China VR Industry Survey: The Wild Age of Hardware and Content

This is a difficult search process. The reporter of 21st Century Business Herald tried to find several mature companies in the domestic VR industry, whether engaged in hardware production or VR content production, but unfortunately, there are very few companies that have formed a stable and mature business model in the industry.

In contrast, investors are very enthusiastic, fearing that they will lose investment opportunities in this emerging technology field. Therefore, although many projects are not necessarily mature, their valuations are also rising.

2016 is considered the first year of VR, but where will the real market explosion point be? It seems that it is still unclear now.

Li Yi's initial success was due to his entry into a relatively niche field, which required better gimmicks, although the product was not perfect. However, most domestic VR content manufacturing companies are not so lucky, and most of them are still in the stage of burning money.

In an office outside Beijing’s Fifth Ring Road south, chips and circuit boards are piled high, with Oculus helmets and HTC Vives everywhere in the corners.

This is Guo Lin’s office. He was a professor at the School of Software and Microelectronics at Peking University. He started researching VR in 2009. A few years ago, he started his own business and founded a company called "Light and Shadow Infinity".

On the morning of April 8, after waiting for more than ten minutes, this middle-aged man in his 30s came up. He was wearing a plaid shirt and jeans, and his curly hair seemed to have not been washed for a few days. Most of the time, he was not here, but doing experiments in the laboratory.

His goal is clear - to develop a VR game product. In order to achieve this goal, he also has to take on some small business projects for specific customers to keep the company running.

Whether in the equity investment market or the secondary market, VR is a hot concept. But in reality it is a bit "cruel".

The 21st Century Business Herald reporter visited many hardware developers, manufacturers, and content producers in half a month, but it was difficult to find a domestic company that provides mature VR products and has a mature profit model. The hardware technology is still not up to standard, the content is very scarce, and it is still unclear what kind of content the market needs, but the enthusiasm of investors is very high.

"Everyone is still exploring," a senior person in the industry told the 21st Century Business Herald reporter. He believes that domestic hardware manufacturers are generally backward in technology, mainly taking orders from foreign giants, and their technology research and development capabilities are seriously insufficient. The products that appear on the market in the name of VR are mixed, and some are not even VR at all.

Guo Lin is very optimistic about the prospects of VR games. In his laboratory, he introduced a new hardware product to the reporter of 21st Century Business Herald. He is developing adapted games for it. "The experience this brings is subversive," he said excitedly.

Like him, although the reality is embarrassing, the ideal is full, and many people are working hard for their dreams. According to Digi Capital's forecast, by 2020, the global AR and VR market size will reach 150 billion US dollars. From the domestic market, iiMedia Research data shows that the market size of China's virtual reality industry was 1.54 billion yuan in 2015, and is expected to reach 5.66 billion yuan in 2016, and the market size is expected to exceed 55 billion yuan in 2020.

However, there seem to be many difficulties in achieving this goal at this stage.

Lucky

"We will be able to make a profit starting this month," Li Yi, the founder of Wuyouwofang, told the 21st Century Business Herald reporter in his office in Dongzhimen. He had just returned from the GTC summit in the United States. During the conversation, the 30-year-old could hardly hide his excitement about the industry's good news and the company's profits.

Wuyouwofang is a company that uses VR to view houses and help developers sell more houses. In March this year, it received 50 orders, which is the total of the past six months.

The 21st Century Business Herald reporter tried to find VR content production companies that have achieved or are close to profitability. Wuyouwofang is considered one of them. There are very few such companies. Although their company was only established last year, Li Yi said that they will soon become the first profitable company in China's VR content field.

His business model is not mainstream and has nothing to do with entertainment or online games. Instead, it is in the real estate sector. At the end of 2014, Li Yi visited a VR house viewing company near Silicon Valley. This was his first experience with VR house viewing.

Based on his past experience in the real estate industry, he thinks this is a good business. "First, it takes a long time to make a product. Second, compared with the construction of traditional model rooms, the cost is low. Third, it allows viewing of houses in other places. Fourth, it can be customized."

