×

The promise of virtual reality is starting to look very real

Virtual reality start-ups have raised more than $100 million in VC funding in four consecutive quarters.

Only a handful of virtual reality (VR) headsets existed when Alphabet unveiled Google Glass, but the past half decade has seen billions invested in VR, moving a technology once thought of as a gimmick much closer to being a part of everyday existence.

Virtual reality companies raised $1.46 billion in venture capital from the start of 2012 through the third quarter this year, according to CB Insights, marking four straight quarters that these start-ups reached $100 million-plus in funding. Since 2010, these firms have raised $3.9 billion, according to PitchBook.

All that money is leading up to what should be the biggest release year ever for new consumer VR products in 2016.

Magic Leap is developing augmented reality technology
Source: Magic Leap
Magic Leap is developing augmented reality technology

Virtual reality even has its own unicorn — or a start-up with a valuation of more than $1 billion. Magic Leap, which raised a $542 million round of venture capital in the fourth quarter of 2014, is reportedly looking to raise an even bigger deal now of more than $800 million, according to a state filing. The new round would value the firm at as much as $3.5 billion. Its existing backers include Alphabet's Google Ventures, Qualcomm's VC arm, movie studio Legendary Entertainment and VC heavyweights Andreessen Horowitz and Kleiner Perkins Caufield & Byers.

While Magic Leap is known for its "secrecy," what's important for most people is that a multitude of commercial and developer-only models have come to market in late 2015 or are expected to debut next year, with a much broader anticipated audience than gaming junkies or techies with cash to burn.

"We're seeing a change in consumer behavior," said Ed Tang, founder and CSO of Avegant, a virtual reality tech company that has raised $36 million in venture capital and is coming to market with its own VR device next year. "People are starting to explore beyond traditional media and try new types of media. The cost of virtual reality is becoming surpassed by the quality of the user experience."

Altered states of everyday reality
Virtual and augmented reality tours are changing the consumer experience.

Sotheby’s International Realty

Sotheby’s International Realty: The luxury home real estate company is starting to use virtual reality headsets, including the Oculus and Samsung Gear VR, to showcase high-end homes around the U.S. It’s an initiative at the level of the independently operated real estate offices, rather than coming from the corporate level, so not all Sotheby’s International offices feature the technology. Due to the cost of a 3-D 360-degree scan — a few hundred dollars — it follows that this application of virtual reality technology would first hit the luxury home market, but it is likely to expand within the residential real estate market as costs go down. It’s an idea that is also coming to the Class A commercial real estate market: In June, Sage Realty began arming leasing agents with an Oculus headset so they could show prospective tenants, who were interested in a Manhattan office tower that was still undergoing a $60 million renovation, what it was eventually going to look like with its greenery, conference space and $6 million Sky Lounge.

Read more profiles:

How VR is being defined

What is commonly called VR is technically divided into three technology approaches: virtual, mixed and augmented reality. The differences are difficult to explain succinctly — indeed, high-profile firms in this niche are often referred to in the press using more than one of these categories.

The best way to think about the various definitions are based on two factors. First, the level of "immersion" the environment creates. True VR creates a wholly alternate world that replaces your reality — today, through an "immersive" headset and most often associated with gaming, though that will change.

Mixed reality and augmented reality devices create environments that are a combination of the real world and alternate, sensory fields or superimposed visual displays. A few YouTube demos from Magic Leap shows how an alternate reality can be overlaid on actual experience. There is continuing confusion between mixed and augmented reality, but mixed is typically more "immersive" — say, for example, watching a sporting game entirely rendered in 3-D in your living room, while augmented reality may be a virtual display while shopping in a Target retail store.

All three approaches have uses in fields ranging from education to entertainment, real estate, retail, medicine and aerospace engineering — as well as design projects across all industries.

Microsoft's mixed reality

Microsoft Volvo Virtual Reality
Source: Microsoft

HoloLens is a fully untethered, holographic headset from Microsoft — which, for the record, the tech giant defines as a mixed-reality approach, as it projects holographs onto the surrounding environment and allows people to interact with the images.

"The way we see the industry, virtual reality is great for gaming due to it being immersive, augmented reality is great for quick fixed-display alerts, and mixed reality places holograms into the real world and allows your peripheral vision to be preserved so you can walk around very freely," explained a Microsoft spokesman who is a member of the HoloLens team.

Microsoft sees HoloLens as transformative in how it adds depth, especially in creative departments. Imagine taking a three-dimensional project that two people are creating on a computer. It only has the workability that manipulating the 3-D project within a two-dimensional screen allows. "With HoloLens you're able to take those views of the project and put them on a desktop between two artists who are collaborating together," said the Microsoft spokesman.

While the development edition is more expensive than most headsets at $3,000, it will only be for handpicked developers in the U.S. and Canada. These developers will begin receiving the devices in the first quarter of 2016.

