The emerging business strategies for monetizing virtual reality

Rodriguez: In the current model for ads, whether that’s logs or video, there’s an opportunity to escape the ad. At some level we accept ads in our daily lives because we can look away. We can turn the volume down on the TV. We can do something else when an ad shows up on our phone. In VR we’re sort of trapped. How are users going to respond to that?

Shah: In our case, all of our ads have exit buttons. They’re prominent. You can’t miss them. But we still have 75-80 percent view-through rate. Partly it’s because some of the ads are pretty cool. But still, you need that exit button. It’s irresponsible on a number of levels not to allow either back or exit.

Dazin: In VR it’s important to understand your user. When you’re in VR you’re in this great new environment, but you still want to retain control over what you’re doing. For us it’s a lot about user discovery. People hate ads, but they love discovering things that are interesting. If you’re in a virtual world and there are physical things that attract you in a direction and you can go down the rabbit hole, if you will, things like that are much more exciting. The user remains in control from the second they step inside and they can turn back whenever they want.

Takahashi: I have no expertise in VR. I’m a journalist. But I get to listen to a lot of people talk about this. In this early age for VR, we have a premium model that’s predominating now because there’s such a small number of people in the market. If that persists for a while, then it’s possible for some of these companies to make money that way. They’re making maybe a larger amount of money per person. The number we heard today from the Venture Reality Fund was that nine games have generated more than $1 million in revenue through the premium model so far.

When you scale this up and eventually get larger numbers in the market, making less money per person is okay. You’re collecting pennies by the millions and billions. Then it seems to make sense to have models like in-app purchases, and eventually advertising. It’s interesting to me that all the models are there for different stages of the market. Eventually you want to get to a point where you use all of them at once to serve different kinds of users.

My question is, when is it appropriate to use which model? Does it make sense to have an advertising model in the very beginning?

Dazin: I think there are going to be lots of hybrid models in the space right now. HTC just announced they’re doing a subscription model. That’s a great way for developers to hit a certain baseline of revenue. But if they’re really trying to make more, at that point it becomes IAP and things like that, where they can get a bit more out of players who are more involved with their app than others.

A subscription model, if you’re doing royalties based on time spent — as an industry we need to figure that out. The Steam numbers are kind of weirdly reported, if you look at which apps are being used and the time spent there. For developers it’s a very scrappy time. Whatever makes you money will make you money in VR right now. If you go subscription, if you sell a full version that has everything available, or if you sell it piece by piece, people are going to do what they can to get by at this stage.

Rodriguez: I’m curious about VR and how it relates to mobile gaming when it comes to session length and engagement. When I think about premium content, it tends to center around long form content. That tends to be the driver of up-front premium. With VR there’s a question about session lengths. You guys must be studying this all the time. What do you see?

Shah: The problem I have is the framing of the question. The most confusing part of big talks at conferences like this is I think we’re talking about two different VR markets. One is the console market, which is Oculus and HTC Vive and PSVR and others out there. We’re talking about really low volumes, fairly high production costs and quality. It’s a console market. It’s an engaged console market. You don’t want ads in those games, full stop. On my PlayStation at home I don’t want ads coming up. Also you can’t play on the exchanges, and in general it’s a much lower-volume game.

If the question is about what sort of metrics we’re seeing around console VR, the user counts are so low that it’s hard to draw any conclusions. I’m from the mobile space, and social before that, where our user counts were — literally, it was a bad day if we did a billion impressions in a day. “Wow, we’re slipping.” So I don’t know the answer, but I do know that it’s a premium market for console or tethered VR.

The reality is that the far larger usage is on what we don’t talk about as much, which is mobile VR and mobile 360. It’s not as sexy. The production quality isn’t as high. But for those experiences — those are a lot of the folks doing social game development, social app development, mobile game development, mobile app development, they’re coming into this new platform, which is 360 on mobile and on VR. It runs on things like Cardboard, which is not sexy. It runs on Gear VR, which is slightly sexier.

In those cases we’re seeing anywhere between three- and 10-minute engagement times per day. We saw about 1.5 million active users in December. I think that makes us one of the largest VR platforms out there, to give you an idea of the scale. We’re seeing on the order of $20-40 CPMs on the really good titles and $7-15 on not as good titles.

