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Pokemon Go - the start of a new reality

21 July 2016

James Follows - Head of UK Equities

Virtual reality (VR) – the convincing creation of a 3D world - has been imagined for decades, but it is only recent breakthroughs in computer processing power and screen display quality that has taken it to the point of being a viable mainstream technology. VR is still associated with teenagers playing computer games, but I believe that we are on the verge of a far more widespread application of the technology, and for a stock market investor, the creation of new digital realities will bring opportunities and threats. New companies will come to prominence and some existing market leaders will see their business models undermined.

The names of some of the companies working on VR - Facebook, Google, Apple, Amazon, Microsoft, Sony, Samsung, and Disney (courtesy of the Industrial Light & Magic Experience Lab business that they acquired when they bought Lucas Film and the Star Wars franchise) – highlights that the technology is on the verge of going mainstream. Facebook is widely regarded as having a lead, because they paid $2bn in 2014 for a young VR headset company called Oculus Rift, but there are a number of other groups who could come to the attention of the wider world.

In partnership with the Taiwanese phone maker HTC, a US group called Valve has developed a new VR platform called Vive that is beginning to make waves. Silicon Valley leaders have also invested heavily in Magic Leap, another US group that has developed a headset that conjures up visions such as human-sized robots walking through the actual walls of a room.

VR overlaid on the real world in this manner is being called mixed reality, or ‘cinematic’ reality. The headset lens is semi-transparent, allowing you to see your actual surroundings, and there are suggestions that the technology creates a more powerful experience than VR. Closely related to mixed reality is augmented reality like the widely popular ‘Pokemon Go’ where computer generated content is superimposed over a real-world item to enhance it some way. The idea here is that VR could be accessed via a smartphone. In theory, it would enable someone tasked with repairing a piece of machinery to aim their phone’s camera at the machinery and have an overlay presented that labels all the key components. Cutaway animations would show how the machinery works, and short videos would show how to repair the most common faults.

Differing approaches aside, the underlying point to appreciate is that the convincing rendition of a 3D world makes us believe that we are seeing reality. Early headset designs resemble a pair of space-aged snowboarding goggles. Inside, two high-definition screens present a video image to each eye, magnified by two lenses. They fill the viewer’s field-of-vision. The images are stereoscopic, to create the illusion of 3D and depth. Accelerometers detect head-movements, and adjust the images with a latency of one millisecond, as though the viewer was in another world. The immersive nature of such an experience is enhanced by motion sensors, and dynamic binaural, or 3D, sound. This is more than just stereo sound, which is fixed in space, as it shifts the apparent location of a sound as you move your head. The technology makes VR persuasive and the net result is that people do not remember VR as a memory of something they saw. They remember it as a more tangible experience that ‘happened’ to them.

It is the power and emotion of this experience that will see the technology being widely adopted, and I fully expect that within the space of the next five years, we will all end up hearing stories of users who had to be treated for their addiction to a virtual world. In this respect, Pokemon Go is only the start of a new reality!

So what new businesses will be created? Only time will tell, but films will be told, and consumed differently and there will be big changes in all forms of education. Primary school children will ‘travel’ to ancient Rome, while battlefield simulations will allow soldiers to be better trained and prepared for real-life combat. The accurate replication of actual medical situations will also ensure that surgeons will operate with a steady hand and cool head because they’ve ‘been’ there before.

A British group called MelodyVR is providing 360-degree immersive videos of live music gigs. It wants to be the VR equivalent of itunes. Another group, BaDoink, is shaping up to be the largest producer of adult VR content. There may well be good growth ahead for UK chip design companies, but I am already beginning to suspect that the dominant forces in VR hardware and software will end up being the giant, and cash rich, US companies that I referenced earlier, rather than any enterprising British upstart. A group like Apple can apply its design expertise, while also buying a group like Magic Leap to secure the knowhow it doesn’t possess. And a group like Disney, with a deep history of storytelling is bound to utilise the talents of Industrial Light & Magic’s Experience Lab, a super group of artists, engineers, sound designers, and storytellers, to dominate the future of interactive, immersive cinema and theme park style attractions.

The dreamers will conjure up the impossible, and the rocket builders will figure out how to make it all happen. There is a wave of change coming and for analysts and investors alike, VR promises to be quite a ride.