In a new report from IDC (International Data Corporation), the market research firm predicts a near 10 fold increase in the shipments of augmented and virtual reality headsets in the next 4 years, bolstered by a plethora of new devices and “expanding array of content for both consumer and enterprise users.”
Lets be honest, the last few years have seen some pretty wild speculation from industry analysts whilst the excitement and hype surrounding the most recent renaissance in immersive technology has ridden high. A new report from IDC published last week however, while still erring on the side of ‘very optimistic’ in our opinion, may actually provide some attainable target aspirations for the fledgling VR industry.
“2016 marked an important step for the AR and VR headset market with product finally arriving in end users’ hands and on their heads,” noted Ramon Llamas, research manager with IDC’s Augmented and Virtual Reality team. “While there was clear demand coming primarily from technology enthusiasts, what became readily apparent were the use cases for enterprise users across multiple verticals and for consumers with gaming and content consumption. This sets the stage for the multiple aspects of the market that device makers, platforms and content providers, and developers will be addressing in the months and years to come.”
2016 saw the arrival of 3 major consumer virtual reality headsets, the Oculus Rift, HTC Vive and PlayStation VR. Despite Sony being pleasantly surprised by its official PSVR sales figures – with the nearly 1 million units sold since its October 2016 launch – it’s difficult to get a handle on market penetration for VR hardware to date. Many analysts issued somewhat gloomy reports on VR’s performance in 2016, despite that fact that the ‘disappointments’ cited were often due to some ludicrous and overexcited prediction from the analyst industry to date.
Samsung confirmed at CES in January that its Oculus engineered Samsung Gear VR headset had passed an install base figure of 5 Million and more recently Google affirmed that it had shipped over 10 Million Cardboard viewers. But it’s reasonable to say that the high cost of VR headsets and the gaming hardware needed to support them, is keeping high-end VR accessibility low right now. However, 2017 will see a glut of new devices hit the market from new vendors, increasing choice for consumers and introducing competition. At the same time, despite the general focus on VR’s entertainment prospects, IDC sees the technology’s wider appeal to other verticals as key to its growth predictions.
“Although AR remains as the minority portion of the market in terms of shipments, these headsets are expected to bring in significantly more revenue over the course of the forecast as the value of AR headsets grows from $209 million in 2016 to $48.7 billion in 2021. Meanwhile, VR headsets grow from $2.1 billion in 2016 to $18.6 billion in 2021,” states IDC’s report.
As we’ve said, these numbers still feel a touch on the optimistic side, and it’s difficult to see how fast augmented reality – long seen as the logical target evolution from VR for immersive technology – will develop once big AR players like Magic Leap (and hopefully Apple) finally hit the market (or, you know, show anything at all).
It should also be pointed out that, as is the case for every market researcher, predictions can easily be wide of the mark. IDC themselves predicted in 2011 that by 2015, Microsoft’s then new (and now dead) Windows Phone platform would overtake Apple’s IOS as in the mobile phone market.
Despite its major role in the growing VR space, HTC’s overall business continues to struggle financially, posting significant losses over the last two years. Working to turn things around with a restructuring of assets and priorities, the company is facing the sale of a smartphone factory in Shanghai. The proceeds from the $91 million sale will largely funnel toward the company’s Vive VR business, according to China Daily.
On Wednesday, HTC’s board made the decision to sell the factory to Shanghai Xingbao Information Technology as part of an effort to return the company to financial stability. According to HTC, the sale of the nearly 1.3 million square-foot factory and the land on which it’s built will not have an impact on the company’s staff or planned production capacity, reports China Daily.
While HTC’s smartphone business has seen major challenges in the last several years, VR—though still a tiny fraction of the company’s overall business—has been seen as a bright spot since its introduction in 2015. That year the company formed a wholly owned subsidiary, HTC Vive Tech Corporation, to codify and grow its virtual reality efforts which have been ramping up in 2016 following the launch of the Vive system in March.
According to Android Authority, HTC sold another factory in 2015 for $183 million, though it continues to own and operate three key factories in Taoyuan, Taiwan. Android Authority summarizes the latest factory sale and the last few years of HTC’s financial struggles:
Established in 2009, the facility mainly produced phones for the Chinese market. At its height in 2011, it churned out two million mobile devices every month, but starting in 2013 most of its assembly lines went out of production due to decreasing demand. Rumors about a sale of the Shanghai facility first emerged in August 2015, but HTC denied it planned to offload it.
Facing dwindling sales, HTC has been cutting workforce and closing down production lines for the past five years. The company outsourced much of its production to contract manufacturers like Compal Electronics or Wingtech.
