With virtual reality (VR) and augmented reality (AR) technology slowly gaining a foothold in the video game world, developers and licensors are facing real-world decisions on where to make their investments.

Mobile, console and online games are expected to continue to drive the market for at least the near term, if not longer. But with the first wave of VR headsets – Oculus Rift, Samsung VR, HTC Vive and Sony PlayStation VR and others – having been released last year and AR-based products also moving on to the market, licensed content undoubtedly will come increasingly into play.

To be sure, the history of the video game business is replete with periodic format wars, with names such as Intellivision, Colecovision, Atari 2600, 3DO and Sega Genesis fondly remembered by many. So in a sense, the kind of market cleansing that will have to take place among these newer technologies is only the latest in a decades-old process.

Competing Platforms

In the case of VR, the current list of major players and incompatible platforms is well established. Aside from the four mentioned above, there’s Google’s Daydream, a VR headset compatible with the Android operating system; and Samsung Gear VR, a headset that needs to be fitted onto a Samsung Galaxy smartphone. Google also has its Cardboard – a fold-out cardboard VR viewer into which a smartphone is inserted to view compatible applications. To further muddy the waters, Microsoft is promising Windows 10-compatible “Mixed Reality” (MR) glasses that promise to allow the user to manipulate virtual objects while still being able to see the world around them.

Meanwhile AR drew widespread attention last summer with the meteoric launch and PR hysteria surrounding the release of Niantic’s Pokemon Go!. The AR game, which was compatible with both Android and Apple smartphones and required no additional gear, generated $788 million in revenue, according to SuperData Research.

The various technologies face the classic chicken-and-egg scenario, with hardware and development costs remaining high until a mass market arrives, something that may be 3-5 years away, say industry executives. But of course, those same high hardware and development costs make the goal of developing a mass market that much harder to achieve.

Headsets that sell for $500 or more must be paired with desktop and notebook PCs that are specifically built to be compatible with either the Oculus or Vive platform. Meanwhile, the PlayStation VR requires the base console ($350) to be paired with a headset (about $400). And Microsoft has promised its MR headsets for about $300, sold under the Dell and Hewlett Packard brands. Microsoft also is developing the AR-compatible HoloLens glasses that it has said can be tethered to specifically engineered PCs. To break free of the PC, Oculus last fall demonstrated a headset that could play a game without being connected to a computer, but timing for its introduction hasn’t been set.

Seeking Exclusivity

Following the long-established pattern of the videogame business, developers of the VR platforms are seeking exclusive content; after all, the theory goes, consumers don’t generally buy videogame hardware, but rather the ability to play a specific game. For example, Starbreeze Studios/Lionsgate’s “John Wick: The Impossible Task” Chronicles is only going to available on HTC’s Vive when it is released this month.

But exclusivity isn’t always the rule. Ubisoft is slated to release “Star Trek: Bridge View” for HTC’s Vive, Oculus Rift and PlayStation VR on March 14.

The prominence of licenses is no accident in the quest for that breakthrough game, though terms can be an issue. “We have had lots conversations with [software developers] that understand the value of licensing but they have to wrap their heads around how the model works in this stage of the technology,” says Striker Entertainment’s Russell Binder, “They can’t predict sales right now — and therefore define royalties and minimum guarantees — because the business isn’t defined enough.”

The search for exclusivity is driving up the amounts of money that platform proponents are offering software developers and IP owners, as they try to tie up a “killer app” that will fuel hardware sales. Facebook doubled to $500 million last fall the money it makes available to developers to create Oculus-based entertainment and games. HTC also has a developers program that provides funding for titles.

Said Facebook CEO Mark Zuckerberg to investors last month: “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: you need the content in order to create the ecosystem.”

It’s put a certain amount of market power in developers’ hands. “The platforms are all trying to have the best content possible so for the first time in a long time, content creators have the leverage and they need to be demanding better terms than those available in the mobile games and other spaces,” says Matt Hooper, founder of Interactive Media and Entertainment, a law firm representing a range of VR companies as well as a venture capital fund making investments in the technology.

Moving Forward

So how are property owners figuring out their investments? VR is market ready at this point (though at high price points), says BD Labs principal (and former Sony licensing executive) Mark Caplan. But the success of Pokemon GO turned lots of heads toward AR. “Everyone was really inspired by what happened with Pokemon Go!,” he says. “But there still is a question of whether you can replicate that. The mass adoption of [AR and VR] is yet to come; they are still on a trajectory of proving themselves. My kids loved Pokemon AR, but until there is mass adoption of hardware and content, we are still a ways away.”

Yet the market for VR and AR gained footing last year. Among the dedicated headsets, Sony PlayStation VR shipped the most headsets at 745,000 units followed by Vive (420,000), Oculus Rift (355,000) and Google Daydream (261,000), according to SuperData Research.

Among lower priced options, shipments of Samsung Gear VR, which carries a $99 price and is tied to the Oculus platform, hit 2.3 million units in 2016, Google’s Cardboard came in at 88 million units, SuperData said.(Sell-through numbers are much harder to come by.)

Despite a market that is still in its infancy, property owners and developers are investing:

• Fox recently formed Foxnext earlier this year to shepherd VR, AR and videogame productions across the studio’s TV programs and films. The new division is being headed by President Salil Mehta, who previously oversaw content management for Twentieth Century Fox Film. Foxnext grew from the studio’s Fox Innovation Lab, which was responsible for the Fox’s first VR film tie-in title, The Martian VR Experience. The group will oversee all production of Fox-related VR projects including Alien and The Planet of the Apes, the company said.
• Warner Bros. Interactive is plunging ahead with VR titles based on its own IP. It released “Batman: Arkham” VR last summer, jointly developed with Rocksteady Studios. And Warner is working on a VR game tied to the film Fantastic Beasts and Where to Find Them.
• Scholastic is trying to determine its next steps, having worked with Cosmic Forces on a VR mobile title initially for Google Cardboard that shifted from a $4.99 app to free-to-play in early 2016. Cosmic Forces also made the title available for the Samsung Gear VR, returning to a $4.99 price for that platform. The two versions of the game have generated a combined 3.5 million downloads, says Cosmic Forces’ Ziad Seirafi. Scholastic also has had some interest from a developer for an AR-based Magic School Bus game, says Scholastic’s Gary Hymowitz.
• After postponing a planned 2016 launch, the VR title “Paranormal Activity: The Lost Soul” based on a Paramount film is slated to be released this year. “We believed that horror had the potential of being the most visceral experience and we concluded that best way to launch is with a known brand,” Alex Barder, co-Managing Partner at the title’s developer VRwerx, told Forbes magazine.
• Developer Seismic Games is expanding into VR and AR games, having acquired Grue Games late last year, and has two games based on movie properties in development, a company spokesman said. As a hedge, the combined company also will work on mobile titles and a location-based game, he said.
• XRGames, a new UK-based gaming studio of kids and entertainment research firm Dubit, recently received a seven-figure investment to fund development of VR apps aimed at children starting at eight years old, XRGames Bobby Thandi told Kidscreen. “The killer application in VR experience in gaming, film and TV is still yet to be made.”

Mass adoption likely won’t come quickly. Zuckerberg recently urged investors to have patience with Oculus, conceding that the technology may not reach mass adoption until 2024 — the 10th anniversary of Facebook acquiring the company.