How China's biggest companies are crushing it at virtual reality

How China's biggest companies are crushing it at virtual reality

By Stephanie Llamas, SuperData Rese

September 20th 2016 at 10:00AM

SuperData director of research and head of VR/AR strategy Stephanie Llamas takes a look at why companies in the region have embraced the nascent medium

Ever since Zuckerberg forked over $2 billion for Oculus in 2014, investors worldwide have been salivating at virtual reality’s potential.

In its first year of consumer viability, 2016 virtual hardware sales will surpass $2.3 billion and drive the global market to surpass $40 billion by the end of 2020.

As Asia’s population continues to burst at the seams, it’s no wonder VR investors are eyeing its potential the way they did MMOs and mobile. But it is a blind spot for Western companies, especially when it comes to China’s enormous but highly regulated market. 

China has long capitalised on being a tech fast-follower rather than a global innovator. The state’s intensive involvement in the private sector restricts firms’ abilities to compete with the tactics other, freer markets use. There is also a cultural divide that has made for a ripe domestic market, but a difficult one for investors from outside of China.

TAKING ASIA

Asia’s VR market will grow to almost $10bn over the next five years, largely driven by the sheer volume of production and investment coming out of China.

Close neighbors like Korea and Japan have also placed all bets on their biggest tech companies: the former’s Samsung Gear VR and the latter’s PlayStation VR. It’s true that both countries boast two valuable hardware leaders and a handful of big game publishers, but they’re clearly trying to catch up

Meanwhile, China’s top guns are going after VR with a two-pronged strategy: by selling lots of goods for very cheap and infusing the foreign market with billions in investment. 

Already do we see thousands of cheap headsets on Alibaba’s various marketplaces. Although none of these devices are known for their quality, they are affordable and allow Alibaba to help push VR into the mainstream. As any Risk player knows, once you hold Asia, it’s easy pickings from there.

Tencent is throwing itself into the ring by making a push for small content developers, many homegrown. They recently made a deal with local developer Original Force to create content for the company’s production studio Tencent Pictures and invested $12 million in VR projects by popular travel and lifestyle site Zanadu.

This does not mean they are ignoring after the top markets: rather, Tencent bought itself a seat at the table by joining a $50 million funding round for American AR start-up Meta.

Tencent has focused much of their expansion on the games market; one of their most notable investments was the acquisition of League of Legends developer Riot in 2011. On the VR side, they recently invested in Epic Games and Altspace VR, two companies working on gamified virtual experiences.

Tencent is using this opportunity to capitalise on their own internal endeavors. The one billion users who access games through their messaging apps WeChat and QQ are the lowest hanging fruit. They recently created an AR game for the Olympic Games and announced upcoming VR functionalities for WeChat. Their plans to move into the micro-console space have provided them the opportunity to launch one of the first third-party VR-capable devices. 

China’s version of Google, Baidu, hasn’t gotten as much international attention for its VR/AR ventures as Tencent and Alibaba, but their domestic investment has arguably been the largest in both scope and capital. Through its online video platform IQiyi.com, Baidu has set up its own exclusive platform for Chinese VR video content. To further bring more VR production into China, they announced a partner incentive program that will allow developers to make VR content around copyrighted movies, shows and games.

They are also taking a page from Pokémon Go by launching DuSee, an AR platform that allows smartphone apps to generate 3D images on flat surfaces. 

INVESTED INTEREST

Although these three enterprises are leading the charge to bring VR innovation and revenues to China, other domestic companies have found their own opportunities. Two of China’s largest media companies, Shanghai Media Group and China Media Capital, recently teamed up with leading content provider Jaunt to launch Jaunt China. Meanwhile, western start-up Spaces announced this summer they had entered into a $30m joint venture with Songcheng Performance Development, one of the world’s biggest theme park operators, after raising $3 million in funding. 

However, virtual reality is on track to create an investment bubble if too many investors throw too much money its way. So in time we will see whether these companies are actually ahead of the curve or on track to burst with the rest of ‘em. 

Either way, aggressive offshore investments like these are making China’s tech sector virtually unstoppable.

Stephanie Llamas is director of research and head of VR/AR strategy at SuperData Research. www.superdataresearch.com