​With over 3,200 exhibitors at the 2023 Consumer Electronics Show, of which over 1,000 are start-ups, getting product releases out can be a difficult task, especially when competing with the massive PR machines that are part of major CE companies.  This leaves companies to spend an inordinate amount of time formulating a single headline that is fashioned to catch the attention of the media, who then, hopefully, pass it on to consumers[1].  When searching for a word to describe many of the headlines that emanate from CES, the word ‘bombastic’ comes to mind (Oxford definition - “high-sounding but with little meaning; inflated”).  “Words like ‘revolutionary’, ‘game-changing’, and ‘unbelievable’ pop up in many releases, but when one digs a bit further into what was actually released or announced, things tend to be a bit less than those adjectives might imply.
One such headline from a company we have mentioned recently was “Magic Leap 2 Receives 60601 Certification for Use in The Operating Room”.  Magic Leap (pvt) is a well-funded AR unicorn that recently became the property of the Saudi government, when it took a controlling stake in the company through a $450m purchase made by the country’s sovereign wealth fund.  Magic Leap, as we have previously noted has been through some highs and lows since its founding in 2010, including the stepping down of its founder in 2020 when the company faced financial trouble.  Magic Leap refocused itself from a consumer orientation to a commercial one and last September released the Magic Leap 2 AR headset, the follow-up to the Magic Leap 1 released in 2018, an improved version that has been touted for use by both repairmen and surgeons, albeit the $3,300 price.  
 
We have no issue with the Magic Leap 2 device itself, however the release seemed to indicate that there was some governmental approval for the device’s use in operating rooms, opening up the world of AR to surgical suites across the globe, however if one looks at what 60601 certification actually is, the headline is a bit misleading.  IEC 60601 is a series of technical standards for the safety and effectiveness of medical electrical equipment.  It is the de facto requirement for bringing new medical devices to market in many countries, but is quite specific as to what it covers which is the operation of a device’s power supply.  With a number of certification levels as noted below, the certification is an absolute necessity for any device used in a healthcare facility or even a home environment and measures the potential for a number of potential electromagnetic hazards that could emanate from such devices.  In some cases those emanations might cause problems with other equipment in the vicinity, similar to the way in which smartphones must be certified for excessive RF radiation before they are made available to the public.
 
·       No body contact – such as with X-Ray or MRI machines, or even hospital beds and lighting
·       Physical Contact – such as blood pressure monitors, ultrasound tools, or even thermometers
·       Cardiac Contact – such as defibrillators or dialysis machines
 
In no way does this certification mean that the Magic Leap 2 AR headset has been certified by a government organization like the FDA or other drug or medically-related organization and the option to use the ML 2 headset would be in the hands of the user.  We are certainly not criticizing the use of AR in a surgery suite, just the opposite, but rather than tout a certification that sounds like a tacit road to AR or VR assisted surgery, it might have been more beneficial to produce a headline that highlighted the company’s partnership with SentiAR (pvt), a company that has developed the software to visualize cardiac catheter lab procedures, bring them from typical 2D visualization on monitor screens, to 3D visualization using AR devices such as the Magic Leap 2 (https://youtu.be/rsS2D7PrkEo) or EchoPixel (pvt) working toward similar cardiac 3D imaging solutions.
 
The FDA is still a bit iffy about software  used in or around medical devices, so there are a number of classifications that can be bandied about in headlines for companies associated with AR in a healthcare setting, and while there is no overarching FDA policy toward medical software, when software is used to analyze medical device data it is considered an accessory to the device, however when the software is part of the device’s functions, and could pose a risk, the FDA oversight can become more stringent.  While in some such cases, such as the use of a small or low resolution screen in a radiological exam, could lead to a poor or misleading diagnosis, the FDA seems to recognize the importance of managing those risks through regulation, but the field of AR or VR in practical medicine is relatively new and will likely take years for the FDA to develop regulations that are specific to their use in medical settings.  If the use of devices that indicate blood glucose levels or display ECG information are any indication, it will be even more difficult for the FDA to classify how it will regulate AR or VR software that can create 3D visual images that can be viewed before or during procedures.
 
Headlines do not make products, or at least not in the medical AR/VR space.  Devices and software that make complex medical procedures safer, simpler, and more successful can bring XR into the public eye far more significantly than eye-catching headlines, just as robotically assisted surgery has reduced the risks related to on-pump CABG procedures.  Being able to visualize actual patient organs in 3 dimensions should make procedures faster and therefore less risky, so if companies like Magic Leap want to popularize AR devices in the medical space, they should focus on how such devices can be used to save lives.  If they are as effective as the company (and others) say they are at improving surgical outcomes, and the media can make that information available to the public, it would go a long way toward improving the regulatory processes needed to maintain a safe use environment.  If the public thought there was a real benefit to using AR/VR in healthcare and puts some pressure on regulatory agencies to codify better regulations, things will move more quickly for AR companies than confusing headlines.


[1] We note that CES is not open to the general public.  One has to prove they are a part of the media or are ‘in’ the CE industry in some way, either as a producer or consumer (retail or otherwise) of CE products.

