VR and Advertising Do Not Mix

Advertising in VR worlds will not likely work. One of the most compelling value propositions of Virtual Reality is the ability to indulge in a plethora of games, places, and experiences from your home. It makes you feel like you are actually there. By putting on the headset, you can be transported into vast virtual environments or places to explore and engage with - a portal to be who you want and where you want. Given the importance of a deeply immersive experience, VR companies should stay far away from programmatic advertising.

Last month, Facebook announced that they would be testing ads in their Oculus Quest. This isn’t surprising as Facebook generates almost 100% of their revenue from advertising (Investopedia). The issue here is that programmatic ads in VR, especially the way Facebook is testing them, separates a user from the experience. Ads integrated into a VR environment remind the user that the scene is not real. It takes away the most critical benefit of putting on the headset, which is separating yourself from the real world. This is one of the core reasons we have not invested in any in-game advertising companies. Backlash from consumers has been so significant that Resolution Games already pulled their game, Blaston, out of the ad trials (Eurogamer). For a product that has already struggled from an adoption point of view (both for consumers and developers), we believe that advertising is a step in the wrong direction.

One of the biggest issues for VR platforms to address is monetization, and a solution outside of advertising is needed. Here are some innovative ways we believe VR can monetize (outside of traditional content sales) that keeps the allure of VR while also making it economically viable:

1) Avatar-based customization: Social is becoming an integral part of VR content. Companies like Rec Room and VRChat have leaned into VR as a space to socialize with others. Part of this experience is having a personal avatar that you control and use to interact with other individuals. Giving users the ability to customize cosmetics or even their specific figure could offer a more personalized experience and follow the same successful model of cosmetic-based microtransactions.

2) Virtual experiences at scale: With VR, there are tons of opportunities to offer experiences that are currently impossible to do from your home. From museum tours, digital concerts, or buying virtual seats to your favorite sports game, VR can put you there. Selling unique experiences that have not historically been accessible can offer an alternative revenue model specifically molded for VR. Unlike experiencing these in reality, selling these in VR can scale even further due to the uncapped number of individuals able to partake concurrently (i.e. infinite capacity).

3) VR economies: In VR worlds, people will have the ability to create new worlds, establish businesses, and even engage in commerce. The “play to earn” trend is accelerating quickly and the immersiveness of VR provides an excellent medium for users to build, sell, and buy from not only the platform owner (Facebook, HTC, etc) but also from other users. This will create entire economies that have immense scale, immersion potential, and can be quite lucrative for all parties involved.  

Sustained Growth During Pandemic

As the Covid pandemic unfolded, the video gaming industry saw a large spike in concurrent players. Video games were seen as a place to have fun, socialize, and take your mind off of the craziness. March 2020 saw the largest month over month growth that Steam has ever seen (+4.5m players, +23.8%) and from August 2020 through April 2021, Steam saw an increase in peak users every month. Peak users reached a new record in April 2021 at 26.9m which was a 40% increase in peak users from February 2020. Before February 2020, this level of growth took 34 months (May 2017 through February 2020, 42%).

Given the recent decline in peak user growth, it’s possible that the exponential growth phase during the pandemic is subsiding. First, most of the growth is probably attributed to individuals that were already gamers and we expect this to result in popular games seeing a lift in users. Second, a portion of this growth can definitely be attributed to new gamers, which is great for the market.

We are seeing a slowdown in the growth side but not a return to pre-Covid levels, showing a sustained base for the video gaming player base. In the last year, the video gaming industry saw 3+ years of typical growth compressed into one year. This industry continues to thrive and we just added an entire new cohort of millions of gamers to the community.