Augmented reality companies: where to next after Niantic raises $190 million?
Augmented reality continues to attract attention and money. We have a look at what the latest fundraiser by Niantic, the firm behind hit mobile game Pokémon Go, means for the rest of the market.
It is early days for augmented reality (AR), the technology that overlays digital images and information over the real world through smartphones, glasses and other devices. Development is proving to be an expensive business, and a task too difficult for several of the world’s leading tech giants that have been forced back to the drawing board.
Billions have been lost in ventures that have so far failed to make AR a reality. Alphabet’s attempt to bring us the first mainstream AR headset (Google Glasses) ultimately overpromised and undelivered while Intel pulled its development programme only months after revealing its Vaunt AR glasses early last year. It isn’t just the hardware either. UK-based startup Blippar, built on technology that allows people to point their smartphone at products to gain more information about them, fell into administration just before Christmas.
Those that have broken through the high barriers to entry have needed huge sums to compete with the tech giants and are still far from profitability, demonstrated by Magic Leap having to raise $2 billion before it was able to launch its first AR headset, the Magic Leap One.
However, those willing to invest have started to carve out a lead in this nascent industry and are demonstrating an ability to monetise early versions of the technology.
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Augmented reality gaming: Niantic makes breakthrough with Pokémon Go
Niantic is demonstrating both sides of the coin. On one side, it has had huge success in monetising Pokémon Go, the AR smartphone game that allows users to hunt for virtual Pokémon in the real world and the first to bring AR gaming to the masses. While hype around Pokémon Go has waned with users and downloads both well past their peak, those that have stuck around have demonstrated their willingness to buy optional extras on the otherwise free app, with one report suggesting users spent a staggering $795 million on the game in 2018 - up 35% from the year before. Although Pokémon Go, just one of many in Niantic’s portfolio, experienced some teething problems and faced fierce criticism when it was launched, the introduction of new features has thrusted consumer spending in the right direction, with users spending an average of $2.2 million daily in 2018 compared to $1.6 million in 2017. But these figures are not representative of Niantic’s financials.
As the developer, Niantic shares revenue from Pokémon Go with the Pokémon Co (as well as with Apple and Google for downloads through their app stores), which means it has only received one, albeit large, slice of the pie. And it is a large pie: a total of $2.2 billion has been spent on Pokémon Go since it was launched two-and-a-half years ago.
Niantic raises $190 million ahead of new Harry Potter game
On the other side of the coin, Niantic has recently raised over $190 million as it prepares to launch its second big name title later this year, taking total funding to $415 million since being spun out of Google in 2015. The latest funding round, reportedly led by late-stage venture capital firm IVG, is thought to value Niantic at $3.9 billion.
Niantic is finding success thrusting big brands into the AR gaming market and intends to replicate the achievements of Pokémon Go with a new game, Harry Potter: Wizards Unite, based on an even more successful franchise. The game is being released in partnership with Warner Bros, the owner of the franchise that was bought out by AT&T in 2018.
The new Harry Potter game was originally expected to be released last year and the delay means it has missed the excitement created by the release of the second film in the Harry Potter follow-on series, Fantastic Beats: The crimes of Grindelwald, late last year. Still, if Niantic can get a title out this year then it can capitalise on the third film of the series that is touted to be released sometime in 2020.
From a brand perspective, Niantic could not have picked a better candidate than Harry Potter and all the wand-wielding capabilities that AR gaming could unlock. That is key because the game needs to be a winner to show Pokémon Go isn’t a one-off success and that there is sustainable money to be made in this early era of AR gaming. Execution will be everything but, with such a strong brand (that doesn’t rely on the nostalgia that Pokémon Go plays on) and now more experienced having learnt the lessons from launching its first blockbuster title, Niantic looks on course to release another major hit this year.
Licensing such big brands and developing what are groundbreaking games is not cheap but the figures bandied about suggest the latest cash injection is about buffering investment budgets rather than fuelling the cash burn that is so common with tech startups, as well as securing strategic partners with the latest funding round bringing the likes of Samsung and aXiomatic Gaming on board.
Augmented reality ecosystem: only as fast as the slowest moving part
Nobody in the AR market has the end-to-end capabilities to deliver a full AR experience so collaboration is key now. Niantic is aware that content and software is just one half of the market and only capable of moving as fast as the other piece of the jigsaw: hardware. This has seen companies from across the supply chain come together to build an ‘ecosystem’ to move the entire AR market forward. This is sensible as there is little point in firms like Niantic steaming ahead with content development if there isn’t anything to play them on because smartphones or headsets haven’t kept up.
Niantic partnered with Mitsubishi Chemical’s investment arm late last year when the pair jointly invested in DigiLens, which creates holographic waveguide displays used for AR, in a deal that was about bringing core elements of the industry together. Mitsubishi Chemicals, the global chemical giant, will supply the core materials needed to build DigiLens’s headset (the latest Crystal version has just been launched as a reference design for AR developers to use) which will be complimented by Niantic’s content.