Rodriguez: That’s significant for folks looking to develop when you compare it to other business models. When you say 1.5 million, we’re talking about an installed base of maybe 6 million devices, right?

Shah: Yeah. We saw about 20-25 percent of the total worldwide VR user base. We all love them, because they’re trying to so hard to find content. They’re really trying.

Takahashi: I interviewed Chris Early from Ubisoft about their first VR game, Eagle Flight. They were told, when they were making the game, by the platform folks that the average user experience should last no more than seven minutes, because that’s how long people have patience for wearing a VR headset. They launched and found that the average user was playing for more than an hour. It’s a different kind of user. They found a way to get to someone who’s much more hardcore. As soon as you get to that audience, all those numbers tend to change.

Shah: I think that’s right, in terms of time. The most successful engagement numbers, and frankly the most successful apps from a monetization and re-engagement standpoint, are those guys who are doing mobile 360 crossing to VR. There’s a monoscopic mode and a fully immersed mode. You have examples like YouTube, Hulu, Jaunt, or LittleStar. These are VR apps, but the majority of the usage is mobile 360, because everyone has a phone and you can use your phone on the bus. It’s a little different from strapping on a VR headset. Those guys are doing well because they’re driving a bridge for consumers to engage with 360, anywhere and anytime, without having to lean in to hardware that they don’t understand well enough to choose from yet.

Another great example is Panorama 360. Another great example is Fractal Combat X, which is a great game that’s VR and mobile. Your game state is persistent between the two. That’s pretty cool.

Rodriguez: I want to expand on the point you made earlier about the platforms. It’s pretty clear by the way the press generally covers it that dedicated hardware is what gets a lot of lines.

Shah: But nobody’s using it on a mass scale.

Rodriguez. Right. So is mobile really the VR market?

Shah: It depends, again, on who you’re talking to. If you’re a console game developer who’s made PlayStation games for the last 20 years, that’s what you do. You do category-topping titles that take years to develop. Don’t talk to the ad guys. You should be talking to HTC and Oculus and publishing massive titles. The issue there is that you’re still not going to get that many purchases. Not many people have these devices. So the question is how much you invest now versus later.

If you’re talking to traditional mobile app developers, it’s all going to be mobile VR and mobile 360. That’s my personal opinion, based on the data we’re seeing.

Takahashi: I think Superdata said that 6.3 million headsets shipped in 2016 and 5 million of them were Gear VR.

Rodriguez: This morning we had our VR breakfast, talking with some VCs and startups looking to build games in the space. One thing the VCs recommended, which I hadn’t thought much about, is that there’s right now still a business opportunity from the manufacturers. We’re seeing subsidized game development in the range of several hundred million dollars. We’re still in that space at this time.

Shah: I don’t think that’s a business model. That’s a funding model. It’s a way to get funding that’s non-dilutive, and it’s a great way to do that, but it’s not a business model. You can’t get that forever.

Takahashi: It’s a necessary seeding of the market. Everyone’s learning. Everyone’s practicing. Nobody’s paying that much for experiences yet. This large amount of money from the platform owners — HTC, Facebook, Intel, maybe Microsoft soon, Sony — is a necessary part of kickstarting the market.

Jason Rubin from Oculus said earlier that the VR transition is probably the hardest transition he’s ever seen for the game industry, because there are so many things to learn. You’re probably going to fail several times before you get it right, but when you get it right, there should be a gold mine at the end of that.

Dazin: The world we live in right now, mobile VR exists because it’s easy and it’s cheap. But desktop VR will be the mobile of tomorrow at some point. Seeding these developers to take risks and build larger projects that will take more time and money but be highly polished, I think that will bode really well for mobile a year, a year and a half down the line. That development is going to be largely the same. We’re seeing mobile headsets start to have hand-tracking controls. In the future they’ll have inside-out tracking. Developers will only learn how to do that if they start working on the platform today. If there’s no money there, sometimes there needs to be an incentive to do that.

Rodriguez: I’m curious about design considerations. When you’re building your game out — let’s take ads for an example. If you think that might be part of your business model, what’s different for VR? I’d argue, by the way, that mobile still hasn’t gotten it completely right. The way ads get inserted in some mobile games is still pretty clunky. What design considerations do people still need to think about for ad insertion into VR?