2016 Could Finally Be The Year Virtual Reality Takes Over

After more than three decades of virtual reality being stuck in a "hype-and-then-die" cycle, the space is finally expected to see adoption growth in 2016, according to Ross Sandler of Deutsche Bank. In a report published Thursday, Sandler stated that virtual reality adoption has suffered from a "chicken-and-egg" problem that is the segment does not have a large enough installed base to entice premium content development. However, this is set to change with Facebook's Oculus Rift, Sony's Project Morpheus and HTC's Vive all set to ship in 2016. Sandler continued that the virtual reality space will further benefit from: 1) a more "connected" internet, 2) "healthy" levels of investments from venture capitalists, 3) professional content owners "embracing" the new technology, and 4) hardware and software that can actually support a "quality" user experience. "We think premium content is going to be the "killer app" that draws users to virtual reality," Sandler wrote. "We are seeing new concepts in sports, live concerts, games, training video, shopping, and many other virtual reality categories (including adult content).

Sandler pointed out that the consumer version of Oculus is expected to begin shipping to consumers in the first quarter of 2016 and could sell 1.5 million units at an average price of $350 per device. As such, Facebook could see sales of $578 million which represents three percent of total revenue. Sandler also added that it is likely Facebook could sell the devices at a 50 percent margin. While this would imply an incremental $250 million in COGS (cost of goods sold) to the company next year, it only represents three percent of their total 2015 COGS. Looking past 2016, the analyst is estimating total Oculus revenue of $599 million in 2017, $751 million in 2018, $905 million in 2019 and $1.063 billion in 2020. Shares of Facebook remain Buy rated with an unchanged $115 price target.