Companies like Magic Leap have demonstrated the serious sums needed to even have a chance of taking on big boys like Microsoft, which is the only tech giant publicly known to have won a notable contract for AR hardware. The deal could see Microsoft ship up to 100,000 units (double its current total shipments to date) to the US army under a $480 million contract that could see AR introduced to active soldiers.
AR challenges: Bringing down the cost of headsets
The headsets currently available cost thousands – one Finnish company, Varjo Technologies Oy, is reported to be selling headsets designed for high-end business applications for $11,000 each and even Microsoft’s lucrative deal, using basic math, equates to $4800 each (the HoloLens is currently publicly priced at around $3000).
Virtual reality (VR) went through a similar experience. Headsets were (and still are) expensive but when Facebook released a version of its Oculus Go headset priced at just £200, it was expected to be the boon needed to start to encourage mass adoption of VR, but take-up has remained subdued.
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But VR’s need for a purpose-built headset is greater than AR as it involves immersing people in completely digitally-created virtual worlds, whereas AR is able to enjoy more success on existing devices like smartphones because of the need to interact with the real world. Plus, the price of AR headsets is coming down drastically: DigiLens has openly said the key reason Niantic and Mitsubishi were willing to invest was its ability to sell its latest Crystal AR glasses for under $500.
Collectively, the industry has other, more challenging problems to overcome beside the price point. Creating an AR headset capable of delivering the sci-fi promises made to consumers means widening the field-of-view (the extent the real world can be looked through AR), boosting the power of batteries while making them lighter, and improving connectivity and efficiency. The debate over how devices that see and hear what you do handle data and protect privacy will become louder further down the line.
How much is the augmented reality market worth?
Overall global spending on VR and AR is forecast to breach the $20 billion threshold this year, according to market intelligence company IDC, compared to $12.1 billion in 2018 with expectations for the industry to grow at a compound annual growth rate (CAGR) of over 120% during the five years to 2023.
In terms of hardware, VR headsets have found a firm consumer base that has predominantly been built around a $4 billion gaming industry, although companies like Walmart have introduced VR into their training programmes. However, the current buyers of these early AR headsets are developers, rich enthusiasts or organisations applying them to high-end applications, like the US army. Gaming is currently one of the biggest sectors of the AR market at present (although seven times smaller than VR) but is expected to be overtaken in 2022 by industrial maintenance applications, such as supplying engineers with headsets to provide information and training on the job to improve efficiency.
An estimated 800,000 AR headsets were shipped worldwide last year compared to 8.1 million VR headsets. By 2023, VR shipments are expected to reach 34.2 million and remain a larger market than AR, but the latter will grow faster from the current low base to nearly 27 million units.
VR may have the lead now, but IDC’s estimates show overall spending on AR will start to outstrip VR in 2023. Spending on AR software will overtake that of VR slightly earlier in 2021.
Augmented reality: Snap, Apple and pop!
While AR is finding its feet in business applications rather than with consumers, there are signs that the technology will start to be thrusted in front of the public over the coming years as companies like Apple and Snap plan to launch new products to their users.
Both companies have already released AR features and are known to have new devices in the pipeline. Snap has already had several shots with versions of its Spectacles, essentially sunglasses equipped with a camera to take short videos and photos that can be uploaded onto its social media platform, and has twinned its hardware with filters, such as the dancing hot dog that Snap described as the 'world’s first AR superstar'. Apple has already introduced similar AR features to its smartphones, like Animojis that turn those taking a selfie into various animal characters. Apple is known to be working on AR hardware based on acquisitions and hires it has made in recent years but has been tight-lipped as to what is exactly in store.
Apple and augmented reality: the evolution of smartphones
Apple chief executive Tim Cook has previously said the possibilities with AR are endless and that it could be as big as the smartphone – and that is a crucial sign that AR headsets are considered the next stage of mobile communication, not an extension of it. That means one day AR headsets could replace smartphones entirely as our main communication tool rather than complement our smartphones like smart watches and other wearables do today.
The day that AR glasses replace the smartphone is, however, a long way off. This can only happen once AR glasses have capabilities better than our highly advanced smartphones which are only getting smarter – otherwise glasses can’t be the successor. Speculation that Apple, amid the slowing smartphone market and the longer cycle between people upgrading their smartphones, is to replace the iPhone with some form of AR glasses has been fuelled by purchases of small startups including a holographic smart glass company. But any Apple AR glasses are still thought to be years away (the firm doesn’t like to be the first to test the waters with core products, instead holding off and arriving fashionably late with an upmarket product like it did with the iPhone), meaning it is likely to continue introducing new AR features through the iPhone, for now.
Apple’s strategy with the iPhone has been a simple one: improve the existing phone enough to demand a higher price than the last model and convince users to upgrade (and tinker with the size and colours etc…). But this strategy is coming under strain as users are waiting longer before upgrading their phones, prompting Apple to introduce new discounting methods (Apple products have historically been bulletproof from sales) through trade-in offers or free Apple gift cards.