After returning to China, he began to raise funds through crowdfunding. In January 2015, the first phase of the project raised 24.5 million yuan, and in April it exceeded 100 million yuan. As a result, Wuyouwofang Company was officially registered and established. The reason why so much money was raised in a short period of time was not entirely due to VR, but also due to the hot real estate market.

In May last year, Li Yi developed the first VR house viewing content product "VR Model Room", which is compatible with Oculus. But this product has defects and the interactivity is not good. However, even so, he received orders in July. The market is concerned about the gimmick of VR.

Last October, after the release of the second-generation product based on HTC VIVE, Li Yi received another order from Greenland. As of the time of the interview with the 21st Century Business Herald reporter, the company had received more than 100 orders. On the official website of his company, Li Yi listed several real estate companies including Vanke and Greenland as his partners.

Li Yi's initial success was due to his entry into a relatively niche field, which needed better gimmicks, although the product was not perfect. However, most domestic VR content manufacturing companies are not so lucky, and most of them are still in the stage of burning money. Taking VR movies as an example, it is conservatively estimated that the production cost of a VR movie is 4-6 times that of an ordinary movie, and its broadcast channel also depends on VR hardware equipment.

There are already many companies in the market that claim to provide VR house viewing. "Buying a house with VR is my next plan," said Li Yi. He plans to realize this wish within a year. VR content is on the eve of an explosion, but not everyone has found the "explosion point".

Blind Men and the Elephant

Lanting Digital is a company that was involved in VR content production earlier in China. In early March this year, it received a Pre-A investment of RMB 31.5 million from three listed companies, with a valuation of RMB 210 million. Previously, Lanting had received an investment of RMB 20 million from China News Media.

Zhuang Jishun told the 21st Century Business Herald reporter that his truest feeling over the past year was confusion. As the content market was still in its early stages and the direction of its explosion was unclear, Zhuang Jishun felt that he had nowhere to exert his strength.

In order to find the direction for explosion, Lanting Digital shot nearly 80 VR videos last year, covering travel, live broadcasts, events, movies, etc.

At that time, tourism was one of the more promising directions in the industry, and Zhuang Jishun decided to try it first, but it was also the first direction he gave up. "Its business logic is not sound. It is possible to go to the B-end in this field, but the market is not large. Moreover, the stickiness of the C-end is extremely poor. Users may pay to watch once, but they can't continue to do so." He said, "The real explosion of content must be on the C-end."

Therefore, after inferring from the video data, they locked on the next direction: pan-entertainment. For example, watching celebrity concerts through VR live broadcasts and making money through fan economy. However, it is still difficult to say that this path has found a mature profit model.

Like Zhuang Jishun, there are many people trying to find a way to develop VR content. VR games are considered one of the hottest areas.

Guo Lin was a professor at the School of Software and Microelectronics at Peking University. He started researching VR technology in 2009. In 2012, he founded his own company, Guangying Wuxian, but encountered financial difficulties. In the early stages, in order to ensure cash flow, the company had to take on some commercial cooperation, including "to B" projects such as automobiles and real estate, to maintain the company's operations.

But Guo Lin's real goal is to develop a VR game. "The core technology of VR is real-time rendering of games. I have been developing this technology at Peking University, making virtual campuses and 3D modeling, and seeing 3D things on the screen. There are similarities between the two technologies."

After getting the HTC Vive prototype, he used the advantages of Vive to develop a demo (test version) of a game. Among the games adapted for HTC Vive, this game is the only one that can be operated online, which is why HTC values ​​him.

Despite this, all Guo Lin can produce is a test version, and it remains a test whether he can really develop a complete and mature game.

Find a foundry

Somewhat similar to the embarrassing situation in the field of VR content production, the technical maturity of hardware equipment is still being explored.

Lexiang Technology, which has a valuation of 800 million yuan, is one of the typical examples in the domestic hardware field. Through cooperation with Samsung OLED screens, the company has achieved a leading position in this start-up industry.

OLED screens are crucial in VR hardware, and Samsung is the only company that dominates this field, occupying a large market share.

In 2014, the domestic VR hardware market had just started, and a number of hardware companies, represented by LeXiang Technology, Ant Vision, and 3Glasses, emerged. After nearly a year of efforts, in March last year, LeXiang became the only company to cooperate with Samsung.