Magic Leap (pvt), the Florida based AR company that has been one of the most successful AR companies in terms of raising capital, has indicated that the Saudi Arabia Public Investment Fund ($620b as of 1Q ’22) has increased its stake in the company, now holding a controlling interest.  The deal, which consisted of $150m in convertible preferred and $300m in debt, and gives the fund the right to appoint 4 of the company’s 8 directors.  Magic Leap, which was founded in 2010 by Roby Abovitz, has raised over $3.5b through 28 investors, including Google (GOOG), Alibaba (BABA), Qualcomm (QCOM), AT&T (T) and a number of VCs, but went through some difficult times in 2020.  The company was forced to lay off ~1,000 employees (~50% of staff) when sales of its Magic Leap 1 AR headset, released that year failed to materialize as expected, and rumors that the company was looking for a buyer turned out to be untrue as the company went back to private investors for more capital.  The company then changed focus (most of the layoffs came from the consumer segment) to the enterprise market, and the founder and CEO gave up the reins to a new CEO in 2020.  Since then, he has relinquished his board seat to found a new company, Sun & Thunder (pvt), that creates Ai characters (“SynthBees”), a Metaverse engine, and “some really cool and creative things”, according to the company.
Magic Leap’s initial headset problem was price, and while the device (Magic Leap 1) was quite sophisticated, it cost ~$2,300, which was hard to justify in the consumer market in 2018.  Since then the company announced the Magic Leap 2 in January of 2021, but did not release the device until September 29 of this year.  While the new device itself costs ~$3,300 (~$5,000) for the complete package), and is the most expensive AR device released in 2022, it is designed to be used across a number of industry verticals where considerable software has been developed to integrate the device with existing applications such as IT tools, 3D modeling, training, collaboration, technical guidance, and metaverse creation.  The device has considerably more internal storage capacity than similar devices, a positive for quick responses to user needs, although the display uses LCoS (Liquid Crystal on Silicon), an LCD based technology that is rarely used in such devices, having been replaced by Micro-OLED or Micro-LED display technology.
The Saudi confidence in the company is a bit surprising considering their original investment, which we believe was made in March 2018 ($461m) has seen a number of ups and downs but given the pre-money valuation of Magic Leap of between $1.5b and $2b, they seem to be optimistic about the longer-term prospects for AR and Magic Leap itself.  If the Saudi’s do take four board seats, there will have to be some reshuffling, as those seats have been held by Alibaba, Qualcomm, and Google representatives, but with over $700m invested, the Saudi fund has the right to run the board.  All in, the Saudi Fund, which remains under the control of Mohammed bin Salman, the Crown Prince and Prime Minister of Saudi Arabia, has stakes in other tech companies (Uber (UBER), Capcom (9697.JP), etc) but also has made investments in a number of US politically linked companies, particularly those of Jared Kushner, triggering issues surrounding Kushner’s ongoing support for the Saudi government, despite human rights violations.  There has been little controversy over the existing Saudi investment in Magic Leap, but given the political climate, that could change quickly given the company’s status as a US unicorn.,

As we mentioned in our12-05-22 note, Samsung Electronics (005930.KS) has been conspicuously absent from the AR/VR world and seems to be looking toward the necessity for an application that would drive consumers into the space before making a major step into the AR/VR hardware business.  That said, Samsung has been developing and to a lesser degree marketing, Micro-LED technology, which is the use of very small LEDs as display emitting sources.  While Micro-LED technology is thought to be the ultimate replacement for LCD and even OLED display technology years down the road, it is currently a work in progress, and still faces some major issues that limit its use and maintain a high cost.  While that development will continue, Samsung Display (pvt) is taking its expertise in OLED display technology and moving toward another display venue.
SDC is beginning to take steps toward the mass production of Micro-OLED displays.  Micro-OLED displays use existing OLED technology, that of phosphorescent and fluorescent emitter materials, but with unusually small pixels that are densely packed in a small space..  There are theoretically two ways in which Micro-OLEDs can be used, the first being with an OLED emitter (or combination of emitters) that produces a single color and is then passed through a color filter that breaks the light into red, green, and blue components, similar to the way and OLED TV works.  The second is a using three OLED emitters (RGB) that are individually controllable and therefore do not need a color filter, similar to the way a smartphone OLED display works.  What makes these displays different from typical OLED displays is that they are built on silicon substrates, where larger OLED displays tend to be built on glass or flexible polymer plastics.
The OLED/Color filter path for Micro-OLED is being championed by Sony (SNE), who produces such displays for camera electronic viewer, HUDs, and AR/VR devices.  The display shown below measures 0.64” (Diagonal) and has 3,145,728 pixels squeezed into a display that is 0.512” x 0.384”, representing ~4,000 pixels/inch, with each pixel being spaced 0.0064mm apart (on center).  While this might sound like overkill, in a VR application the display is almost touching your eye, so if the pixels were not so closely spaced, the user would see gaps between the pixels, creating what is called the ‘screen-door’ effect

The problem is however, that using a color filter to create colors means that much of the light energy is eliminated, either reflected away from the user or absorbed, reducing the overall brightness of each color and the overall display, so Samsung Display, the global leader in RGB OLED displays for smartphones, is looking toward creating RGB Micro-OL:ED displays that contain a red, green, and blue sub-pixel within each pixel, and therefore does not need a color filter.  As can be expected however, these sub-pixels must all fit within the space of a pixel, which makes their deposition even more difficult and precise than that of the OLED/Color filter process.  It seems that while Samsung Electronics is still trying to find a key that will unlock consumer interest in AR/VR, Samsung Display, an affiliate, is thought to be taking the Micro-OLED concept a bit further.  