Microsoft is planning on sending HoloLens out into the consumer world as well — in a manner similar to the Audi and Ferrari examples noted in the slideshow above. Microsoft recently announced a deal with Volvo to roll out HoloLens as part of the car-buying experience at Volvo dealerships.

Nizar Tarhuni, analyst for start-up data tracker PitchBook Data, said mobile may see the greatest use of these technologies. "Where the mass growth is going to happen is going to be on the mobile side, as there are so many less hindrances to consumers in the mobile market," Tarhuni said.

Facebook's $2 billion bet that VR is for real

Facebook CEO Mark Zuckerberg made a surprise appearance on stage at an Oculus Rift developers' conference to underscore the importance of the new platform, which Facebook paid $2 billion for in a 2014 acquisition.

"There is always a richer and more immersive medium," Zuckerberg said. "The next logical step is fully immersive VR," he told developers. He described the early days as "just a 360 video," adding, "In the future, you're going to feel like you're right there."

Facebook's Oculus virtual reality platform recently unveiled lower-cost hardware and a slew of media partnerships that aim to bring the technology to the mainstream — its debut is slated for the first quarter of 2016. While hard-core gamers wait for the Oculus Rift to launch for use with PCs, many consumers were anxious to get their hands on the consumer version of the Samsung Gear VR, which went on sale for $99 in November, half the price of the headset last year. It sold out on eBay and Amazon in just a few days.

Google has Cardboard, a cheaper VR headset that uses smartphones as a screen, like the Samsung Gear VR.

Google's product, unveiled at its developer conference in June 2014, is shockingly simple. With an Android phone and a few bucks for materials (cardboard, lenses, a magnet, a rubber band and Velcro), virtual reality is available to the masses right now. Google and The New York Times recently began a 3-D journalism partnership — Times' home-delivery subscribers were sent a Cardboard with their newspaper on a Sunday as part of the launch of the paper's first virtual reality reporting series, "The Displaced," covering the global refugee crisis.

Another highly anticipated VR device is Sony's Project Morpheus. Tarhuni said it gets less press than Oculus, but Sony's headset can compete effectively against Facebook's VR effort, and others that will first target entertainment, such as gaming and movies. An advantage of Sony's approach is that with Oculus, a gamer also needs to have a computer with an expensive graphics card, which could cost an extra $400 to $600.

A Sony Playstation costs less than a high-end graphics card, and that makes the cost of entrance to VR much lower overall and could speed adoption among Sony Playstation owners. "If you already have a PS4, then the cost of a headset is a lot less," Tarhuni said. "It will be tailored to the gaming market, but I think of people who watch movies on a PS4 also," he added.

Sony has not provided much detail on a release date beyond saying that Project Morpheus is scheduled for "early 2016." The PitchBook analyst said that as far as he knows, Sony is still finalizing the average selling price (ASP) for the product.

An upstart among tech giants

Avegant Glyph headset
Source: Avegant

Avegant's Glyph ($599) is a virtual reality gadget designed a little differently than other contenders — it is built with the design concept of marrying high-end headphones to a VR headset. Glyph is intended to give consumers quick access to immersive entertainment in a minimalist package. Glyph can be used as high-end headphones alone, or "flipped down" 90 degrees to turn into a VR headset that can project an image from a HDMI source, such as a phone or tablet, directly onto a wearer's retina.

CEO Tang referred to the new approach lacking a physical screen as "retinal imaging technology," and it uses micro mirrors to project light directly onto the eye. "At the same time, it allows you to look around the band and provides a large amount of peripheral vision, allowing you to use it in public without feeling uncomfortable," Tang said.

Glyph is another consumer VR product that is scheduled to start shipping in 2016, but it has moved back its launch date a few times.

Tarhuni said that consumers should expect that with these novel products, release dates will get moved back as the companies solidify ASPs, distribution channels and make final tweaks. The fact that most are slated for post-holiday season release is another factor as the companies assess how the existing VR products on the market performed. But Tarhuni does think the first half of 2016 will be a watershed for consumer VR.

Tarhuni said Avegant — while lacking the profile of one of the tech giants — could help to reinvent the home theater system. With VR headsets, you traditionally have to use your own headphones, the PitchBook analyst noted. He thinks Avegant can make a dent in the market for premade content, like movie-watching more so than gaming.

"This is much better than the 3-D glasses of old from TV companies," Tarhuni said. "It's not just 3-D but an immersive environment," he said, and added that it's probably less a play at the gamers targeted by Oculus than going after the consumer "sitting in the house watching a movie or traveling on a long trip."

An often overlooked area for virtual reality growth is the music industry.

Taylor Swift made big news this week when she cut a deal with Apple to have a concert tour video exclusively available on Apple Music. But what if that concert were in 3-D?

"With VR you introduce a new monetization scheme," Tarhuni said. "Right now if you're going to watch music videos, you can see them for free on YouTube. With headsets, you can introduce options such as watching it 'normally' for free or 'watching in VR for $4.99,' if users want it to be immersive," Tarhuni said.

By Michael Sheetz, special to CNBC.com