After the two parties cooperated, they set a task: to realize mass production of Dapeng's second-generation helmet E2 in July 2015.

How to achieve mass production is a problem for Lexiang, and it is also a problem for almost all VR hardware companies. Since VR helmets are a new product form, domestic factories have almost no production experience, and have never even come into contact with this type of product form. The production is difficult, and coupled with the small order volume, almost no factory is willing to accept the order.

The process of getting in touch with the factory was difficult. Scott, the head of Lexiang's product department, went to the factory every day to show his face and drink tea in the boss's office. After drinking tea so much and getting to know the boss, the factory began to feel bad and arranged for the project to connect with them.

The tedious details of production gradually exposed themselves. "Many links are non-standard, and the workers don't know how to do it. In fact, we don't know either." He spends every day on the production line, proofing with the factory countless times, and placing key materials in 3-4 factories for proofing at the same time.

"I'm often still working in the factory until 2 a.m., and I don't know where to sleep after work." At 1 a.m., Scott sent this WeChat message to a reporter from 21st Century Business Herald. At the time, he was in a hotel next to a factory in Shenzhen, and he had to go to the plastic factory early the next morning.

Today, according to LeXiang's public data, this OLED screen has a market share of 63% in China, of which the PC market share exceeds 68%. In order to achieve higher shipments, Scott will continue to go deep into the factory to solve the production capacity problem that even Oculus will encounter.

Bubble appears, VR companies' value soars

"After the Chinese New Year, good VR projects are being snapped up," said Niu Siyuan, investment director of Hongli Equity Investment Co., Ltd. (Note: this company is a wholly-owned subsidiary of China News Media), who has been watching VR projects for two years. "When I watched VR before the Chinese New Year, almost no one was watching it at the same time."

As many foreign companies released consumer-grade VR products in 2016, the rumored first year of VR has arrived. From the end of last year to the beginning of this year, the domestic secondary market first hyped VR, and its activity far exceeded that of the industry itself.

In the equity investment market, industry chaos also began to emerge. The valuation of the same content production company went from 40 million before the New Year to 150 million. Projects that were promising before the New Year, if not invested in, would definitely increase in price after the New Year. In order to get the project, investors had to raise the price. For a time, the right of choice went from investors to startups. "It's crazy." An investor who has been paying close attention to the VR industry repeatedly lamented to the 21st Century Business Herald reporter.

"If you don't invest now, it will be too late next year"

The price increase after the New Year is related to the entry of listed companies. "The valuation system of listed companies is completely different from that of startups. The speculation in the secondary market has fermented rapidly after the New Year, and the prices of good projects have increased a lot in an instant." said An Le, partner of Hejun Capital VR Fund

Therefore, for Huawen, investing 20 million in Lanting Digital before the capital explosion was a correct decision. "If it was invested in May this year, it would have been at least 500 to 600 million," he said.

Niu Siyuan first came into contact with Lanting Digital in May last year. At that time, China News had basically completed the investment in two hardware companies, Lexiang and 3Glasses. At this time, he had deeply realized the importance of content and it was urgent to find suitable content.

As he was optimistic about Lanting Digital's team and wanted to take a gamble, Niu Siyuan decided to invest in the company.

However, he was questioned by the Investment Committee. At that time, there was a lack of understanding of VR in China, and people did not understand the significance of investment content. Therefore, it was rejected after the first inventory.

Niu Siyuan knew that the content market would explode soon. He needed good content so much that he insisted on doing a second inventory and convinced the investment committee after sufficient industry research.

The two sides bargained for about a week over the investment amount. Lanting Digital quoted an expected value of 25 million, while Huawen's psychological price was 20 million. At first, neither side gave in, and after a week of phone calls, Niu Siyuan showed some impatience.

"You are in the content business, not specialized in financing. Once you get the money, get to work quickly. Don't stop at this stage." Niu Siyuan told Lanting's marketing director.

But he immediately added, "If it were now, it would be absolutely impossible to talk to a content company like this, let alone bargain. Don't even think about it now."

