VIRTUAL AND AUGMENTED REALITY DON T BELIEVE ME, … · Virtual and Augmented Reality: Don’t...

Gee Leung, PartnerCharlie Schopp, Vice President

DECEMBER, 2015INSIGHTS

VIRTUAL AND AUGMENTED REALITY DON’T BELIEVE ME, JUST WATCH!

Virtual and Augmented Reality: Don’t believe me, just watch!

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1. Introduction “Augmented reality will be the biggest technological revolution that happens in our lifetimes,” according to Tim Sweeney, CEO of Epic Games. While certainly an ambitious forecast, there is a lot of support for why this may come true. Both Augmented Reality (“AR”) and its close cousin, Virtual Reality (“VR”) have the potential to disrupt massive existing industries while building new businesses and enabling new business models we haven’t yet conceived. These technologies have long been more “science experiment” than “commercial product” and have been beyond the reach of everyday consumers. However, recent efforts by technology giants like Facebook (Oculus), Sony (Morpheus) and Samsung (Gear VR) will result in VR headsets finally reaching the mass market in late 2015. These VR headsets have the potential to completely redefine the landscape of the living room by changing the way audiences experience home entertainment. Slightly further down the road, AR providers like Google’s Magic Leap and Microsoft’s HoloLens may in time replace almost every mobile and PC display and spur countless associated services and content businesses. While often mentioned in tandem, the distinctions between VR and AR are important and makes each suited for different use cases. Virtual Reality places a user in a fully-immersive visual and audio (and perhaps someday tactile and olfactory) experience of a digital world. Everything the user is seeing or hearing is computer generated. These characteristics make VR ideal for experiences which benefit from total immersion, such as watching a movie or playing a game. However, it may not be a good idea to move around too much while in VR or the real world might literally smack you in the face! Augmented Reality, on the other hand, places digital objects directly in a user’s view of the real world, augmenting physical objects using virtual information or graphics. The AR experience can be considered immersive or non-immersive depending on the degree by which the user’s visual field is altered. Because field of view is not typically occluded, AR technologies can be used in a wider range of locations and situations such as walking down the street, driving a car or while at work. By providing more convenient access to content and information and enhancing both personal as well as work related activities, AR may eventually play a prominent role in a large part of our daily lives. Given the mindboggling number of possible applications and the massive markets that they will disrupt, the AR and VR markets are estimated to be approximately $150 billion annually by 2020 (Digi-Capital). Investors seeking to capitalize on this opportunity have already put into play $4B in capital since 2010 to fund AR and VR businesses. This report examines some of the key trends and innovative companies that will shape this rapidly growing market. 1.1. Anatomy of a VR Headset

Source: AGC, image copyright Sony Playstation


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2. VR/AR Landscape The below landscape provides an illustrative sample of VR and AR players across devices, content, services, and enabling technologies. The industry is dynamic and evolving fast so there are certainly companies that we have missed. Some companies may be active across several categories across the landscape.

Source: AGC Partners


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3. Defining Virtual Reality and Augmented Reality While VR and AR share many similar characteristics, the two technologies may serve significantly divergent potential applications. At the most fundamental level, both employ eyewear that delivers digitally generated objects/environments to a user’s field of view. Having a user’s view of the real world completely blocked, or only partially occluded, provides for some very different potential use cases. Virtual Reality is defined as an artificial world that consists of images and sounds created by a computer and that is affected by the actions of a person who is experiencing it (Merriam Webster). The user’s field of view is completely encased by a VR headset giving the visual perception of complete immersion in an experience. An individual moving his/her head up, down, left or right experiences a virtual field of view changing as it would in real life. In the near term, the most prevalent use of VR technology will be for games. “Games are a great first target for VR due to the fact that games, especially games on PC and console, are inherently 3D,” noted Brian Blau, research director for personal technologies at research firm Gartner. “VR requires a sophisticated 3D engine to drive the visuals, and it’s those game engines that are the ones that will be used in VR as they are, to a large degree, capable of processing the complex 3D environments that are at the heart of a VR system.” VR movies, sports and other video content will follow as the content catches up with what is possible through VR hardware. Augmented Reality is defined as an enhanced version of reality created by the use of technology to overlay digital information on an image of something being viewed through a device (Merriam Webster). An AR headset generates digital objects that, to the user, appear as if they were actually present in the real world. For example, with AR a medical team could converse around a holographic image of an organ in preparation for a surgical procedure, or an auto mechanic could have a detailed digital schematic of an assembly overlaid on top of the actual car to aid in a repair job. Given a user’s ability to still see and operate in his/her surroundings, AR has the potential to be used at any time, any place, and across a wide range of applications. AR may ultimately serve as a replacement for the multitude of screens that pervade our daily lives. A physical screen may not be needed if a user’s AR headset can project a virtual one in any size and onto any surface. Like the mobile phone that it may come to replace, AR technology has the potential to change the way that we work, play, communicate and interact with the world around us. 3.1. Comparison of VR and AR

