The Emerging Virtual Reality Landscape: a Primer

1. Virtual Reality Introduction & Market Overview by Brian Radmin ©BDMI, Nov 2015 1

2. Virtual Reality (VR) Experience that simulates immersive physical presence in a real or imagined environment. What is Virtual Reality? Augmented Reality (AR) Experience that supplements the view of a live, physical environment with digital assets. ©BDMI, Nov 2015 2

3. Beginnings of VR 1962! 1966! 1968! 1977! 1982! 1990! 1994! Morton Heilig created the Sensorama, a 3D display, vibrating seat, and scent producer. Ivan Sutherland created the Sword of Damocles, widely considered to be the ﬁrst VR headset. Atari Sunnyvale Research Laboratory, led by Alan Kay, founded to explore VR. Sega introduced the Sega VR-1, a head-tracking VR device. Thomas A. Furness III introduced Super Cockpit, a visual ﬂight simulator for the Air Force. Jonathan Waldern founded Virtuality, a company in the UK that produced arcade headsets. MIT created the Aspen Movie Map, a hypermedia experience that allowed users to take a virtual tour. ©BDMI, Nov 2015 3

4. Modern Era of VR QUARTER1! 2011! OCTOBER! 2012! JUNE! 2014! MARCH! 2014! QUARTER1! 2016E! QUARTER1! 2016E! ! 2016E! Valve launches VR effort to create headset with truly immersive presence. Oculus crowdfunds $2.4M, promises a $300 VR development headset. Facebook acquires Oculus for reported $2B. Google releases Cardboard, a do-it- yourself VR headset. Valve and HTC plan to release Vive VR headset. Oculus plans to release consumer Rift VR headset. Sony plans to release PlayStation VR headset for PS4. P R E S E N T ©BDMI, Nov 2015 4

5. The Right Time for VR $0 $5 $10 $15 $20 2011 2012 2013 2014 Billions - 75 150 225 300 2008 2010 2012 2014 More content is being created. Hours of Video Uploaded Every Minute on YouTube Democratized content CREATION Widely affordable DISTRIBUTION Devices available for CONSUMPTION $0 $350 $700 $1,050 $1,400 2000 2005 2010 2015 - 1 2 3 4 2000 2005 2010 2015 Billions - 0.50 1.00 1.50 2.00 2006 2009 2012 2015 Billions $0 $2 $4 $6 $8 2000 2007 2014 More money is available for creating. Crowdfunding Investments More people can afford cheaper bandwidth. Bandwidth Cost (per 1000 Mbps) More people have access to the internet. Internet Penetration More people can afford computing devices. Computing Cost (per 1M transistors) More people have smartphones. Smartphone Penetration Hours Sources: eMarketer (Mobile User Forecast), Deloitte University Press (Exponential Technologies to Exponential Innovation), Crowdsourcing (Crowdfunding Industry Report) ©BDMI, Nov 2015 5

6. The Right Time for VR New technologies are generally being adopted faster. 0 5 10 15 20 25 Virtual Reality Tablet Smartphone Internet PC Television Telephone ? (1876) (1938) (1990) (2005) (2010) (1975) (2015) Years Years from consumer availability to 10% penetration in US Sources: Technology Review (US Technology Adoption Rates), The World Bank (Internet Users), Asympco (Smartphone Penetration) ©BDMI, Nov 2015 6

7. GAMES ADVERTISING FILM “Working on game development, we always try to create a new kind of experience, and having VR technology is almost unfair.” Shuhei Yoshia President of Sony PS Studios “We’re right on the cusp of a major upheaval of the entertainment world once [VR] technology really kicks in.” Peter Jackson Director of Lord of the Rings Trilogy “[VR] is a percepCon changer for any adverCser that wants to associate with a new fronCer in media.” Mitch Gelman VP of Product for Gannet Digital SOCIAL “[VR] has the potenCal to be the most social plaEorm ever. Immersive, virtual and augmented reality will be part of people’s daily lives.” Mark Zuckerberg CEO of Facebook Disruptive Potential of VR EDUCATION “[VR] is going to be really important for educaCon. Because kids don’t learn best from reading a book or looking at a chalk board.” Palmer Luckey Creator of the Oculus RiO MUSIC “I can only do so many concerts. So to be able to have more people experience them through VR… that would be epic.” Miley Cyrus Singer / Songwriter ©BDMI, Nov 2015 7

