Virtual Reality

October 10, 2016

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In this episode of TechTalk, we discuss some of the financial aspects of virtual reality, such as investment, valuation, revenue recognition and more.


Transcript

Dave Plaskow: Welcome to EisnerAmper’s Technology Podcast Series. With more than 500 technology clients, we’re always interested in the latest industry trends and developments, as well as any related business and accounting opportunities and challenges. Today’s topic is a good one – it’s virtual reality. Typical of many technology sectors, virtual reality offers products for both consumers and businesses. Our speaker today is David Katz, Senior Manager in EisnerAmper’s Technology and Life Sciences Practice. Dave, welcome.
David Katz: Thank you for having me – good to be here.

DP: Tell me, how did you first get involved in virtual reality?
DK: So I remember seeing virtual reality in malls or arcades when I was a kid. You’d either sit in a pod or pull the mask over your face and you’d play some sort of interactive game, and of course I begged my parents to let me try and somehow convinced them. But I’d say I was very underwhelmed by the experience. And then you had the late ‘90s, you had a movie like The Matrix, where the entire reality was in fact a simulated virtual reality experience. But overall it seemed to fall off the radar. And now today, I’m not a gamer, I’m certainly no longer a kid, so I don’t really see VR in my daily life. But I was watching the baseball All-Star game this year, and I saw they had a virtual reality homerun derby in San Diego for the fans, so that really piqued my interest, and they’re even taking it to the level where you would feel like you’re catching a fly ball in the virtual reality. And I heard about a similar experience for the Champion’s League soccer final as well as some virtual reality experience planned for the Olympics in Rio. So it looks like virtual reality is here to stay.
DP:Now, being a member of EisnerAmper’s Technology Group, for the folks out there who may not know much about virtual reality, give us a little background on it.
DK:Sure. So virtual reality is a computer-generated environment that lets you experience a different reality – anything from simulating you’re in the middle of Times Square to skydiving off the Empire State Building. So typically a headset fits around your head and over your eyes, images are simulated and fed into small lenses. In the 1960’s, Ivan Sutherland created the first head mounted device – it could even track user movements, change the user views appropriately. And this tracking’s not only critical to the VR experience, but it’s also a major technology challenge still today.
DP: Now, in line with the Wright brothers at Kitty Hawk, and Alexander Graham Bell’s first phone call, was there that defining, watershed moment for virtual reality?
DK: I’d say the first breakthrough was probably in 1982 when Thomas Furnace developed what was the first flight simulator for training pilots, and you’ve seen news stories about pilots who are able to get out of potential trouble because they virtually experienced that same thing previously. You saw some devices pop up in the ‘80s and ‘90s, but there were no in-home experiences or virtual reality that you can really access easily.
DP:And as we know, technology advances at the speed of light these days. How is virtual reality different today in 2016 versus back in the ‘80s or ‘90s?
DK:Right. So it’s now readily accessible for in-home consumer use. You have something like Google cardboard. It’s only $15 and that can turn any smartphone into a VR device, and all the major players are really getting into the space. Samsung has the Gear VR, Sony has the PlayStation VR, and HTC has the Vive. Samsung’s relatively cheap at $100, and some of the others are in the $800 range. And then you have a company like Oculus, founded solely as a VR company in 2012, which was acquired by Facebook for $2 billion in 2014. So these aren’t small companies kicking around with new technology. These are major players, with major resources, and they’re ready to get into this space. Industry estimates have the number of active VR users at somewhere around 43 to 45 million people, and those are mostly in the gaming area right now. But that number’s expected to quadruple over the next two years, especially as developers figure a way to take this outside gaming and into mainstream use. And they’re projecting over $1 billion of virtual reality sales for 2016, so, things are heating up here.
DP:Pokémon Go. It’s the summer’s biggest game – everyone’s playing it – my daughter’s playing it. I don’t understand it. But is that virtual reality?
DK:Maybe. The purists believe it falls into this augmented reality arena. But if you consider that some users had been put in jeopardy because they’re so engrossed in the game, and they’ve walked down dark alleys or into traffic, I guess you can say Pokémon Go is a form of virtual reality in my eyes. Still, it represents this new branch that some call untethered mobile reality. So it’s going to be very interesting to see where this takes us over the next couple of years.
DP:Right, because as I understand it, for virtual reality it does have to be connected to some sort of computer or smartphone.
DK:That’s correct. Right now it needs to be tethered to some other device in order for it to work.
