Recent technological development has impacted the gaming industry by expanding the capability of existing platforms, creating exciting new channels and challenging developers to think creatively about alternate forms of consumer experiences. Of these changes, augmented reality (AR) and virtual reality (VR) seem to be the most prominent upcoming frontiers for gaming. Modern examples of commercialized games demonstrate the tremendous potential of these technologies, which have come a long way from their purely theoretical and academic roots. According to statista.com, the global AR and VR market will reach over $200 billion in 2021. The potential for substantial growth is driven by the emergence of new types of experiences; the gaming industry will likely see increasingly immersive and imaginative content in the near future. AR and VR are expanding the limits of what was previously considered possible in games and captivating consumers in new ways.

AR enhances a user’s view of reality by superimposing digital images to create a unique experience. While the technology has existed for decades, primarily for research and digital marketing, its accessibility to the average consumer was only recently made possible by the drastic advancements seen in mobile devices. The ability of smartphones to run AR-enabled software that combines visual, audio and geolocation sensors has created unique experiences that are both engaging and refreshing for gamers. With sufficient technology in place, developers are only beginning to explore the various commercial applications. New categories of the industry may emerge, such as the combination of exercise and gaming. As active lifestyles are becoming more popular in mainstream culture, these types of games aim to gain traction with new cohorts of consumers: those trying to start a daily routine, or those just hoping to make their existing routines a bit more fun. Thus, the total addressable market is well-positioned to expand: statista.com estimates the global AR market will grow to approximately $90 billion by 2020.

Perhaps the best recent application of AR in games has been Pokemon Go, which Niantic launched in summer of 2016. Although wildly successful at first, PoGo’s use of AR is actually rather basic: overlaying mostly-stationary creatures on the phone’s camera preview screen and allowing users to capture them by throwing virtual balls. More recently, it has added an “AR+” mode for iOS that anchors the creature within the environment even when the camera moves around – this feature allows users to see different angles and move closer for more accurate throws. Although its explosive growth in the first few months is arguably the result of hype from riding the coattails of the legendary Pokemon franchise, it also demonstrated that AR holds both a viable and promising future in gaming. The substantial demand is driven by various factors: consumers are fascinated with the immersive playstyle and exercise in a fun way as they continuously move around the real world. As a business, Niantic generates substantial revenue through microtransactions. According to SuperDataResearch.com, Niantic made almost $900 million in revenue over 2017 from the game; as of April 2018, PoGo is the number one grossing Android app per Google Play listings. Overall, this demonstrates the compatibility of AR mobile gaming with existing monetization strategies and undoubtedly encourages the development of similar types of games.

A close relative of AR, VR also uses computer-generated images to create new user experiences. The key difference is that VR seeks to supplant reality rather than supplement it: the idea is to completely simulate an environment and immerse the user in this artificial world, which requires overcoming a much higher technological hurdle. Fortunately, engineering efforts over the last century in optics, computers and software have finally enabled users to experience the magic of what Palmer Luckey (founder of Oculus VR) and others are calling the last great human invention: the “final platform.” A 2017 statista.com survey conducted in the US stated that over 90 percent of participants have heard of the term “virtual reality” already, and the majority mentioned that the most interesting aspect of VR was the feeling of entering another world.

Even within the context of gaming, the spectrum of VR hardware is broad. After all, 3D simulation can be accomplished in many ways. From an accessibility perspective, smartphones are an easy entry point into VR games since most modern ones are powerful enough to run them. There are many headsets on the market today that are simply smartphone head mounts which use optical tricks to create a basic VR experience. Google Cardboard accomplishes this for only $15, but more durable sets like Daydream and Gear VR are still only a fraction of a smartphone’s cost. These headsets are a relatively small purchase for any curious consumer who already owns a smartphone. With more than a third of the global population estimated to be using a smartphone by the end of 2018 according to a recent forecast by eMarketer, the untapped market of VR mobile gaming is substantial.

