Editor's Note: In this complimentary edition of About Everything, Hedgeye Demography Sector Head Neil Howe discusses the media hype surrounding virtual reality versus "the next big thing [that] may already be sitting in your pocket: augmented reality." Howe breaks down the key takeaways and explains the broader implications for investors.
WHAT’S HAPPENING?
Virtual reality (VR) has gotten a lot of media hype over the past few years as the tech world’s “next big thing,” with enthusiasts heaping praise on devices like Facebook’s Oculus Rift.
But the next big thing may already be sitting in your pocket: augmented reality (AR), brought to you by smartphones.
Think about it. Pokémon Go, an AR app, was downloaded more times during its first week of existence than any other app in history. Its success more than doubled Nintendo’s (NTDOY) stock price in two weeks—despite the fact that private software development firm Niantic, not Nintendo, actually created Pokémon Go. (The boom receded quickly once investors realized their error.)
Plenty of other companies also believe that this is AR’s moment. Intel (INTC) will unveil its Remote EyeSight AR goggles sometime this month. Google (GOOGL) has hinted that it’s not done with AR despite its Google Glass misstep. Even retailers like IKEA and Lowe’s (LOW) are using in-store AR displays to help their customers “try out” different amenities or paint colors.
All told, technology consulting firm Digi-Capital predicts that the AR market will be four times more lucrative than the VR market by 2020, generating $120 billion in annual revenue.
All of this bullishness is warranted, given that Pokémon Go’s success may fast-track AR’s adoption cycle. Think about it: An emerging technology normally takes 10 to 15 years to make its way to the mass markets. But now, millions upon millions of consumers have already used AR—most of them without ever spending a dime to acquire the technology. When’s the last time you saw that happen?
WHAT IS AUGMENTED REALITY?
The all-encompassing “alternate reality” field can be broken down into several types of technology, each subtly different than the next.
Think of alternate reality on a sliding scale, ordered from the highest degree of verisimilitude to the lowest.
At the high end of the spectrum is virtual reality. Devices like the Oculus Rift place users in an immersive environment completely separate from the real world. Also in this realm is “mixed reality”: Devices like Microsoft’s HoloLens display digital holograms overlaid on top of a user’s surroundings. VR and MR are perfect for entertainment and, in some fields, for instruction or training.
At the low end of the verisimilitude spectrum is what’s called a “schematic interface,” like the Waze navigation app—or like a real-time operator display screen for drivers or pilots or robot operators. Though Waze doesn’t show anything that looks like the real world, it does give valuable information about the real world that can be acted upon. (Even Pokémon Go has some elements of a schematic interface.)
Each end of this spectrum has limitations. The most realistic VR devices feel stunning—but they aren’t very good at helping you interact with the real world. Indeed, they induce users to withdraw from the real world, which gives them a somewhat creepy, dystopian vibe. While Mark Zuckerberg may say he plans to create “social VR,” the facts on the ground point to “adult content” as perhaps the biggest single source of VR revenue over the next several years.
The least realistic devices, on the other hand, may do a great job helping you navigate and manipulate your environment—just push the fan image on your car dashboard and the AC starts—but they only work in highly structured settings. And they don’t look anything like the environment they’re representing.
AR is in the perfect sweet spot: right in the middle of the spectrum. AR gets the best of both sides—plenty of interaction with the real world plus flexibility and a high degree of verisimilitude—without straying too far in either direction.
“Onsite AR” apps and platforms like Pokémon Go enable (and often require) users to interact with their real-life surroundings. For example, travelers can use AR apps to locate a good restaurant nearby. Tourists visiting foreign countries can use AR apps to translate unfamiliar street signs. Hotel visitors can use AR to find their way to the lobby or the pool. One could even imagine a car mechanic using an AR tablet app to identify malfunctioning parts under the hood.
One step down in terms of verisimilitude is “remote AR,” like the yellow first-down line you see when you tune into any NFL broadcast, or like the virtual display used by a drone operator. These services overlay information on top of a real-world display—but don’t portray a user’s immediate surroundings.
