reality and virtual reality remain early stage despite moving further up the chain from pilots to production in some companies.
Balancing these supply and demand factors, Digi-Capital has a neutral stance on enterprise AR/VR in the short to medium-term.
App stores
Physical lockdowns have proven to be a boon for both app downloads and usage on mobile app stores. This has already resulted in increased revenue for the mobile AR market leader Niantic’s Pokémon Go and potentially VR app developers. The biggest impact for AR/VR app store revenues from the crisis could be in the dominant games category.
Brick-and-mortar retail closures and essential ecommerce delivery limitations have less impact on AR/VR apps, but supply chain disruption (supplier, manufacturer, distribution, wholesale, retail) has already seen delays to the launch of triple-A VR games titles. It’s not clear how this factor will stabilize yet.
The big unknown is the economic impact of a global recession or depression on in-app-purchases and premium apps. Unavoidable choices between essential household needs and entertainment could slow spending on AR/VR apps in the medium-term, but uncertainties remain.
Digi-Capital is taking a neutral position on AR/VR app store revenue through at least the next quarter. This could change as more hard data becomes available.
Location-based entertainment
Physical lockdowns have effectively shuttered location based entertainment globally (not just AR/VR), and many location based VR businesses have closed their doors for now. An open question is if and when consumers will return at scale to location based entertainment where contact with others and surfaces they’ve touched is unavoidable (again, not just AR/VR). With high standards of hygiene already required for wearing a headset on your face and holding controllers in your hands, both practical and behavioral issues could play a bigger role going forward.
The closure of bricks-and-mortar location based entertainment venues (again, not just AR/VR) has been devastating for the sector in both short and medium-terms. As above, the long-term is an open question.
Essential ecommerce delivery limitations and supply chain disruption (supplier, manufacturer, distribution, wholesale, retail) are negative for location based VR, even though closed businesses have bigger issues than the supply of new AR/VR hardware and software to worry about. The same is the case for recession/depression economic impacts.
Digi-Capital is taking a negative stance on location based AR/VR entertainment for 2020/2021, with a hoped for recovery in the long-term.
Video
Physical lockdowns have been a massive booster for video consumption more broadly, and could potentially provide a tailwind for VR video players. Bricks-and-mortar retail closures could be a mild positive for VR video, despite a relatively limited uplift from multiplex cinema closures. Essential ecommerce delivery limitations are less of an issue, but supply chain disruption (supplier, manufacturer, distribution, wholesale, retail) is a negative for live-action VR video (like 360 video). This is particularly an issue for 360 video in now shuttered live-action sports, which had been a specific area of promise for the sector. Animated VR video companies able to accommodate remote working might fare better during the crisis.
While there is limited visibility on the short-term, recession/depression economic impacts for VR video could become an issue over time. The medium-term tradeoff between basic needs and entertainment is hard to determine at this stage. Digi-Capital’s forecast for VR video was already relatively modest, so our neutral to mildly negative stance on the sector has limited economic impact.