On the other end of the accessibility spectrum lies more advanced and customized VR equipment. For $400, an Oculus Rift kit will provide a much more sophisticated experience than those like Google Cardboard. These goggles pack in more specialized sensors than a smartphone and rely on the PC they’re connected to for the necessary processing power to generate images. Similarly, consoles like the PlayStation are offering their own VR headsets and supporting accessories such as wands that enable more interaction with their virtual worlds. These purchases are quite substantial for any consumer, especially when they may become outdated in just a year or two.

With the variety of VR hardware described above comes a variety of games. For example, well-known titles such as Skyrim, Fallout and Minecraft have VR-enabled expansions for consoles and PC that offer  players their familiar environments in a more intimate way, helping draw attention from veteran gamers to the growing VR gaming campaign. Generally, demand from consumers seeking a fresh perspective from modern games has led to promising results: International Data Corporation expects sales of over 12 million headsets in 2018 versus 8 million in 2017, attributable to changes in hardware, software and pricing.

The variety of emerging VR games demonstrates the rapidly growing commercial interest, as developers are shifting their focus to meet demand in this promising new space. As with many emerging markets, the first step after broad consumer accessibility is a land grab. Tech giants like Facebook, Apple, Google and Microsoft have made significant investments to capture market share. Google acquired Owlchemy Labs (a VR game studio) in 2017, Apple bought Metaio (an AR software startup) in 2015 and Facebook paid $3 billion for Oculus VR in 2014. Sony made substantial investments to develop Playstation VR, similar to Microsoft’s HoloLens for AR. Now that their hardware is in the hands of consumers, they will seek to hold consumer attention by developing more interesting games. Just like with AR, it seems that VR games today are just the tip of the iceberg. The traditional experience that kept gamers glued to a screen and clutching controllers is shifting towards a more dynamic one, where users wearing headsets continuously look around as they slash their virtual swords and fire their laser rifles.

Both AR and VR are offering users fresh, new experiences that continue to surprise, impress and captivate. Over the next few decades, refinement of VR will likely enable mirroring of reality and beyond, allowing us to explore with all our senses places that have captivated our imaginations ever since childhood, such as space. Traditional video game genres like first-person shooters will become more immersive, while sports games could offer first-person perspectives to any ordinary player. Professional athletes could benefit from AR goggles that show real-time trajectory calculations and monitor vitals. Popular outdoor hobbies like fishing and hunting could be replaced by simulators that offer the exact same sensory experience without any devastating ecological consequences. With all the possibilities, the line between virtual gaming and life begins to blur and traditional gaming companies will evolve to provide solely high-tech entertainment. Even though development still has a long way to go, if the efforts of the industry to date are any indicator, we have plenty to look forward to.

It’s safe to say virtual reality isn’t virtual anymore.

As startup firms tested the water early in 2015 with gradual unveilings of new content and progressive technological improvements, virtual reality morphed into one of the most disruptive technologies to enter the gaming industry in recent years. When Deloitte predicted that virtual reality companies would carve out a billion-dollar video gaming niche in 2016, they were wrong. 2016 exceeded all expectations and brought with it a $5.2-billion year for the virtual reality market.

While the arrival of tech giants such as HTC, Google and Sony signaled a massive influx of capital to capture gains in the entertainment sector, industry analysts suggest the true potential of the technology has yet to be realized. To be sure, the arrival of full-body, immersion-based gaming experiences are exciting for the gaming industry and present significant opportunities for investors in and of themselves. However, high dollar acquisitions like Facebook’s buyout of Oculus in 2014 for $2 billion and ambitious market growth targets mean that Silicon Valley name brands are interested in more than mere gaming.

Valuations like these are driven not by what virtual reality has done so far. They are based on the technology’s potential applications beyond just console-based gaming. Inside the virtual reality headset, sensors behind glass lenses track eye movements to construct a close-to-real environment. High-speed image transmission delivers inputs to the eyes at rates that make the brain believe the world around it is real as it moves in lockstep with the rotation of the head.