Category Virtual Reality Augmented Reality

Visual Experience Fully immersive, puts user in a virtual

environment Additive, enhances existing view of the

real world

Possible Use Cases

User needs to be stationary while using so ideally suited for indoor use

Applicable to a wide range of settings

Applications Immersive games, 3D movies Games, communication, industrial,

medical, military

Commercial Availability

Consumer models rolling out over next 12 months

2-3 years

Estimated Market Size (in 2020)

$30 billion $120 billion

Source: AGC Partners, Digi-Capital.


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4. The Current Reality of Virtual and Augmented Reality Since before the crew aboard the Starship Enterprise introduced TV watchers to the virtual reality generating holodeck, the idea of people being able to engage with computer generated characters, objects and environments has captured the popular imagination. While truly immersive worlds that are indistinguishable to the five senses remains in the realm of science fiction, the VR and AR technologies of today are providing important building blocks towards that future vision. Like any new technology (the first prototype handheld mobile phone from Motorola in 1973 weighed 2.4 lbs, was the size of a brick and offered a talk time of just 30 minutes on a 10 hour charge!) it will take decades for VR and AR to mature into its full potential. Many technological challenges will need to be addressed and the requisite ecosystem of suppliers, distributors, developers and content creators will need to be built to support these emergent industries. While versions of VR headsets have been available for decades, they have only been suitable for researchers and hobbyists. However, consumer Virtual Reality is now becoming true reality with recent mass-market VR product releases. Advances in processing power, electronics miniaturization, tracking and display resolution are finally making VR technologically practical and deep pocketed OEMs have invested billions in making the products commercially viable. Also, rich 3D virtual worlds have long been a mainstay of video games, giving VR a strong foundation of developer talent from which to draw upon to create VR experiences. Within the next year, several VR headsets from leading OEMs are scheduled to hit the market for the first time, giving the average consumer the ability to enjoy all of the wonders of digital immersion. Some version “1.0” products/experiences are sure to have kinks that will need to be worked out (dizziness, tracking, controls, etc.) but seriously folks – VIRTUAL REALITY. Who isn’t going to want to try it?! True Augmented Reality is a bit further off. “True AR is predicated on elegant and accurate optics (which are not there yet), eye tracking (not integrated into any production hardware yet), and sophisticated computer vision, which in turn requires powerful processors, which in turn require better heat dissipation mechanisms and larger batteries,” according to Kyle Samani, CEO of Pristine, a developer of smartglass software. In short, analyzing the real world and making digital objects appear in it in a manner that is spatially aware and indistinguishable from how a real object would appear, is no easy task. As an indicator of how challenging these problems are, secretive AR start-up Magic Leap, has raised approximately $1.4 billion in capital to overcome these hurdles. Their amazing demo videos suggest that commercially available AR may be on the horizon but, as yet, they have not announced a launch date. 4.1. VR/AR Challenges and Inhibitors

Category Challenges

Virtual Reality

Field of View. VR headsets, which currently provide a ~90 degree field of view will have to be increased to >220 degrees for a more natural viewing experience.

Image Quality. Pixel density and color contrast will need to be enhanced significantly to provide a more realistic environment.

Depth of Focus. Focus of objects should vary depending on perceived virtual distance.

Latency. Latency will need to exceed 20 ms (current spec for most recent devices) to avoid disorienting users.

Augmented Reality

Computer Vision. The headwear has to know where and what the eye is looking at, and the device must sense what’s in the real world, what’s moving and what’s staying still.

Processing Power. Significant processing demands as data gets crunched in real-time.

Power. The significant amount of processing required to enable AR requires a lot of power while not being burdensome to the user on the go.

Social Acceptance. Since AR is meant to be mobile, AR may not appeal to consumers until the devices reach a certain level of miniaturization.