Though HTC hasn’t announced official sales figures for the Vive, the company has said that it’s selling the $800 system at profit, and recently introduced financing options in an effort to make the system more affordable.
A survey of game developers attending the annual GDC conference suggests major growth in the number of developers building games for AR and VR headsets.
The 2017 GDC State of the Game Industry report, which gathered data from 4,500 attendees of the annual GDC conference, has been published. Among the insights from the report is that a healthy 39% of respondents are developing titles for AR and VR headsets.
Present AR/VR Focus
With 2016 being the year that major headsets have finally hit store shelves, there’s been major growth in the number of developers focusing on immersive platforms. According to the report, the HTC Vive (25% of respondents) and the Oculus Rift (24%) are leading the pack by a significant margin in terms of which headsets developers are currently developing for, followed by PlayStation VR (13%), right on par with Samsung’s Gear VR (13%).
Future AR/VR Focus
As for the future, development interest in the HTC Vive seems to be growing the most compared to other platforms. 40% of respondents said they expected their next VR/AR project (after the current project) to target the Vive while 37% said the Rift and 26% said PlayStation VR, according to the report.
Exclusivity
Among 11% of respondents who said they were working on an AR/VR game that would be exclusive to a single platform, the gap between Vive (33%) and Rift (24%) widened, with PlayStation VR coming in at 15%.
Developer Interest in AR/VR Platforms
Actual present or future projects aside, the survey also asked developers what VR/AR headsets interested them most; here the Vive took an even stronger lead, with 45% of developers interested in the Vive, 30% in the Rift, and 29% in PlayStation VR. Interestingly, in terms of interest, Google’s Daydream at 17% of interested respondents, beat out Gear VR at 13%.
Great Majority of Developers See AR/VR as a Sustaining Long-term Business
When it comes to AR/VR as a sustainable business, confidence is high among game developers, with 75% believing that it will be a long-term success as a gaming platform, the figure as last year’s GDC State of the Industry report.
Ever since Facebook’s acquisition of Oculus in 2014, CEO Mark Zuckerberg has poised the move as a strategic bet on a technology that would eventually change the way we communicate. In the company’s most recent earnings call, Zuckerberg asked for “the patience of the investor community” as he reminded them about his belief in Oculus as a long term bet.
Addressing questions from investors and analysts on what’s perceived to be a slow start for Facebook’s VR plans, Zuckerberg didn’t offer up any specific sales metrics for the Oculus Rift, but pointed to Samsung’s recent announcement that 5 million Gear VR headsets have now been shipped (Oculus makes the software that powers Gear VR).
And while he did nod to the delayed rollout of the Rift and Touch controllers in 2016, he believes the company’s efforts in kickstarting VR content is “coming at a reasonable clip.” Facebook has been investing large sums of cash into VR content development—and recently committed another $250 million—some of which has controversially been used to support games exclusive to Oculus’ platform.
Early on there is this issue which is that if you’re a AAA game developer, until there’s a certain volume of units in the field, you’re not going to be able to make enough money to fund your game development just based off of people buying your content. That’s why we’re investing so much capital in content to seed the ecosystem and solve this chicken and egg problem, of you need the content in order to create the ecosystem.
And while Zuckerberg may be enthusiastic about the pace of VR content development, he reaffirmed his belief in a 10 year trajectory for VR (presumably meaning how long it will take to achieve widespread use), and asked investors for their patience as the company looks toward 2024, the 10 year anniversary of the Oculus acquisition.
…I don’t think that there is really a strategy to pull [VR’s trajectory] in from ten years to five; I just think it’s going to be a 10 year thing. The analogy I always use, the first Smartphones came out in 2013—sorry, 2003—the Blackberry and Palm Treo. And it took 10 years to get to a billion units.
I don’t know there was something that folks could have done to make that happen fast but I think that was pretty good. And if we can be on a similar trajectory of anywhere near 10 years for VR and AR, then I would feel very good about that. And I feel like we’re making the right bets now to plant the seeds for that. But I would ask for the patience of the investor community in doing that because we’re going to invest a lot in this and it’s not going to return or be really profitable for us for quite a while.
To his credit, that’s not spin from Zuckerberg. More than a year ago he told investors the same anecdote about the early smartphone market, and set first year sales expectations for VR headsets in the ‘hundreds of thousands of units’, which by most estimates Oculus has indeed achieved.
