Why Is Google Increasing Its Focus on Virtual Reality?

Reports suggest that Alphabet‘s (NASDAQ:GOOG) subsidiary Google is forming its own dedicated division for virtual reality computing and a key executive has been appointed to run this division. ^[1] Earlier this year, Facebook launched its Oculus Rift, a virtual reality headset, priced at $599 which would work on an Oculus ready PC. ^[2] Google’s virtual reality device “Cardboard” on the other hand is targeted towards smartphone users and available at a much lower price range of $4 to $30.  While this does not appear to be a real competition to Facebook’s Oculus, with virtual reality style ads hitting the market, Google’s focus in this space appears to be to catch up with competition, enhance its video platform You Tube and grab market share in the virtual reality advertising space.

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Virtual Reality Advertising Could Be The Next Big Thing

In September 2015, Facebook rolled out a video creation tool which allows publishers to post 360 degree clips to their pages, which can be viewed on Android phones, tablets, desktops and iOS and Samsung gear devices as well. ^[3] Virtual reality (VR) is believed to be the most compelling and effective digital advertising since it is immersive and experiential. Brands such as Coca Cola, HBO and Nissan have ventured into virtual worlds and as this technology becomes more affordable and easily available, an increasing number of advertisers are likely to invest in virtual reality ads. ^[4]  For Google to maintain its leadership position in the search ads business, investment in this future trend is essential.  According to our estimates, the search ads business accounts for more than 70% of Google’s valuation and one of the key drivers of this business is the company’s mobile search market share.

Google’s strategy is to build cheap VR devices that can be used by a large number of people on their smartphones to view content. It should work to its advantage.  As video content moves onto a virtual reality platform that can be viewed by millions with the affordable mobile compatible devices built by Google, the company will have a competitive edge in the virtual reality advertising space. Apart from Facebook’s Oculus Rift, players such as Samsung (Gear VR $99), Microsoft (Holo Lens $3,000), Freefly (VR Headset,  $79) have launched various VR devices, as well.  But Google’s Cardboard stands out in terms of its pricing. ^[5].

Better Monetization Of YouTube

Google can also benefit through its investment in the virtual reality space by better monetization of its video streaming service YouTube. Officials at YouTube believe that virtual reality is on the cusp of a major breakthrough into the main stream in 2016. YouTube has been pushing into 360 degree and 3D videos and with the shift to virtual reality it will become a far more immersive experience. ^[6]   According to our estimates, YouTube accounts for less than 5% of the company’s valuation, at present.  But with the launch of the subscription service and plans to stream movies and TV series along with original content, it could be a key revenue driver in future.

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More Trefis Research

1. Google Now Has an Official Virtual Reality Boss to Take On Facebook’s Oculus, Re/Code, January 12, 2016 [↩]
2. Facebook And Oculus Rift: The Price Is Right, Seeking Alpha, January 10, 2016 [↩]
3. Facebook’s Virtual Reality-Style Ads Are Here With Big Brands On Board, AdWeek, November 2015 [↩]
4. Virtual Reality: The last frontier in native advertising, Venture Beat, October 2015 [↩]
5. The best VR Headsets, Wareable, January 2016 [↩]
6. YouTube’s money man says the future is live virtual reality, The Verge, January 8, 2016 [↩]