Quite simply: new smartphones are not offering features worth upgrading for, especially if it involves spending $1000-plus just to get Animojis, a slightly better camera or better battery life. It’s important to note that it is not just Apple but the wider market, with Samsung also experiencing a slowdown. It seems the industry needs another big bang moment like the arrival of smartphones and AR is one of many evolving technologies (as well as 5G and AI) that can create the required spark. However, smartphone makers will be minded to remember what happened to the incumbents like Nokia and Blackberry when they took over.
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Recent rumours support the idea that Apple plans to put AR at the forefront of its next iPhone offering, after reports surfaced that the next model will be equipped with a 3D camera made by Sony that can provide the depth and measurement tools needed to vastly improve the AR experience on a smartphone. While an AR-led iPhone is purely speculative, Sony has shown off its camera equipped with 3D sensors that beam lasers into a room to judge where everything is based on how long it takes to bounce back (this is known as ‘time of flight’).
Will augmented reality be the saviour of Snap?
Despite the limited success of Snap’s Spectacles to date, the company is banking on future versions to diversify its business and expand the appeal of its social media platform. Despite their shortcomings, Spectacles have tried to tackle the consumer market more than any other and the product is different to everything else. While many are trying to shove a multitude of tech into AR headsets, Spectacles is a simpler offering that focuses on allowing users to snap pictures hands-free and offering interactive filters such as its dancing hot dog that has become popular with its millennial user base. Photos and videos can only be uploaded to its own platform at present, an understandable move but one that ultimately restricts the appeal.
It is thought the aim of future Spectacles is to make them a more everyday-device but whatever the firm comes out with is likely to be a more stripped back, cheaper offering than higher-spec versions being released by rivals. The question for Snap in the meantime is whether it can afford to wait several years for its own and other AR glasses to gain traction.
Eyewear brands could be the dark horse of the augmented reality revolution
If it can, Snap could highlight another market player that investors looking for AR exposure should pay attention to. If AR headsets in the form of glasses are truly the future, then eyewear brands and manufacturers could be huge winners. Some believe Snap will, instead of making its own glasses, licence out its technology to eyewear brands to penetrate more of the market. It has already hired eyewear designers that have worked for brands such as Michael Kors and is aware fashionability (which is largely being sacrificed by most in favour of functionality) is more important to its younger customers.
Augmented reality: where should you invest your money?
AR is a fragmented industry that has already proven too much for even some of the most advanced tech companies. For investors, the tough task comes down to deciding where the true value lies: is it in the AR device manufacturers, the chip makers, the camera specialists or content creators like Niantic? While the various arms of this young industry currently work together, individual players will continue to diverge and consolidate to gain end-to-end capabilities.
One of the safest bets for investors looking for AR exposure seems to be the chipmakers and those making components, like Qualcomm, Intel, NVIDIA and Microvision. Not only because they are already supplying vital components needed to bring AR to smartphones (suggesting they could be among the earliest profiteers from early AR) but also the new headsets and other upcoming devices coming onto the market.
Augmented reality and autonomous vehicles
Another major opportunity for AR that can’t be ignored lies in the automotive sector, with virtually all carmakers looking to add AR displays on either windscreens or behind the steering wheel to help provide drivers with additional information about obstacles, road signs and speed limits, for example. Even as cars become autonomous, this sort of information is considered key to allow the self-driving car to communicate with passengers. Plus, without having to drive, AR becomes a productive and entertaining tool for those on their daily commute or undertaking a long journey.
NVIDIA is a prime example, having shown off its AR interface for cars that, rather than going for the more ambitious windscreen design, is a display to replace the speedometer and fuel gauge etc… It has major carmakers on board including Tesla, Toyota and Audi. Equally, Microvision has secured work to use its laser scanning technology that is not only key to autonomous vehicles but for other AR applications too.
The major benefit that chip and component makers have in the AR space is wide exposure. Companies like NVIDIA and Qualcomm are boasting components that are utilised in numerous sectors deploying AR on different devices, whether that be smartphones, glasses or a car windscreen.
Read about who will be the winners of the self-driving car revolution
Invest in augmented reality before it is unleashed
There is little doubt that AR, much like other breakthroughs such as autonomous vehicles, virtual assistants and artificial intelligence (AI), will be a revolutionary technology. The problem is that AR is currently being held back by the development of such technologies. New technological developments coming online are heavily dependent on one another: we can’t have autonomous cars or better AI without 5G, which means AR won’t find its true potential if other areas don’t blossom as expected. This again highlights the rule that the AR industry will only move forward as fast as the slowest moving part allows it and strengthens the investment case for those companies dabbling in more than one of these breakthrough developments.
This means the true value of these new technologies has not even started to be seen by investors but once the likes of 5G come online and more mainstream AR devices are launched, then the floodgates will open, and the market will begin to evaluate the true value AR can offer.
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The AR industry is currently operating within a delicate ecosystem that has big barriers to overcome. Small guys will continue to come up with big ideas, but the big guys will swallow up the small as time goes on, and the fact that the market is highly fragmented, with no one having one answer for bringing AR to the masses, means picking the right area to invest in is even harder for investors.
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