Virtual Reality Not in Microsoft’s Plans for Xbox

E3 has come and gone and, despite no surprise platform announcements, this year’s event did quite a bit to uncover what lies ahead for the gaming industry (and, by association, Virtual Reality (VR)). Leading up to E3, Sony released a comment that suggested the next PlayStation platform could arrive around 2020 to 2021, also putting the current PS4/PS4 Pro “generation” in the waning years of its life cycle. Similarly, Microsoft stated it is currently working on its next-generation platform, leading some to speculate its follow-up platform could be announced at E3 next year and launch as soon as 2019 (although 2020 is a more likely launch window considering the close proximity to the Xbox One X release). We have to be careful to use the word “platform,” because while we expect another round of consoles, it is possible the next “generation” of platforms could favor the cloud. Perhaps more significant was what wasn’t heavily pushed at the event: VR.

There were some new VR titles shown, but not enough to significantly change the current consumer narrative. Not only did VR not receive a great deal of attention, but Microsoft also formally stated it has no current plans for VR on Xbox; this contradicts both its initial unveiling of the Xbox One X and statements made by Phil Spencer (Head of Xbox Division), who suggested support would eventually come to Xbox One X. While it was a gradual shift in stance that started last year, it is a significant blow to the tethered VR space. Even though the Xbox One X has a much smaller user base (estimated to be less than 2 million compared to the approaching 80 million units shipped of PS4/PS4 Pro), it would have had a better crossover to the PC market than PlayStation VR, which uses dedicated hardware.

VR troubles in the consumer space is old news and E3 offered little fuel for those carrying the VR flame to spread much positivity, and Microsoft’s stance likely doused some smoldering embers with a cold bucket of water. In addition, the potential transition to cloud gaming could further complicate the VR landscape if fewer households have on-premise hardware to drive the VR experiences. While the odds favor Microsoft releasing at least one more console, Sony’s future remains a bit more clouded. Chances are that Sony will release another console, particularly given the strong success of its PS4 platform, but it could make a stronger effort to push both its console and cloud service on equal ground. Rumors swirling around Google and the prospects for a cloud gaming service further add intrigue and could push the incumbents (at least Sony and Microsoft) to ensure there is a competitive environment for newcomers. Cloud gaming could also mean a dramatic shift in the mobile gaming space as well, with more users relying on smartphones and tablets as their primary gaming device (Samsung, at least, has recently offered solutions that bring the mobile experience to larger screens).

While there have been some very early instances of cloud VR (in China), the overall trends in the VR gaming space will likely keep premium experiences ahead of the cloud gaming curve. Mobile VR with 5G is certainly an area drawing a great deal of attention and the introduction of more standalone VR units could begin to offer more appealing installed bases, or at least create an opening where content creators start to see a viable market opportunity to invest in VR development. In the near term, however, the general consumer space (outside of areas like destination VR) will likely continue to see a challenging landscape.

The current forecast for 2018 tethered VR Head-Mounted Displays (HMDs) called for around 6.5 million units, but in light of Microsoft’s announcement and the less than exuberant market reaction to the HTC VIVE Pro and Microsoft Mixed Reality HMDs, the end of year total will likely be much lower. The console market might account for a figure closer to 1 million units in 2018 (a roughly 30% decline from 2017), while the PC market could remain flat to down, suggesting an adjusted forecast of around 3 to 4 million units; there have already been some price drops and attractive bundling from Sony, and as we approach the holidays, more price cuts and bundles should help drive some additional demand.

Long-term, however, the forecast will certainly look different as the growth from consoles will evaporate, which will impact the prospects for PC VR as well (the crossover between PC and console was expected to be relatively high). This is less impactful for the video space because mobile and standalone were always viewed as the main targets for this content, but it nonetheless diminishes the consumer segment for VR overall.

VR, in many ways, has ended up far more similar to Augmented Reality (AR) than not. It has just taken a more circuitous pathway to the reach the same point: a focus on enterprise and commercial applications. AR made a splash with Google Glass, but it became apparent rather quickly that the consumer space was not ready; the focus is finally starting to shift in the VR space as well. As we consider what the future markets and technologies might look like, it is healthy to view VR using the same lenses as one would use to evaluate AR, and ultimately, to view this market under the guise of immersive technology and media, rather than AR or VR alone (or XR has become increasingly commonplace). AR in the head-mounted format is still looking for that break into the consumer space and when that happens, it should bring VR along with it.