A completely virtual universe separate from the physical world we all know has been in conversation for years now. However, when and if that hypothetical world becomes a “reality” is still unknown (although we estimated 4-7 years in Covenant’s AR investment article). What is certain, is that augmented reality (AR) and virtual reality (VR) are quickly becoming part of society’s everyday lives. The concrete divide between the physical and virtual worlds is deteriorating, and with Apple’s (AAPL) announcement of the Vision Pro device, the augmented reality race is officially on.
Augmented reality can include virtual reality, mixed reality, and extended reality. Although all are related on a general basis in that each has a virtual property, it would be incorrect to consider them synonymous. Augmented reality adds virtual layers or elements to an already existing environment. In other words, it is a combination of the real world and computer generated content. Virtual reality on the other hand completely removes the user from the physical world and immerses them in a virtual one. Currently, because of this complete immersion, the only way to access virtual reality is via headset. Mixed reality (MR) is similar to AR in the fact that it will not add virtual elements to the surrounding environment. However it is more specific because you need a headset in order to experience it. Lastly, extended reality (XR) is an umbrella term, as it refers to anything that removes users from the strict confines of the physical world.
Market Discussion
Over the past several years, the AR market has seen consistent growth. Shipments of AR/VR headsets have dramatically increased. Though the headset market is largely led by VR, AR headsets are poised to gain momentum in the coming years from shipments of 280,000 in 2022 to a forecasted 6.41 million by the end of 2027. VR headsets are also forecasted to drastically increase from 8.55 million shipments in 2022 to 24.65 million by the end of 2027. The AR market is largely dependent upon computer generated content, and as a result software engineers/developers prove to be pivotal in the continued growth of the AR world. As the demand for AR content and technologies continues to rapidly increase, the number of software developers will follow. From 2018-2019, interview demand for software developers increased by 1,400%. Though this dates back several years, it still emphasizes the point that companies are (or were) preparing for the AR movement. Furthermore, The Bureau of Labor Statistics estimates a 22% increase in job demand for software developers between 2020 and 2030.
The AR/VR market can be broken down into six individual sectors: AR hardware, AR software, AR advertising, VR hardware, VR software, and VR advertising. Although there are numerous sectors, the majority of the market is made up of two segments: AR software and VR hardware. These two alone are forecasted to amount to $30.6 billion dollars of revenue by the end of 2027. Nonetheless, the other four sectors are all predicted to see significant growth and are still vital to the overall unification and completion of the market. Based on the premise of their definitions AR software and VR hardware should be the main revenue pipeline for the market. As a whole, the AR market is expected to reach $50 billion dollars by the end of 2027.
Market Players:
Meta (META) is one of the largest companies in the AR market. Not only do they control three of the largest social media platforms, they also have introduced the Metaverse, a completely virtual space where users can interact with both a computer generated environment and other users. However, currently, the technology does not exist for there to be millions of users synchronously participating in an entirely virtual environment. A concept like the Metaverse will continue to progress gradually over the years. Niantic is also a large player regarding software development. Niantic has raised $750M dollars and was responsible for the creation of Pokemon Go.
In the AR glasses space, Nreal, Magic Leap and Microsoft (MSFT) lead the charge. Apple (AAPL) has announced that they will be releasing AR glasses in the near future. Considering the company’s cult-like following, it would be no surprise that many already believe that Apple may have already won in the AR platform war. Magic Leap is a privately held company and has raised over $3 billion dollars to date making it one of the larger companies in the market. However, their AR glasses are quite expensive, deeming them inaccessible to the majority of individuals. Nreal on the other hand, produces relatively inexpensive headsets compared to Magic Leap.
Current Use Cases
Augmented reality has already penetrated into society’s everyday lives because of the ease of accessibility. AR has become widespread across numerous industries that can be accessed via smartphones: gaming, retail and social media amongst the most prominent. In 2016, Pokemon Go brought augmented reality in the gaming scene to a mass audience, promoting the merger of the virtual and physical worlds. Pokemon Go users roam the physical world following a virtual map in hopes of finding rare Pokemon. Moving forward the gaming industry is poised to be a major contributor to the AR/VR market. In addition, certain retailers are implementing AR in the online shopping experience. Using AR, Wayfair and IKEA have made it possible to see what a piece of furniture might look like in a user’s home by adding the virtual layer of the furniture onto the user’s smartphone camera. For years, social media platforms like Snapchat, Instagram and more recently TikTok, have given users the ability to apply filters to videos or pictures. These filters are a form of augmented reality as there is a virtual alteration to reality. The evolution of complexity of these filters since snapchat first implemented them speaks to the development of augmented reality
Heads up displays (HUD’s) are a form of AR which add a virtual layer to the windshields of cars. This display allows the driver to see their current speed, navigation directions, speed limit signs,etc. HUD’s are a safety feature in that they allow the driver to receive critical driving information without taking their eyes off the road.
The consumer experience will be forever changed with the advent of augmented reality. The ability to interact with social commerce live streams, content creators, in-app advertising, in-game advertisements, and potentially in-home augmented advertising provides a near limitless canvass for the user to demonstrate their interest/intent, and for a seller to find their demographic. In the physical/digital world nicknamed “phygital,” the ability to one click shop will make almost every experience outside the home an opportunity to be monetized. Indeed, we are entering the world of science fiction where consumers and sellers will have access to unfathomable amounts of information.
Investments:
The AR market has seen an increasing flow of investments from venture capitalists, signaling the growing potential and attractiveness of this technology. These investments have not only aided in technological advancements but have also contributed to market expansion. As AR continues to become more integrated in society, funding from venture capital firms will continue to be crucial.
Investment in AR centered companies could prove beneficial as an addition to Covenant Venture Capital’s portfolio. Though not quite a three trigger company, top venture capital firms such as GV, Sequoia, and Tiger Global have all invested in Physna, a technology company that specializes in developing advanced solutions for 3D modeling and analysis. At its core, Physna uses AR to digitally represent physical objects in 3D. By utilizing complex mathematical models and machine learning techniques, Physna’s technology can analyze geometric properties and structures of various objects, providing detailed insights and data. This allows users to compare, search, and identify similarities or differences between different 3D models. Industries where 3D modeling and analysis are crucial, such as manufacturing, e-commerce, and design can benefit from Physna’s innovative technology as a means to increase efficiency and productivity. To date, Physna has generated 84.9 million and has closed Series C of funding.
There will certainly be challenges in the coming years with the platform wars and the burden that the government will soon face in creating laws to protect consumers. However, this is an exciting time for consumers as we witness the birth of the next smartphone-like device that will change how we communicate, and a sector worth investor attention.