What this means is that today’s virtual reality systems have mastered the art of fooling our sense of sight. False environments for entertainment purposes, training scenarios for healthcare and combat practice for the military are all feasible applications made possible with this new technology. From a budgetary perspective, education with headsets and tailored content costs less than the overall operational fees associated with training programs.

In terms of wide-scale application, virtual reality is still in its infancy, and several factors continue to impede its popularity with the public. According to a recent Sketchfab survey, individual consumers are put off by the costs associated with more advanced virtual reality headsets. With the price of the Oculus Rift headset at upwards of $850 and the HTC Vive at $799, such complaints are not unjustified.

The 2017 virtual reality industry survey compiled by Sketchfab also highlights two other pressing issues: the readiness of the technology and the absence of appealing content. While trade-show demos at the recent Consumer Electronics Show in Las Vegas enthralled viewers with crystal clear representations of scuba diving, space exploration and the like, a similar buildup of hype also surrounded the commercial failure of three-dimensional TV’s launch.
Virtual reality has bells and whistles aplenty but needs substance as well. While gamers will continually receive new content from gaming studios that drum up sales with virtual reality compatibility, non-gaming users will turn away if the content is unsatisfactory.

Virtual reality’s ability to succeed where 3D TV failed will be determined by content catering beyond the gaming market. Tweaking and expanding the existing technology for use in augmented reality simulations in healthcare, product design, and education will be key in maintaining VR’s lofty expectations.

However, at this point, the success of virtual reality seems to be almost a given in the industry. The IDC has forecasted worldwide revenues for the technology to grow at a compound annual rate of close to 180 percent until they approach the $150-billion-dollar mark in 2020. Investors looking to position themselves for these gains should plan accordingly and take advantage of the areas the technology can still improve in.

Virtual reality firms can collaborate with content generators, such as GoPro, to improve their products. A market leader in compact, high-quality recording, GoPro uses camera rigs in drones as a cost-effective alternative to expensive 360-degree photography that the creation of digital environments requires. Given its established track record and already successful product lines, GoPro is well-positioned to provide the visual elements that can take virtual reality from gaming to broader audiences. Moreover, with investments in content creator start-ups jumping from $331 million in 2015 to $1.48 billion in 2016 according to Pitchbook, the market certainly exists for companies willing to provide these services.

Companies that have already released VR products can be counted on to deliver reliable returns but investors targeting a larger yield should look to firms that have yet to enter the market. While Sony and Oculus have struck first and will likely reap the near term benefits of leading the gaming industry, Apple may strike last should it choose to marry the underlying technology to its iOS platform in some format. Given its patents for an iPhone compatible virtual reality headset and its 2015 acquisition of the augmented reality startup Metaio, Apple’s prospective foray into the industry is based on more than mere speculation.

Virtual reality could open countless doors for applet compatibility and competition against Alphabet Inc.’s successful Google Cardboard headset, which has already shipped close to five million units. For example, the inclusion of augmented reality technology in Nintendo’s smash hit PokemonGo allowed users to view falsified images overlaying the world around them, and netted the developer an additional $950 million in estimated 2016 revenues, according to market researcher App Annie. If this technology were to expand from downloadable software and apps to built-in smart phone hardware, the applications could be vastly expanded.

While much conjecture surrounds the future product offerings from the competing tech giants, the entry of new firms to the market will be certain to shape and reshape the industry. The simultaneous interest from these companies, coupled with their rapidly expanding investments in virtual reality as they compete for market share will create a plethora of new applications for the technology in due time. With broader content, better engineering and greater efficiencies in production allowing for more competitive pricing, virtual reality’s ultimate matriculation to a much broader consumer audience is nearly assured over the coming three to five-year horizon. At this rate, the returns behind virtual reality investments will be everything but virtual.