Source: AGC Partners, Oculus


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5. Upcoming Gear Review The coming year promises to be an exciting time for VR and AR with a number of headsets scheduled for consumer release. The following are some examples of upcoming products. 5.1. Examples of VR and AR Headsets Scheduled for Release within Next 12 Months

Product Description Price Release

Oculus Rift

Resolution: 2160 x 1200 Refresh Rate: 90Hz Field of View: 110 degrees Sensors: Accelerometer, gyroscope, LED positional tracking Audio: Built-in headphones and mic

TBA Q1 2016

HTC Vive

Resolution: 2160 x 1200 Refresh Rate: 90Hz Field of View: 110 degrees Sensors: Accelerometer, gyroscope, laser position sensor Audio: Built-in headphones

TBA Q4 2015

Playstation VR

Resolution: 1920 x 1080 Refresh Rate: 120Hz Field of View: 100 degrees Sensors: Accelerometer, gyroscope, LED positional tracking Audio: Separate headphones

TBA 1H 2016

Samsung Gear VR

Resolution: 2560 x 1440 (uses mobile phone as display) Refresh Rate: 60Hz Field of View: 96 degrees Sensors: Accelerometer, gyroscope, geomagnetic, proximity Audio: Separate headphones

$99 Q4 2015

Razer OSVR

Resolution: 1920 x 1080 Refresh Rate: 120Hz Field of View: NA Sensors: Accelerometer, gyroscope, geomagnetic Audio: Separate headphones

$299.99 Available

now

Vuzix iWear

Resolution: “~1 million pixels per eye” Refresh Rate: NA Field of View: 57 degrees Sensors: Accelerometer, gyroscope, geomagnetic Audio: Over-ear headphones

$450 Available

now

MSFT HoloLens

Resolution: NA Refresh Rate: 60Hz Field of View: NA Sensors: NA Audio: Built-in speakers

$3000 Q1 2016

Meta 1

Resolution: 960 x 540 Refresh Rate: NA Field of View: 35 degrees Sensors: Accelerometer, gyroscope, geomagnetic Audio: Built-in speakers

$667 Sold Out

ODG R7

Resolution: NA Refresh Rate: 100Hz Field of View: 35 degrees Sensors: Accelerometer, gyroscope, geomagnetic, altitude sensor Audio: Separate headphones

$2750 Q4 2015

? Magic Leap

Resolution: NA Refresh Rate: NA Field of View: [theoretically should encompass entire field of view] Sensors: NA Audio: NA

NA NA

Source: AGC Partners


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6. Market Overview 6.1. AR/VR Market Forecast ($B)

Source: Digi-Capital By 2020, the size of the AR and VR markets will grow to $120B and $30B respectively (Digi-Capital). With well-established entertainment markets to sell in to, VR benefits from a large endemic user base, which should drive adoption. However, the number of applications is limited by the physical constraints of VR which limits the overall market size. AR, however, can be used in a wider range of environments and is more broadly applicable (industrial, education, healthcare, enterprise, military, etc.). AR may ultimately replace the multitude of screens people use in their daily lives, thereby driving optimism for a much larger potential market size. 6.2. Average Selling price of VR Headsets ($)

Source: Piper Jaffray One of the important drivers of AR/VR adoption will be decreasing hardware price points even as the technology improves. Current VR headsets are expected to have ASPs of ~$300-$400 which makes them a rather expensive experimental purchase. OEMs are pretty good at making things better for cheaper so prices should come down over time.

6.3. VR Content Market Size ($M)

Source: Piper Jaffray

Ultimately, content and services are the primary drivers of adoption for any new platform. For VR, many forms of immersive entertainment are already poised to take advantage of the technology. All of the home entertainment experiences that people currently enjoy, such as playing video games, watching movies, and following sports, could be enhanced through VR technology. Live sports may prove to be the biggest opportunity for VR. The NBA and Turner Sports, in partnership with NextVR, recently broadcast the first live professional sports game in virtual reality to generally positive reviews. No one is ripping up their court side tickets just yet, but that may change as the virtual experience improves. The NBA and NFL alone are expected to generate $1.7B from VR by 2025. Video gamers, already familiar with 3D environments, will be early adopters of VR technology and will drive that segment of the market to $1.4B by 2025. Always a technology early adopter, the adult entertainment industry is also gearing up to take advantage of VR and is expected to grow to a $1B market by 2025. Finally, driven by more powerful storytelling through immersion, the movie industry is also predicted to generate $610M from VR by 2025. Due to the early stage of the AR market it is more challenging to predict the eventual “killer apps” but there is optimism around applying the technology to certain verticals. AR may replace the mobile phone for uses like calls, search, email, web browsing and social networking. Commerce may be a significant opportunity as AR allows for greater information to be conveyed during the in-store shopping experience. AR could also see applicability within education, manufacturing, health care and the military sectors, presenting many growth opportunities.