“Virtual reality has the potential to be the next computing platform that changes all our lives,” he told investors during a 2015 earnings call. “It’s important to also recognize that this will grow slowly, like computers and mobile phones when they first arrived. So we’re committed to Oculus and virtual reality for the long term.”
And while Zuckerberg’s belief in VR as a long term bet hasn’t changed, the recent verdict of the ZeniMax v. Oculus trial could put a wrinkle in that timeline. While Facebook itself escaped damages resulting from the lawsuit, Oculus (a subsidiary of Facebook) and two of its founders were ordered to pay a combined $500 million in damages to ZeniMax. The trial was not addressed in the company’s most recent earnings call, which was held on the same day, just before the jury came to its decision.
It isn’t yet clear if the verdict will alter Facebook’s plans for Oculus and VR. So far it doesn’t appear to have had any major impact on the company’s stock price.
Following the news of a $500 million plaintiff award in the ZeniMax v. Oculus lawsuit, a detailed breakdown of the verdict reveals the jury’s specific findings, and who is responsible to pay for the damages.
Guest Article by Matt Hooper & Brian Sommer, IME Law
Matt is a Partner at IME Law, where he represents clients in the immersive media, entertainment and technology industries. He represents several of the leading VR content creation and software companies in the United States. He also serves as Co-Chair of the VRARA Entertainment Committee. You can follow Matt on Twitter @mhooplaw.
Brian is an interactive media and entertainment attorney at IME Law, where he focuses his practice on the intersection of traditional entertainment and immersive media. He also serves as Co-Chair of the VRARA Licensing Committee. You can follow Brian on Twitter @arvrlaw.
Breaking Down the Jury Verdict in ZeniMax v. Oculus
After only a few days of deliberating, the Oculus jury returned a verdict in favor of Plaintiffs ZeniMax and id Software totaling $500 million. ZeniMax was awarded money damages against Oculus, founder Palmer Luckey, (former CEO) Brendan Iribe and CTO John Carmack, but parent-company Facebook escaped monetary liability (although Oculus is a subsidiary of Facebook).
Before the jurors started deliberating, Judge Ed Kinkeade provided them with nearly 90-pages of jury instructions. The jury instructions read like a missive and questionnaire, detailing the laws the jury must apply and includes spaces for the jury to fill in their award decisions (each count has to be reached unanimously, and there were nine jurors). Since the jury is a cross-section of people with different levels of education and experience, the judge wrote the jury instructions in easily digestible format, being careful to not distort important legal significances and nuances. The Oculus jury was comprised of six women and three men, with a wide-array of diverse backgrounds.╫
The following summarizes each count in the jury instructions and how the jury ruled:
Common Law Misappropriation of Trade Secrets
Defendants: Oculus, Facebook, Luckey, Iribe and Carmack Jury Award (Defendants’ Liability to Plaintiffs): $0
The plaintiffs alleged that the defendants misappropriated their trade secrets. The court explained that a trade secret is defined as “a formula, pattern, device or compilation of information used in a business which gives its owner an opportunity to obtain an advantage over his competitors who do not know or use it.” Plaintiffs asserted that their trade secrets included the following technologies: (1) distortion correction technology; (2) chromatic aberration correction method; (3) gravity orientation and sensor drift correction technology; (4) head and neck modeling technology; (5) HMD view bypass technology; (6) predictive tracking technology; and (7) time warping methodology.
John Carmack had been an employee of id Software (owned by plaintiff ZeniMax). He took an early interest in the Rift (while at id Software) and left to join Oculus as CTO in 2014.
To prevail on their claim for misappropriation of trade secrets, the plaintiffs needed to prove that: (1) a trade secret existed; (2) the defendants acquired the trade secret through breach of a confidential relationship or by improper means; (3) the defendants made commercial use of the trade secret in their business without authorization; and (4) the plaintiffs suffered damages as a result.
The jury found that ZeniMax failed to prove by a preponderance of evidence that any of the defendants misappropriated the trade secrets claimed by the plaintiffs. With respect to most civil claims, a plaintiff need only prove each element of a claim by a “preponderance of the evidence.” To establish an element by a preponderance of the evidence means to prove that “something is more likely so than not so.”╫ This is a significantly lower burden than the “beyond a reasonable doubt” standard which is used for criminal cases.
Because the jury found that ZeniMax failed to prove that any of the defendants misappropriated its trade secrets, the jury did not award any damages to ZeniMax for this claim.