8. Industry Players React to VR PLATFORMS purchased Oculus, VR headset producer, for reported $2B created Cardboard (VR headset) and Jump (rig and software for VR video) developing the HoloLens (AR headset) HARDWARE developing the PlayStation VR (VR headset for PS4) developed the Samsung Gear VR (a mobile VR headset) developing the Vive (VR headset) in collaboration with Steam MEDIA developing two original video series in VR produced the VR documentary film Millions March created VR experiences for the 40th Anniversary SNL Special BRANDS launched a campaign for Google Cardboard with a VR app developed VR experiences to tour tropical destinations created a VR walk- through of their distillery ©BDMI, Nov 2015 8

9. Games Hardware Film Theme Park Other Projected VR Market 0 20 40 60 80 100 2016E 2017E 2018E 2019E 2020E Millions console / PC mobile VR Headset Sales VR Hardware Revenues VR Software Revenues VR Revenues by Category $30B 2020E nearly $7B cumulative over next 3 years more than $6.5B cumulative over next 3 years over 200M users with headsets by 2020 $30B in projected revenue in 2020 $0 $1 $2 $3 2016E 2017E 2018E Billions $0 $1 $2 $3 2016E 2017E 2018E Billions Sources: KZero (Consumer Virtual Reality Report), Piper Jaffray (Next Mega Tech Theme is Virtual Reality), Digi-Capital (Augmented / Virtual Reality Report) ©BDMI, Nov 2015 9

10. Games Hardware Film Theme Park Other Projected VR Market 0 20 40 60 80 100 2016E 2017E 2018E 2019E 2020E Millions console / PC mobile VR Headset Sales VR Hardware Revenues VR Software Revenues VR Revenues by Category $30B 2020E more than $8B cumulative over 4 years more than $7.5B cumulative over 4 years over 200M users with headsets by 2020 $30B in projected revenue in 2020 Sources: KZero (Consumer Virtual Reality Report), Piper Jaffray (Next Mega Tech Theme is Virtual Reality), Digi-Capital (Augmented / Virtual Reality Report) $0 $1 $2 $3 2015E 2016E 2017E 2018E Billions $0 $1 $2 $3 2015E 2016E 2017E 2018E Billions ©BDMI, Nov 2015 10

11. Landscape of VR ©BDMI, Nov 2015 11

12. VR Studios Jurassic World FILM | COMPUTER-GENERATED Interact with an Apatosaurus up close and personal in this companion experience. Watch Sir Paul McCartney in concert performing Live and Let Die in a cinematic VR experience. Paul McCartney MUSIC | LIVE-ACTION Volvo Reality ADVERTISING | BLENDED Test drive the Volvo XC90 in a beautiful journey through Vancouver. ©BDMI, Nov 2015 12

13. VR Capture 360 Degree Stereoscopic 3D Lightfield Multiple cameras are carefully angled to form a rig that captures 360° video. Two cameras are placed at each viewpoint and slightly angled, capturing different video for each eye that allows viewers to infer depth. Lenses capture the intensity and direction of light in a scene, creating a map of the environment that lets users look around with 6° of freedom. ©BDMI, Nov 2015 13

14. VR Process & Engines Editing & Stitching CompressionEngines Software to edit videos and stitch together footage from multiple cameras. Frameworks for the creation of computer-generated imagery (CGI), game development, and animation. Technology that reduces file sizes. Particularly pertinent for VR, where video sizes can reach up to 1 TB / hour footage. ©BDMI, Nov 2015 14

15. VR Distribute Closed Open Companies in the distribution space provide platforms where users can access (stream or download) content. In regards to being closed / open, they can be evaluated across three dimensions: Only available on specific devices. Available on many devices, but only provide specific or curated pieces of content, and can be fee-based. Available on many devices for free, and allow open uploading of content. Hardware – can be a closed ecosystem tied to a specific headset (‘walled garden’) or hardware-agnostic. Content – can provide premium content (‘Netflix of VR’) or be open to any user-generated content (‘YouTube of VR’). Price – can be fee-based (e.g., pay-per-download, subscription) or free for consumers. ©BDMI, Nov 2015 15

