When Yang Yang, a former filmmaker, established his virtual reality (VR) game studio If Games in 2014 in Beijing, he found himself alone in a nascent field. “Oculus Rift Development Kit 1 and DK2 were the only VR headsets out there, and inputs were nowhere to be found,” he said, referring to some of the early prototype headsets developed by Facebook-owned Oculus VR. But Yang did not have to wait long for the VR scene to become crowded, with Shanghai-based Vsensory and Shenzhen-based Multiverse entering the field alongside a number of labs funded by China’s internet titans, Baidu, Alibaba and Tencent. Over the past few years, Yang has produced a string of successful games, including zombie shooter Fastigium, which people can be seen playing in VR game centres across China. The studio is currently developing Ghost, a fully-immersive cyberpunk game that will launch in August. However, Yang says the industry has thinned dramatically in the past year as new upstarts who thought they could make a quick buck by joining the bandwagon have struggled to make money. The number of deals in China’s VR industry in 2016 jumped nearly threefold to 178 from 60 in the previous year, with more than 4.98 billion yuan (US$767 million) raised, according to a 2017 report by a VR committee under the Chinese Ministry of Industry and Information Technology. The number of deals dropped to 71 in 2017 though, according to data collected by industry news site VR Tuoluo. “Many studios have died because they failed to monetise their games,” Yang said. Developing online VR games for use with smartphones and home computers has been particularly hard, because consumers have not been willing to shell out for the VR viewers needed to go with these games, said Yang. To justify VR content production costs, game developers are reliant on the wider adoption of headsets. On the other hand, VR device makers see the lack of compelling content as a barrier to headset sales taking off. In other words, the world of VR is stuck in a classic “chicken and the egg” dilemma – what comes first? It needs to be cracked as China’s VR and augmented reality (AR) market is expected to reach US$10.2 billion in 2018 with 70 per cent annual growth over the next five years, according to an IDC report released last month. China also has the potential to take more than US$1 of every US$5 spent on AR and VR globally by 2022, a Digi-Capital report in May showed. While virtual reality creates an immersive, computer-generated environment that is artificial, augmented reality integrates digital information into the user’s existing environment in real time. Chinese town ‘pioneers’ VR to stiffen Communist Party loyalty Yang’s studio has survived the roller-coaster ride thanks to revenue from industry and government clients. One of the company’s latest side projects was to help build a 56-seat VR cinema for a tourism attraction site called Jiang’an River Park in Chengdu, southwest China. “We cannot rely solely on gamers to make VR happen. The user base is just too small,” he said. As there is still a very limited number of players who are willing to pay for a headset, Yang’s If Games chose to produce VR content for use in game centres. “China’s VR scene will take off first in the public arena, and will only move to households once it has been tested – just like video games that first started in arcades before moving into use on home consoles,” said Yang. However, VR arcade operators are also becoming impatient. Peter Yu, chief executive of JetOne Motion, a VR experience centre in Hong Kong, recalls being approached by a handful of VR game companies trying to sell their new games last year. He turned them all down. “VR games have a narrow market and target young people, it’s hard for us to have repeat customers as they usually lose interest after a few tries. VR game content will need to be diverse and evolve a lot more before it’s a success,” Yu said. Content and VR hardware are facilitating and restraining the development of each other, said Shi Qing, general manager of EmdoorVR, a Shenzhen-based VR device designer and maker that counts HTC Vive as one of their content partners. HTC Vive is a virtual reality headset developed by Taiwanese consumer electronics maker HTC and US games producer Valve Corporation. EmdoorVR shipped VR headsets numbered only in the tens of thousands last year when the industry “hit bottom”, Shi said, but he remains confident that shipment volumes can at least triple in the next two to three years. Facebook finds a way into China with Xiaomi tie-up on VR headsets “The quality of VR content production in China is still in its early stages, and the ecosystem does not have enough hardware. As a result, a virtuous industry cycle has yet to start running,” Shi said, confirming the “chick and egg” dilemma. Shi is hoping that hardware can take a lead though. As technical problems such as “game lag” are resolved and as the devices become more cost effective, Shi believes VR installations will climb and software developers will enter the space. “Hardware innovation will lay down the foundations for VR gaming and software will provide the soul,” Shi said. Shi could be right as VR device makers have started to up their game. The Mi VR stand-alone headset, jointly developed by Chinese smartphone company Xiaomi and Oculus, was sold out only four minutes after it was made available for Chinese consumers at the start of this month. Meanwhile Facebook’s Oculus Go, HTC’s Vive Pro, iQiyi’s Qiyu VR and Lenovo’s Mirage Solo with Daydream are all due for launch in 2018. The shipment volumes of VR devices in 2017 increased by over 70 per cent to 1.03 million in China, and further growth above 90 per cent is expected in 2018, according to Neo Zheng Xi, research manager at IDC China’s Client System Research. “Despite a lack of industry optimism, we saw considerable shipment growth of VR devices in the past year in China,” Zheng said. “Up to half of the VR devices are sold to the B2C [consumer facing] market, but the B2B [business facing] market is expected to rise this year. However, around 70 to 80 per cent of VR content is sold to the [consumer facing] market. There are many opportunities in the [business facing] market as well, including its use in education, training and design,” said Zheng. Growth will be further boosted by the launch of more affordable VR headsets, such as the Oculus Go, which starts from US$199 and the Mi VR stand-alone, which starts from 1,499 yuan (US$234), new usage verticals such as education, and attractive new content such as the VR game Beat Saber, Zheng said. Beat Saber allows users to slash cubes with two lightsabres in time with the music and has become an instant hit, topping the VR game charts on Steam only three days after its release in May, according to VR news site RoadtoVR. The game was developed by Czech indie game studio Hyperbolic Magnetism. Beat Saber’s success can be seen as an encouraging signal for hardware makers and the wider industry. “It is a VR game strongly recommended by players,” Zheng said. “This is exactly the sort of game likely to drive the VR industry forward.” Robots and VR steal the show at Asia’s biggest toy fair Yet quality games, and especially VR games, require long development cycles that can easily drain the limited capital available to small studios. Zheng also pointed out that while many Chinese developers are eager for instant success and returns, this can be harder for VR games developers as they have a much smaller user base currently than peers in the mobile gaming arena. Ashima Thomas, CEO of Singapore-based Warrior9 VR, wants to create VR content that appeals to consumers beyond the technology and gaming communities, with a particular focus on content with Asian influences. “This chicken-and-egg dilemma, we do feel that.” “I feel that we are near a point where things will change”, Thomas said, citing the latest Oculus headset as an example of gear that could be used daily rather than occasionally. Regular use of hardware “could be the beginning of something”, spurring demand for content. Meanwhile, Yang describes himself as only a beginner compared to Japanese producers who have been in the game for 20 years. He nonetheless wants to differentiate himself from those developers looking for a quick buck. Patience is needed before Chinese gamers take VR to their hearts. “VR gaming is part of a lifestyle, and users will only pay for it when they agree with this lifestyle,” Yang said.