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7. AR/VR M&A and Investment Activity 7.1 VR/AR M&A Deals (2012 – 2015 YTD)

Source: S&P CapitalIQ

7.2. VR/AR PP Deals (2012 – 2015 YTD)

The recent climate of augmented and virtual reality is heating up. Chris Dixon, a Partner at Andreessen Horowitz said, “VR will be the ultimate input-output device. Some people call VR “the last medium” because any subsequent medium can be invented inside of VR, using software alone.” While M&A and private placement activity in the AR and VR space is at the early stages, there has been a significant uptick in 2015. Large players in the ecosystem are laying the groundwork to ensure that they don’t get left behind as the market develops while a few are investing heavily to lead the pack. M&A is primarily being driven by hardware and technology providers who are making tactical acquisitions of critical components that they lack in-house. Hardware design, development and production is an expensive endeavor where the multi-disciplinary capabilities of large OEMs like Sony, Samsung, and HTC, provide distinct advantages over start-ups. With 32 M&A transactions year-to-date, 2015 has seen an increase of 60% over 2014. Private placements on the other hand, are concentrated across content creation, services, and components businesses where innovation and capital efficiency allows smaller players to be competitive. There have been 63 private placement transactions year-to-date, representing a 91% increase over 2014. Facebook made a very loud entry into the VR space with the $2B acquisition of Oculus VR in March 2014 (only three years after the device prototype premiered on Kickstarter). Facebook looks to be taking a true “platform” approach to VR, and working with partners such as Samsung (Gear VR) to commercialize the technology more broadly. Mark Zuckerberg provided some insight into how Facebook views Oculus when he stated that, “With Oculus, it's that they're the clear leader in something that has the potential to be the next important, or one of the next most important computing platforms.” Zuckerberg tied the acquisition into Facebook’s core social business by noting that Oculus also presented “a long term strategic bet on the future for social networking” given the potential for virtual interaction the device presents. Intel, on the other hand, has been focused on acquiring AR and VR enabled devices. The Company has been actively building their footprint in the wearables and AR space having completed 5 acquisitions since 2013. Intel’s acquisitions of Composyt Light Labs, Lemoptix, and Recon Instruments in 2015 signals that they intend to be a major systems supplier as computing shifts to AR and VR. Apple has been quietly acquiring companies to build its own capabilities in the AR space, putting it in a position to roll-out its own device at some point. With the acquisitions of PrimeSense (developed the original technology for Microsoft’s Xbox Kinect platform) in 2013 and Metaio (AR software) in 2015, the company’s next “one more thing” might just be an AR device. If AR does end up replacing mobile phones, this would be a very natural migration for the business. The large market opportunity presented by AR and VR is attracting a broad range of investors including tech giants like Intel Capital, Google Ventures, and Qualcomm Ventures along with well-known venture capital firms such as Andreessen Horowitz, Kleiner Perkins, Rothenberg and Partech. Some of the leading private companies are building up large expectations and equally large valuations. According to Boost VC, a San Francisco-based seed-stage accelerator, approximately 75 VC firms are currently invested in virtual reality companies.


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7.3. Representative VR/AR M&A Transactions

Source: CapIQ, 451 Research 7.4. Representative VR/AR Private Placement Transactions

Source: CapIQ, 451 Research

Date Company Name Business Description Amount ($mm) Acquirer

9/15/2014 MojangDevelops and distributes PC, Mac, console and mobile video games for consumers worldwide, with a focus on the Minecraft franchise

$2,500 Microsoft

3/25/2014 Oculus VR Develops virtual reality products including controllers, headsets, and development kits 2,161 Facebook

11/17/2013 PrimeSenseProvides 3D sensor systems and designs related CMOS-based image sensors and microphones for use in a range of verticals for consumers and businesses globally

345 Apple

6/17/2015 Recon InstrumentsManufactures smart glasses that enable users to monitor performance data, sync with smartphone apps, take photos and videos and utilize GPS-enabled tracking from the worn eyewear display

175 Intel

10/12/2015 VuforiaComprises an augmented reality technology platform that enables applications to connect the physical world with digital experiences

65 PTC

3/6/2014 Xsens TechnologiesDesigns and supplies three-dimensional (3D) motion tracking products and systems for various professional applications in the Netherlands and internationally

61Fairchild Semiconductor

7/16/2015 Pebbles InterfacesProvides hand gesture sensors, controls and software that enables 3D gesture interaction and tracking in computing and electronic devices for businesses

