Investors ploughed more than $1.4bn into augmented reality (AR) / virtual reality (VR) start-ups in the eight months to the end of August 2016, according to CB Insights, almost double the entire amount invested in 2015. The firm projects that $2.2bn will be invested in this sector in 2016, which is more than in the whole of the four years between 2012-2015.
AR/VR is undoubtedly hot, and nowhere is it hotter than in China, which is arguably leading the world in terms of consumer adoption, particularly in VR. Canalys predicts global sales of 6.3mn VR headset units in 2016, of which 40% will be sold in China. Adoption in China is being driven not only by a burgeoning number of domestic companies developing low cost mobile VR headsets aimed at the mass market, but also through the rapid growth of kiosks and cafes in shopping malls and theme parks, which allow consumers to pay-per-use for VR experiences and entertainment.
There is a tremendous amount of start-up activity in VR in China to fuel this demand. It is not only financial investors getting in on the action. HTC, based in Taiwan and developer of the popular Vive device, earlier this year announced Vive X, an accelerator focused on VR based in Beijing, Shanghai, Taipei and San Francisco, backed by a $100mn fund to invest in VR start-ups, which is one of the largest funds dedicated to VR. More recently in September Chinese internet behemoth Baidu launched a $200mn venture fund to invest in VR, amongst other things.
One of the key issues for the Chinese market in VR is that there is a lack of core technology. Much of the innovation in VR has come from the USA. Rather than compete in hardware, the big three Chinese internet companies, Alibaba, Tencent and Baidu, have focused their efforts on building a platform and content, in seeding the ecosystem and in developing applications. Examples include iCIQI, the largest online video platform in China owned by Baidu, which launched a VR platform in May to encourage VR content and production. In August e-commerce giant Alibaba launched a VR shopping experience to enable consumers to view products such as clothing and fashion accessories in more detail than is possible on a regular PC. Meanwhile Alibaba’s payment unit Ant Financial is working on developing a system that could let shoppers strolling through a VR mall and make purchases with a nod of the head rather than having to take the headset off and return to the physical world to pay.
However in order for VR to take off and become mass market, there needs to be substantial investment in compelling content, and here Tencent has taken a lead, investing alongside Hong Kong’s PCCW in film and TV studio STX Entertainment which is also backed by Hony Capital, a Chinese private equity fund. STX is making a significant play in VR content, and in September acquired US based VR content producer Surreal, which will become STX’s VR division.
While consumer entertainment is likely to continue to be the driving force for VR in the near term, other applications are also starting to gain significant traction in China. Local companies such as 51VR, which develops VR applications for third parties and has raised more than $30mn in funding, are seeing rapid uptake in areas like real estate, education, tourism and automotive. As VR moves into the mass market, we expect to see M&A in this sector broaden from the largely US-based hardware and device transactions into a broader range of content providers, application developers and entertainment companies, and this should bode well for M&A activity in China.