Making money in VR is hard

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Virtual reality can build worlds, transport people and transform industries – just don’t expect to get rich off it. The VR industry is either a maturing market or doomed to failure, depending on who you ask, but no one would claim it’s become anything close to a gold rush.

Yet optimism abounds: This year will see major new headsets from Oculus and HTC arrive, upping the quality and lowering the bar of access. Quest, one of two new Oculus systems, is a totally standalone headset that offers a lifeline to those thirsting for high-quality VR without the need for a PC.

Of course if you’re flush with Facebook money you can afford to keep investing in technologies that don’t touch your bottom line. But what of the countless small companies trying to make a success of virtual reality?

“It still feels like you’re pioneering,” says Meagan Budgell, one member of a five-strong team behind the swashbuckling pirate title Furious Seas. “With the new headsets coming out it feels like there’s a bit more support for everyone, so maybe it’s a little less volatile, but there are no guarantees. When you’re a small studio of five people, it’s scary sometimes.”

That will probably sound familiar to any indie game developer – VR or not – however the install base of VR headset users is a fraction of PC and console gamers.

However, there have been big hitters: Beat Saber reach 1 million copies sold in February this year, while Superhot VR has generated more revenue than its original non-VR version. Back in 2017, Oculus said that at least nine titles in its store had made than $1 million, some of which were independent titles not published by Oculus Studios. Some developers have found a lucrative path forward by striking up deals with Oculus to offer their games exclusively on its platform, securing funds for development and the promise of exposure.

Others are getting there by hedging their bets on multiple platforms, although a theme across developers I speak to is that mobile VR, for all its promises of democratizing the medium, is proving slower.

“What we’ve found is the casual VR market is not very strong,” says Darren Hyland, creative director at Virtual Arts Ltd, the studio behind Cargo Racing VR, who told me that the studio has seen more engagement from systems like the HTC Vive and Oculus Rift. “The people who have the headsets, they’re more hardcore”

Inspired by the success of free-to-play games like Fortnite, they’re also exploring in-app purchases. Like others, Hyland is emboldened by the promise of new systems to give virtual reality another gust of hype. “I think it’s picking up again. I think over the next couple of years it will get stronger.”

Rethinking the model

Making money in VR is hard - subscriptions could be the answer

One reason for this optimism is the changing means of distribution.

This month, HTC made changes to its Viveport subscription service by increasing developer revenue share to 80/20, up from 70/30, and, perhaps more dramatically, changed the way that revenue is shared across developers.

Whereas before Viveport subscribers were limited to a Netflix-style “locker” system where they could store up to five games a month, they can now have up to 600 titles at any one time. Under the old model, developers were given a fixed amount of $1.25 for every “slot” they were downloaded to, but not all users filled all slots, and when that happened it wasn’t clear how the revenue should be redistributed. Under the new system, developers will get paid based on usage rather than slots filled. So if someone downloads their game into a slot and plays only that title in one month, the developer will make $10.40.

Making money in VR is hard - subscriptions could be the answer

However, if someone downloads a second game, the revenue will be split in half – and will keep splitting the more games that the user players in the month. This presents a theoretical problem where someone could play 100 games a month and divide the revenue share to a miniscule, Spotify-esque portion for each game. Viveport president Rikard Steiber admits this is a possibility, but says HTC is betting against it based on user behavior.

“Its not like you read 10 books at the same time,” he says. Which is true, in most cases, but there still appears to be a risk that players who want to try out 30 titles a month will significantly diminish the developer’s revenue share. “I can tell you, based on a year and a half of data, that has never happened,” says Steiber. “What we found is that gamers play VR on the weekends primarily, and typically they play three to four games per month.”

What’s beyond doubt is that the transition from sale-only model to subscriptions has resulted in good thing for both HTC and VR developers. For HTC, it saw download sales grow 19% over 18 months, while subscription revenue grew 590%. HTC predicts that the share across subscriptions and downloads will remain the same in the new model – 15% for downloads, 85% for subscriptions – but with more of the cash going to developers.

Time will tell if this strategy plays out. If it does, it could encourage other platform-holders such as Oculus to follow suit.

Where is all the data?

Making money in VR is hard - subscriptions could be the answer

But this raises another problem: there’s a noticeable lack of data around VR sales right now. Sony recently announced it had sold 4.2 million headsets, but Oculus and HTC remain coy on their own specific numbers. When it comes to game developers, it’s also hard to get hard numbers.

“I think the secrecy is two things,” says Joe Radak, who wrote an article titled ‘Why I lost $42,500 making a VR game’. “No one really wants to talk about it because it can be turned against them, and also it can potentially hurt their chances with what investors exist within VR.” Then there are the NDAs signed with publishers that stop developers discussing sales numbers publicly.

That’s not specific to VR of course, but it’s noticeably more difficult to find data in this burgeoning medium. When VR “kicked off” again in 2016, it had an estimated market size of 180 million dollars, which was still just 0.2% of the gaming market overall.

People were hoping for a bigger splash, and at GDC in March this year, a presentation on VR held by Bjorn Book-Larsson, VP of product at HTC, hit the nail on the head: “The hardware complexity and requirements made VR a much harder sell than the way it was anticipated when it first launched”.

Book-Larsson also reeled off some of the biggest obstacles for developing in VR including the lack of established IPs and guidelines, which has resulted in much fumbling in the dark. But this also means VR has become a hotbed for experimentation and problem-solving. And while turning a profit may remain VR’s most elusive challenge, it feels like 2019 could be the year we start working it out.



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