Copyright Infringement
Against Defendants: Oculus, Facebook, Luckey, Iribe and Carmack Jury Award: $50,000,000 in actual damages against Oculus
All the defendants were alleged to have copied ZeniMax or id Software’s computer programs code in violation of their copyrights. There is no copyright protection in a computer program for ideas, program logic, algorithms, systems, methods, concepts or layouts; only original “expressions” of work embodied in a computer program are eligible for copyright protection. For example, literal elements such as source code and non-literal elements such as program architecture, structure, sequence and organization, operation modules and computer-user interface may enjoy copyright protection. A computer program can be original even if it incorporates elements that are not original to the author. Accordingly, computer code copyright infringement cases require filtering and separating uncopyrightable elements of the computer program from the protected parts, an expensive and complicated analysis usually involving expert witnesses.
Former Oculus CEO Brendan Iribe with Facebook CEO Mark Zuckerberg. Both appeared in court as part of the lawsuit. Zuckerberg and Facebook weren’t found liable for any charges, but Oculus (a subsidiary of Facebook) was.
The plaintiffs were granted the $50 million dollar copyright infringement against Oculus because the jury concluded the following: (1) the computer programs in question were copyrightable; (2) ZeniMax or id Software own the copyrights; and (3) Oculus copied the copyright-protected computer programs owned by ZeniMax or id Software.
Elements (1) and (2) were relatively easy issues for the jury to reach, because the plaintiffs registered their computer programs with the Copyright Office. Proving the third element was the complicated, contested part of the trial.
To prove the third element and find Oculus liable, the jury had to answer yes to both of the following questions: (1) did Oculus copy computer programs; and (2) if there was copying, was the copying “substantially similar” to plaintiffs’ copyrighted computer programs.
The Oculus court used the Abstraction-Filtration-Comparison Test (“AFC Test”) to analyze whether the non-literal elements of Oculus computer programs were substantially similar to ZeniMax or id Software copyright-protected computer programs. Essentially, the AFC Test involved breaking down each computer program into constituent parts, examining each of the constituent parts, sifting out non-protectable code and then comparing Oculus and plaintiffs’ programs to determine whether the copyright-protectable elements were substantially similar to warrant a claim for infringement.
Plaintiffs used Dr. David Dobkin, Professor of Computer Science at Princeton, to shepherd jurors through the AFC Test. At the end of his testimony, Dr. Dobkin concluded he is “absolutely certain Oculus copied from ZeniMax code,” and the jury agreed.╫ Prior to the jury verdict, Oculus contended in its January 30, 2017 Motion for Judgment as a Matter of Law that the AFC Test is “invalid and unconstitutional.” This issue may play a central role in expected appeals.
While it wasn’t the $4 billion slam dunk ZeniMax was hoping for, a Dallas, TX jury today awarded $500 million to ZeniMax after finding that Oculus founder Palmer Luckey had breached nondisclosure agreements. However, Oculus was not found to have misappropriated trade secrets, a key claim made by ZeniMax in the case.
Polygon reports that the verdict in the ZeniMax v. Oculus case has just come out following weeks in the courtroom and several days of jury deliberation:
Of the $500 million, Oculus is paying out $200 million for breaking the NDA and $50 million for copyright infringement. Oculus and Luckey each have to pay $50 million for false designation. And Iribe has to pay $150 million for the same, final count.
According to a statement provided to Polygon, Oculus says they plan to appeal the ruling, and further tried to position the jury’s decision as a victory.
“The heart of this case was about whether Oculus stole ZeniMax’s trade secrets, and the jury found decisively in our favor,” an Oculus spokesperson told Polygon. “We’re obviously disappointed by a few other aspects of today’s verdict, but we are undeterred. Oculus products are built with Oculus technology. Our commitment to the long-term success of VR remains the same, and the entire team will continue the work they’ve done since day one – developing VR technology that will transform the way people interact and communicate.”
With two defendants and five defendants, the verdict in this case was not a single, simple ruling, but an array of assignments of liability, damages, and more.
While in criminal cases the burden of proof is “beyond a reasonable doubt” (meaning the prosecution must prove the defendant is guilty beyond a reasonable doubt), the typical burden of proof facing plaintiffs in civil (like this one) cases is much lower. With respect to most civil claims, the plaintiff need only prove each element of a claim by a “preponderance of the evidence.” To establish an element by a preponderance of the evidence means to prove that “something is more likely so than not so.”
The unpredictability that accompanies jury decisions (especially in civil cases with complex issues) is a main reason why parties tend to settle lawsuits, and some settle while the case is with the jury.
Although the verdict has been announced, it’s not likely the end of the case, but actually a second beginning. Given the high stakes of this case, expect a number of post-verdict motions and appeals, resulting in the case dragging on indefinitely. The appellate process can take years. Often, parties will settle during the appellate process for an array of reasons, ranging from business concerns to legal uncertainty to resource drain.
