Get ready for the next digital revolution

As technology moves deeper into what used to be the realm of science fiction, many experts predict that the next big digital revolution will be the shift from mobile into immersive computing. 

Put simply, that means using devices that create a virtual reality (VR) through computer technology generating realistic images, sounds and other sensations – or an augmented reality (AR), which layers virtual information over the real environment. 

Both are manipulated through computer touch inputs, but while in AR the user can interact with the real world, in VR they cannot. 

The World Economic Forum (WEF) said in a September report that last year marked the dawn of a “third wave” of AR or VR products entering the market, driven by billions of dollars worth of acquisitions from tech giants such as Facebook, Sony and Google.

At present the strongest demand for the technology comes from industries in the creative economy – specifically gaming, live events, video entertainment and retail – but the WEF believes that over time it will find wider applications in industries like healthcare, education, the military and real estate.

According to market intelligence provider International Data Corporation, global revenues for the AR/VR market will surge to more than $11bn this year from about $6bn in 2016 – then more than double over each of the next four years to reach $215bn by 2021. 

Predictions by other global research companies are similar, but most show that devices that use AR will greatly outperform, given the wide range of benefits which they can provide to business. 

The spread of products with VR will remain constrained by the steep cost of computer hardware, health and safety issues, and the fact that consumers who do not already play computer games are just not that interested.

There are already many detractors of VR. Critics point out that the $2bn that Facebook spent to acquire virtual reality platform Oculus in 2014 has not paid off yet, unlike other big acquisitions Instagram and WhatsApp. 

But although CEO Mark Zuckerberg admitted in January that it may take five to 10 years to bring VR to the masses, he insists that Facebook will invest another $3bn in the technology over the coming decade. 

In April he announced that the company is working on brain-computer technologies that will eventually allow people to communicate with one another using only their minds – an alarming thought. 

He’ll start with a silent speech system aiming to allow people to type 100 words a minute with their brains, and a speech prosthetic for people with communication disorders is likely to be its first application.

According to Digi Capital Corporation, an investment banking firm that provides financial advice to the digital entertainment industry, investment activity in the VR/AR market climbed to $800m in the second quarter of this year, from $350m during the first quarter. Last year, it amounted to a record $2.3bn.

The WEF points out that beyond technical challenges ranging from device size to battery life, one potential barrier to rapid progress in the industry is the lack of talent to meet demand growth. 

US data shows that demand for freelancers with VR expertise grew far faster than any other skill in the second quarter of this year – a 30-fold year-on-year increase. 

It also said that a recent survey of 200 Canadian companies working on VR projects concluded that the market will face a talent crunch that could fuel consolidation between companies.

Another information provider for the industry, Research and Markets, said that the global VR market is highly fragmented across different end-use segments, requiring manufacturers and technology developers to understand the unique differences and requirements of each industry separately. 

The top four players account for less than 45% of its revenue.

So what should ordinary investors do with this information? Apart from doing their usual research, investors can gain exposure to the technology giants that are betting on AR/VR to drive incremental growth. 

The best place to start would be with companies selling VR and AR devices to consumers, which includes wearables, particularly smart watches. 

“The consumer, retail and manufacturing segments will be the early leaders in AR and VR investment and adoption,” said Marcus Torchia, research director of IDC Customer Insights and Analysis in a statement earlier this year.

“However [...] other segments like government, transportation and education will utilise the transformative capabilities of these technologies.” 

Within regions, the industry segments driving AR/VR spending will evolve differently over time, IDC predicted.

Although the consumer segment will be dominant worldwide initially, in the US and Western Europe manufacturing is set to be the next largest segment, while in Asia-Pacific excluding Japan the shifts will be towards retail and education, it said.

Mariam Isa is a freelance journalist who came to SA in 2000 as chief financial correspondent for Reuters news agency after working in the Middle East, the UK and Sweden, covering topics ranging from war to oil, as well as politics and economics. She joined Business Day as economics editor in 2007 and left in 2014 to write on a wider range of subjects for several publications in SA and in the UK.

This article originally appeared in the 16 November edition of finweek. Buy and download the magazine here.

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