16. VR Display Mobile Low-End – Best for first, introductory VR experiences and quick demonstrations. §  Pros – least expensive, portable, only requires smartphone §  Cons – basic tracking, limited input (i.e., button) Mobile High-End – Best for casual consumption and viewing short-form content. §  Pros – input included, moderate tracking ability, portable, only requires smartphone §  Cons – limited computing power, basic input, can require specific smartphone PC / Console – Best for early adopters and hardcore gaming enthusiasts. §  Pros – best tracking, most computing power, best content §  Cons – most expensive, not very portable, requires external computer Mobile Low-End Mobile High-End PC / Console Name Google Cardboard Wearality MergeVR Samsung Gear VR Oculus Rift PlayStation VR Price ~$20-30 ~$69 ~$129 $200 $350-450 $300-400 Display requires smartphone requires smartphone requires smartphone requires Samsung S6 or Note 4 integrated integrated Computing requires smartphone requires smartphone requires smartphone requires Samsung S6 or Note 4 requires gaming PC (~$1000) requires PS4 ($399) Tracking requires smartphone requires smartphone requires smartphone / integrated integrated integrated integrated Input button on headset not included included touchpad on headset included included ©BDMI, Nov 2015 16

17. VR Input / Output Hands HapticFeet Input that uses hands to interact with VR environments. Leap Motion $80 camera Nod Backspin $149 controller Virtuix Omni $599 treadmill KOR-FX $150 vest Tactical Haptics $160 hand controller Perception Neuron $200 glove w/sensors Input that uses feet to move within VR environments. Stompz $150 foot strap w/sensors Output that recreates the sense of touch by applying motions, forces, or vibrations. ©BDMI, Nov 2015 17

18. VR Business Models Integrated The modern era of VR is still in its infancy. A majority of companies in the space are pre-product / pre-revenue, and are frequently pivoting and repositioning. This state of flux guarantees that new business models will continue to emerge in the future. The studio model includes companies that create VR content. Some produce their own IP, while others work primarily as contractors. The hardware model includes companies that produce physical consumer goods for VR. They can make cameras, headsets, and input / output devices. The middleware model includes companies that develop software and technology for the creation and distribution of VR. The aggregate model includes companies that distribute VR content. They can take the form of apps, app stores, and web destinations. The integrated model includes companies that operate two or more of the business models shown above. Pros: §  many want to create VR but lack expertise (in high demand) Cons: §  not very scalable §  relatively low barrier to entry Pros: §  potential for defensible technology §  large potential market Cons: §  capital intensive §  many competitors §  manufacturing risk §  research & development risk Pros: §  very scalable §  potential for defensible, differentiated offering §  ‘picks and shovels’ approach Cons: §  research & development risk §  difficult to predict the needs of content creators Pros: §  large potential market §  very scalable §  control relationship with end-consumer Cons: §  difficult to differentiate §  dependent on content creators §  threat of winner-take-all market Pros: Cons: §  diversified business §  many competitors §  potentially unfocused §  control more of the user experience and ecosystem §  extremely capital intensive ©BDMI, Nov 2015 18

19. Augmented Reality could be $120B business in 2020 $0 $20 $40 $60 $80 $100 $120 AR VR Billions Hardware Commerce Data Voice Film/TV Enterprise Adspend Consumer Games Theme Park Projected AR Market AR vs VR Revenue (2020E) AR is expected to dwarf the VR market by 4x in 5 years. The wholly immersive nature of VR limits its usage to seated or physically closed experiences (to prevent users from bumping into things), making it primarily suitable for gaming and video consumption. AR, however, allows users to interact within real-world environments. This functionality expands AR’s applicable reach to many other verticals, giving it the potential to disrupt the smartphone / tablet industries. Source: Digi-Capital (Augmented / Virtual Reality Report) ©BDMI, Nov 2015 19

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The Emerging Virtual Reality Landscape: a Primer