DP:Ok. So staying with gaming for a minute, it seems that a big focus of virtual reality is the gaming sector, you know, a billion dollar... several billion dollar industry, and it was a recent theme at the E3 Electronics Expo. But other than the gaming area, are there some more serious or practical applications for virtual reality?
DK:Definitely, and we’ll see where it goes. But right now, we’re seeing healthcare and specifically medical devices are using more virtual reality technology. So the University of Minnesota has a med device center where students and doctors can perform procedures as though they’re doing them in the field. So much like that example with the pilots, doctors and med students are able to use virtual reality to simulate actual medical experience. And that goes hand in hand with the haptic glove technology, which uses air pressure to simulate the feel of virtual objects. So, that has application in all facets – it feels like you’re physically touching something that you see via your virtual reality headset.
DP:Ok. So in addition to having some fun with virtual reality, it could literally be a life saver.
DK:Absolutely.
DP:Let’s talk about the money behind virtual reality for a second. In terms of capital, you know, what are we seeing? Who’s investing? What’s the tie-in between virtual reality and venture capitalists – private equity investors who are looking to possibly get into that sector?
DK:Sure. So we looked at Pitchbook – that’s a publication that tracks alternative investments – and a recent report said that since the start of 2010, there’s nearly $3.9 billion deployed into the VR space across 350 completed deals. 2014 was a high-water mark with over $2.8 billion in that space, but that includes that $2 billion Facebook-Oculus deal that I mentioned earlier. But either way there’s no question we’re seeing increased activity, such as a 27% increase in new investors last year. The first part of 2016 is seeing historic investment, with funding near $600 million and, you know, some of this has been from smaller crowdfunding campaigns for VR accessories, but we also had over $100 million in corporate investments by such companies as Disney. So while the VR hardware development has moved at a quick pace, there’s been less movement in software and content, and that led HTC to create the Vive X Fund – a $100 million fund to help new companies create software for their headsets specifically. And then Facebook created a similar fund – a much smaller dollar amount – for a similar situation to create software for the Oculus itself.
DP: And because it’s a relatively new technology and it is evolving, you know, at a quick pace, maybe if you could talk about some of the technical and business challenges of virtual reality.
DK:Sure. So in terms of technology, as I mentioned, it’s still a work in progress. Tracking, which is used to help create a realistic virtual reality, it’s still an issue, and people are being tethered to computers via cable, so everyone’s still fine tuning this experience and I think we’ll be fine-tuning the experience for the ongoing future. So, you know, we know that if there’s a lag of more than 50 milliseconds between the VR machine and the user, that you notice the difference and that would kind of spoil the experience. Likewise, VR devices, they’re still a bit cumbersome to use so they’re still working on that. And, of course, there are questions as to how to monetize beyond the sale of the units and the related games or software, which is why we’ve seen some ad tech companies jump into this space. And on that end, it seems there’s a couple of formats to offer – one being a five to 10 second VR when the app loads up, the other being a fuller length video of 10 to 30 seconds in between natural breaks in the content. So there’s more than just a hardware or software play to this, and we’ll see some money being made, certainly.
DP:Now Dave, you as a CPA and a business advisor, what are you saying to your clients or potential clients, you know, VR entrepreneurs, what are some of things they should be thinking about?
DK: Yeah, so there’s a few things. Valuations, are certainly a big consideration. There’s a lot to consider like consumer acceptance, changes in technology, stickiness of the customer experience. So, I think of 3D televisions a few years ago. I would have thought by now they’d be in everyone’s living room. For me, I’m not seeing that out there. And revenue recognition will certainly be an interesting topic. Apple’s revenue recognition policies come to mind – they had some similar questions and issues with the iPhone. So, is the delivery of the device the end of the transaction or is there maintenance or software essential to use that may require spreading that revenue over a period of time? And likewise, whether modifications or enhancements are able to be capitalized or need to be expensed immediately – that will require some discussion as well. So, certainly some things to consider on the accounting end.
DP: Well, a really interesting, meaty subject, and a lot more to come on virtual reality, so thanks Dave for your insight here.
DK:Thank you. Thanks for having me.
DP: Tune into the next EisnerAmper podcast where we get down to business.

About John Pennett

John Pennett has public accounting experience with a strong emphasis on life sciences companies. Member New Jersey Society of Certified Public Accountants and New Jersey Technology Council and advisory board of eLabs.

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