WHY AUGMENTED REALITY IS A HIT
AR’s ability to enhance real life gives it unlimited uses. The very functionality of AR means that the technology has vastly more real-world potential than other types of alternate reality.
VR works within its own dedicated universe—making it awesome for passive entertainment, but not very useful for real life. Simulated interfaces have limited usefulness as well, because they don’t portray a user’s surroundings. AR, on the other hand, works on top of what’s already there—meaning that the technology can adapt to whatever a user is doing.
AR is a great fit within our increasingly gamified society. From marketing to education, entire professions are using technology to transform routine tasks into engaging, game-like scenarios. Even entertainment itself is getting more gamified. Any sports broadcast is now loaded with pop-ups that display player stats and simulations that show a play in action. The actual gameplay is just one part of what fans are treated to these days.
AR provides a way to quantify whatever we’re doing—and to grade our performance along the way. As a worker, imagine an AR system guiding you through a complex task. At the end of the task, the system would be able to identify which of your steps needs improvement, thereby helping to boost your performance over time.
Generational change. AR signals a profound shift in what consumers want from technology. For decades, the goal of technology was to reproduce reality, whether by way of “hi-fi” audio or “high-definition” television. VR is simply the last step.
But for Generation Xers and Millennials, fidelity is no longer enough. Today’s consumers want a better, more productive reality loaded with extra information that helps them accomplish something.
Over the long term, AR could fundamentally change how we live and work by placing us in always-on environments bolstered by technology. While older consumers may shudder at the thought, today’s digital natives may not mind being guided by the devices on their heads or in their hands.
BROADER IMPLICATIONS
Certain industries are sure to benefit from AR’s success. Augmented reality is already being used heavily in entertainment and leisure, from games to navigation apps to virtual tour guides. Meanwhile, the military has long used “heads-up displays” (HUDs) that give soldiers valuable information about their surroundings. Pioneer Electronics has even created an HUD car system, NavGate, that projects an AR display onto a driver’s windshield.
What other types of companies will reap AR’s rewards? Smartphone manufacturers like Apple (AAPL) and Samsung are clear long-term winners. The proliferation of app-based AR would give these companies an immediate advantage over AR hopefuls like Google that don’t own the platform on which AR is taking place. Reports are that Apple stands to gain $3 billion in revenue from Pokémon Go alone. Not bad for an app that the company had no hand in creating.
Additionally, AR gives the smartphone—especially the “phablet,” with its larger display—a little more value, adding yet another capability to its repertoire. One can even imagine a scenario in which AR revitalizes a troubled tablet sector by driving sales.
AR also has promising implications for brick-and-mortar retail. Some businesses are already using Pokémon Go to their advantage, buying in-game “lures” to attract more Pokémon in the hopes of boosting foot traffic. But it doesn’t end there: AR could be used to win back market share from e-commerce. Companies could build AR into an all-encompassing system that utilizes everything from in-store analytics to personalized pricing. A store could supplement an item display with layers of information—such as online reviews and prices at nearby stores.
Expect safety to loom ever larger as AR continues to integrate into everyday life. Early iterations of consumer AR have unearthed safety issues. Some analysts worried that Google Glass was not safe to use while walking or biking, while Pokémon Go has already led to distraction-related accidents.
The stakes will only get higher as AR is relied upon for ever-more vital functions. Remember a few years back when mobile GPS was blamed for leading a couple to drive up a wilderness fire road in perilous conditions? One can imagine a similar accidents arising with emerging AR apps that help people perform surgery, design a bridge, or work with dangerous machinery—situations where one small error means disaster.
TAKEAWAYS
- Many analysts believe that consumer VR is tech’s next big thing. But VR takes place in its own dedicated universe, limiting its real-world applications.
- AR, on the other hand, has the potential to fundamentally change entire professions, industries, and our very way of life. It will be a boon especially to smartphone makers that already own the AR hardware—as well as brick-and-mortar retailers that can use AR systems to beat back e-tailers.