The first project invested by Anle was Leke VR. Leke VR obtains cash flow through offline experience stores and realizes monetization, which is also a good offline channel. This project allowed Anle to see the return on investment of VR. Leke is now valued at 300 million yuan. "If we invest this year, the price will definitely double." But at the same time, he is more aware that "if we don't invest now, it will be too late to invest next year."

Investors who “don’t understand”

The more serious problem is that among the capital that entered after the new year, there are listed companies, investment institutions, etc. Among them, most of the new entrants do not understand VR.

“Many investors come to me and say, ‘Actually, I just want to try your equipment and experience it for myself.’ ” A founder of a VR startup company feels helpless about this, but has to do the work of popularizing the market.

The founder of a company with a high valuation in the industry privately raged, "I have no obligation to educate the world! No appointment!"

The real situation of the market is that the entrepreneurial market is full of mixed fish and fowl. How to judge the quality of a project is the first step to test investors.

In such an investment environment, a group of companies have gained a chance to survive in the short term. There is a saying in the industry that a large number of hardware startups emerged at the end of 2014, and many of them died last year or are about to fail.

The direct reason for the company's failure to survive is the cash flow break, but the fundamental reason is that the product is too poor and the technology is not in place. According to the reporter, many small companies' VR equipment does not have the technical content at all, among which mobile VR (mobile phone box) is the most obvious.

Mobile VR is a lightweight hardware device, represented by Samsung Gear VR. For Gear VR, Samsung optimized the mobile phone operating system, and the hardware itself includes multiple core components such as touchpad and independent orientation sensor. However, this relatively mature mobile device can only be used with Samsung phones.

This gave domestic hardware companies an opportunity. Lou Chi, the founder of Fireworks Workshop, did not hide his "plagiarism" of Gear. In his opinion, even if you really want to copy, you should study it seriously, analyze the original code, study the core accessories, and learn all the essence for your own use to make better products.

But in Lou Chi's opinion, although Yanhuo is not hardware-oriented, it has learned more than most domestic hardware practitioners. There are not many followers like him in China, and most of them are low-quality plagiarism. "To be honest, in the early days, many people regarded VR as something with the same difficulty as creative kitchens and creative small ornaments, so it was easy for many people to make it. In essence, it was pure plastic household lenses. But at that time, people thought the concept was good and did crowdfunding. In fact, there were relatively few companies with real technical content." Lou Chi told reporters.

Open Taobao and search for VR lenses. The prices range from 3 yuan to several dozen yuan. According to the cheapest production method, they are almost the same as cardboard. However, due to the lack of understanding of most people, these products can also be packaged as VR.

"They can't sell the first wave, let alone monetize it later, because the profit model is definitely dead. I believe that technology still speaks volumes. Only those with technology and patents can get some good opportunities," said Qin Zheng, founder of AntVR.

Although such enterprises will not stand the test of time, it is still possible to get money in the short term. "There are many VR teams that have received money now, and the more reliable teams have the opportunity to obtain investment." An investor in VR told reporters.

As an investor of AntVision, Fang Yinhe, a member of the China Technology Huaruan Intellectual Property Fund Management Company, does not even care whether AntVision's products are perfect. "It is impossible to have a perfect product at this stage, but AntVision is already in a leading position in domestic hardware. I recognize this team. Its technical route is correct and it is down-to-earth in research and development. I am optimistic about the future."

For investors who entered the market after the new year, the most truthful voice is that they have missed the best opportunity to invest in hardware in 2015. If they do not invest in content and platforms now, they will have no share in the VR market.

The result is an increase in investment prices and a doubling of valuations. Under the influence of each other, prices are driven up and costs are also increased. "If you don't invest, you will lose the opportunity. If you encounter a good project, you must invest even if the price increases." An investor told reporters.

Post-investment management is another important topic. An investment director of a listed company told the 21st Century Business Herald reporter that if the project is reliable, post-investment management is far more meaningful than the investment itself.

Since the market is still in its early stages, industry rules and development directions are uncertain. Good post-investment management can formulate industry development according to the needs of one's own company, including directional decision-making, resource matching, competitive environment and other post-investment management, which can bring more benefits than the original investment decision.

"The bubble has become very serious. We expect this round of bubble to end in 2017 and the industry will cool down," said the investment director.

via: 21st Century Business Herald