60 Oculus VR

10/8/2015 SoftKinetic Intl.Provides 3D scanner and range image sensors and related software to enable users to interface with video and virtual reality products using hand and full-body movement

ND Sony

6/14/2015 WaveOpticsManufactures augmented reality display technology which includes binocular display, high field-of-view, full RGB color, and lightweight features

ND Blippar

5/29/2015 MetaioProvides subscription-based mobile application development SaaS to enable users to create augmented reality (AR) mobile applications

ND Apple

6/18/2014 LayarProvides a mobile app that enables iOS and Android device users to acquire information via image capture on their mobile device and then provide users with additional information from the Web

ND Blippar

Date Company Name Business Description Amount ($mm) Investor(s)

12/07/15 Magic Leap Develops human computing interfaces and software solutions $827 Undisclosed

10/24/14 Magic Leap Develops human computing interfaces and software solutions 542Andreessen Horowitz, Google, KKR, KPCB, Legend Pictures, Obvious Ventures, Qualcomm Ventures, Vulcan Ventures

09/11/15 Jaunt Captures and displays 360 degree video content 67Highland Capital Partners, Redpoint Ventures, The Walt Disney Company, ProSiebenSat.1 Media, Google Ventures

03/06/15 Blippar Develops a mobile application based on augmented reality and image-recognition technologies 45 Undisclosed

06/25/15 MatterportEnables users to create cloud-based 3D models of real-world spaces that can be experienced, changed, and shared online

35DCM, GIC Special Investments, Qualcomm Ventures, Lux Capital Management, Felicis Ventures

11/11/15 NextVR Develops and delivers video capture technology for live and recorded experiences 30Comcast Ventures, Dick Clark Productions, Formation 8, Peter Guber, RSE Ventures, Madison Square Garden Co., Time Warner Investments

01/03/13 Leap Motion Develops motion-control hardware and software 30Highland Capital Partners, The Founders Fund, Andreessen Horowitz

10/22/15 Playful Operates as an independent game company that develops PC, casual mobile, and board games 25 Undisclosed

01/02/15 Vuzix Designs, manufactures, markets, and sells wearable display devices in the United States and internationally 25 Intel Corporation

05/28/15 Avegant Manufactures eye retina based electronic devices to view media and data files 24Intel Capital, Hangzhou Liaison Interactive Information Technology, NHN Investment

01/28/15 Meta Company Provides Meta 1 developer kit, a computing device that provides users with virtual superpowers 23Horizon Ventures, BOE Optoelectronics, VegasTechFund, Danhua Capital, Commodore Partners

03/09/15 Improbable Worlds Developing an operating system that allows developers to build simulated worlds 22 Andreessen Horowitz

08/19/15 castAR Develops and manufactures augmented and virtual reality glasses 15 Playground Global

07/13/15 OccipitalDevelops 3D sensor for mobile devices that allows users to scan objects and people, map interior spaces, and capture 3D models

15Foundry Group, Grishin Robotics, Intel Capital, Shea Venture Capital, K9 Ventures


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Gee M. Leung Partner AGC Partners O: 650.241.1490 C: 415.812.6146 [email protected]

Gee is a Partner at AGC with a focus on Internet and Digital Media With 16+ years of investment banking experience working with technology growth companies, Gee

has completed over 30 mergers and acquisitions and financing transactions Gee’s past experience includes investment banking roles at Citigroup, MESA Global, Montgomery

& Co., and Friedman Billings Ramsey B.A. from the Haas School of Business at UC Berkeley

Charlie Schopp Vice President AGC Partners O: (617) 261-4153 C: (413) 717-1676 [email protected]

Advised on over 20 closed transactions ranging from sell-side M&A to debt and equity financing advisory

Transaction expertise spanning a broad sector base within the Technology space including Digital Media and Internet Services, Mobile Payments and Enterprise Software / SaaS

Charlie holds a B.A. cum laude in Economics with a minor in Psychology from Middlebury College

Unparalleled Expertise – Over 250 Closed Deals

Note: This document is intended to serve as information only, and to suggest that further analysis and consideration may be warranted. Unless otherwise indicated, AGC does not believe that the information contained herein is sufficient to serve as the basis of an investment decision. There can be no assurance that these statements, estimates or forecasts will be attained and actual results may be materially different. Only those representations or warranties which are made in a definitive purchase agreement will have any legal effect. To learn more about the company/companies that is/are the subject of this commentary, contact one of persons named herein who can give you additional information.

VIRTUAL AND AUGMENTED REALITY DON T BELIEVE ME, … · Virtual and Augmented Reality: Don’t...

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