This week the eyes of the virtual reality industry are on a federal court in Dallas, Texas where ZeniMax (and child company id Software) and Facebook (and child company Oculus) have been engaged in legal battle over a dispute which could cost Facebook $4 billion. ZeniMax alleges that a former employee used VR code that it owned after being hired by Oculus, and further that Facebook should have known that the code was ZeniMax property. With jury deliberations now starting, a verdict could come as soon as today. Here’s what you need to know about the case.
Guest Article by Brian Sommer, IME Law
Brian is an interactive media and entertainment attorney at IME Law, where he focuses his practice on the intersection of traditional entertainment and immersive media. He also serves as Co-Chair of the VRARA Licensing Committee. You can follow Brian on Twitter @arvrlaw, and @IME_Law.
For 13 days, attorneys in the Dallas federal court have been selling the jury very different stories. “One of the biggest technology heists ever” is how ZeniMax attorney Tony Sammi described to jurors Facebook’s acquisition of Oculus in opening statements.╫In Thursday’s closing arguments, Oculus attorney Beth Wilkinson told jurors ZeniMax and Id Software are “jealous, they’re angry and they’re embarrassed” over the success of Oculus and the acquisition by Facebook.╫
At first blush, this lawsuit appears to be a complicated mess involving two plaintiffs, five defendants, nine causes of action, over 900 court filings (many sealed from the public) and a demand for more than $4 billion in damages. Without having access to many of the critical motions filed in the case (due in part to the Court’s order sealing such filings), it is not possible to assess in exacting detail certain critical arguments made by each side. But, from arguments, publicly-available filings and reports that have been made available to the public, it appears that the essence of the lawsuit can be distilled down to this: this is a dispute about who owns the intellectual property (“IP”) that was vital in creating the Oculus Rift.
Will the jury agree with ZeniMax that its proprietary computer code was a foundational component of Oculus’ success, or will the jury side with the defense’s argument that Oculus code was developed independently and based upon publicly known code and different solutions?
Starting today, jurors begin sorting through hundreds of facts and applying them to the issues contained in the jury instructions, weighing the credibility of witness testimony and evidence presented. Here are three key issues that could drive jury deliberations:
1. Did Palmer Luckey and Oculus Misappropriate IP That Zenimax Disclosed Through a Nondisclosure Agreement?
Palmer Luckey, Founder of Oculus
Defendant John Carmack is heralded as one of the most recognized and accomplished video game programmers and virtual reality engineers in the industry today. He co-founded Id Software (plaintiff), which was later acquired by ZeniMax (plaintiff). In April 2012, while employed as Id Software’s Technical Director, Carmack discovered through an Internet forum that Palmer Luckey (defendant)—who would go on to become the founder of Oculus—had developed a prototype virtual reality headset called the “Rift.” Carmack contacted Luckey, and Luckey sent Carmack a very early Rift prototype. Carmack is alleged to have immediately started to evaluate, analyze and modify the Rift prototype using research, software code and tools owned by id Software.
Carmack and Luckey’s friendship quickly turned business-like by May 2012 when Luckey in his personal capacity signed a nondisclosure agreement (“NDA”) with Id Software’s parent company ZeniMax, according to information from the case.
Companies use NDAs to ensure ideas or trade secrets disclosed to another party remain confidential. NDAs usually prohibit the recipient of confidential information from using or disclosing any information that they receive under the NDA, except for agreed purposes. Since an NDA is a contract, all of the legal principles surrounding contract law (e.g., elements needed to form a contract, defenses, etc.) are used to analyze an alleged breach of an NDA.
In June 2012, Luckey formed Oculus on the heels of successful demonstrations by Carmack (employed at the time by ZeniMax) and Luckey at the E3 Convention. ZeniMax alleges that through early 2013, and while bound by the NDA, Carmack and other Id Software employees collaborated with Oculus and Luckey to debug and refine the Rift.
ZeniMax alleges Luckey breached the NDA by taking ZeniMax-owned proprietary information and then using it without permission and disclosing it to Facebook. Oculus and Luckey contend the NDA is unenforceable for a number of reasons, including because the NDA was signed by Luckey in his personal capacity before Oculus was founded, a key material term was never defined, and for other legally nuanced reasons. In response, plaintiffs assert that Oculus is bound by the NDA because Oculus is a mere continuation of Luckey’s prior work. The jury’s outcome may hinge on the many factual findings related to the NDA.