​Samsung Display is said to be developing a Micro-LED pilot line at its A2 display fab in Asan, Korea.  According to local sources, the company has ordered panel logistics systems from SFA (036540.KS) and glass encapsulation tools from AP Systems (054620.KS) for the pilot line that is expected to go into limited production toward the middle of 2023.  If successful, SDC will allocate funding for the construction of a small mass production line in 2024 that would be built to handle 6,400 sheets/month at the onset.  While we do not yet know the details of the intended product line, we expect the ultimate objective is to produce an RGB Micro-OLED display that will be used in commercial AR/VR applications, likely by Samsung itself, or sold to other customers, and with Apple (AAPL) expected to release an AR/VR device in 2023 or 2024, SDC is looking to develop a high volume mass production line that will feed the Apple AR/VR supply chain, especially given that Sony is expected to be the supplier for the initial Apple AR/VR product.
We note that creating OLED Micro-displays using the OLED/CF process is difficult, but the process of placing three separate OLED emitters in each pixel makes the RGB Micro-OLED process even more difficult, and SDC will face a number of challenges for which it must find solutions that can be scaled to mass production if these displays are ever to be within the cost demands of high volume consumer devices.  There are only a few manufacturers that can produce OLED Micro-displays, a number of which are large enough to be recognized by investors, such as China’s BOE (200725.CH), E-Magin (EMAN) and Sony, however others are far less recognizable, especially those based in China, such as SeeYa (pvt) in Hefei, Sidtek (pvt) in Wuhu City, Olightek (pvt) in Kunming, and Microoled (pvt) in Grenoble, all of whom have at least some product in the market. 
That said, this is still an evolving product segment and is driven on the technology side by higher resolution, higher brightness near-eye display improvements, leading to headsets and devices that are less bulky and cause less fatigue and stress.  But while the near-eye display industry continues to develop, and the two biggest CE players have not yet participated, the need for application driven demand is the industry’s major growth stumbling block.  Gaming is certainly a driver for the VR space and continues to evolve, but the metaphor of the ‘metaverse’, Meta’s (FB) hope for the future, is not enough to drive the high volumes needed for major CE companies to enter the market.  Meta has been on a costly quest to convince the world that the metaverse is other than a way to sell you something and collect user information but lacks a real application driver to attract consumers.  We expect the technology side of AR/VR displays to develop more rapidly in 2023 and 2024 but the application space will be the true driver for pushing AR/VR more quickly into the CE space.  Without application drivers, we expect the overall development of AR/VR to progress relatively slowly, likely falling behind expectations.

​As the 2nd largest CE company globally, Samsung Electronics has considerable influence over the direction of consumer products and CE technology, yet when in AR/VR circles, little is said about Samsung’s efforts, with much attention given to Meta (FB), who dominates the VR hardware space, and Apple, whose intentions for an Xr device in 2023 or 2024 seem to be well-known to all.  Yet Samsung has been working in the shadows toward developing an AR/VR business plan, although from a slightly different angle than one would expect.
Rather than rush to market with a consumer oriented AR or VR device, Samsung is taking the path of building an AR/VR ecosystem, and working to entice software developers to work with the company, rather than flooding the market with devices and hoping that they become dominant enough to become profitable.  This strategy is a bit different from Samsung’s foldable strategy, which was a race to become the first to commercialize such a technology, given a relatively open field and a well-understood smartphone market.  AR/VR, especially VR, is a new market and one that has considerable issues as to its growth path.  With Meta the dominant player, Samsung would be a catch-up company, having to spend vast sums to advertise that it has the ‘best’ device in the market, and no assurance that the market would accept that notion.
Instead, Samsung seems to be developing an ecosystem around the potential AR/VR markets, starting with a developer system assumedly next year, and aligning the direction of its affiliates and suppliers toward being able to provide as much of the potential ecosystem it would need for a high volume AR/VR production plan.  But Samsung’s focus is more toward creating the content that is necessary to develop the XR market into the high volume markets that Samsung handles well, and that means it needs to coordinate content development rather than flood the market and hope that existing content attracts consumers.  It is not to say that the company does not have hardware under development, with prototypes and models working through R&D, but having released a product in 2018 that saw little volume seems to have shifted Samsung’s attention away from hardware and toward software in this instance.
This is a challenge for Samsung, known for its hardware expertise, and the company faces the relatively meager adoption of its Exynos OS as a blow to its potential for building its software business, but the company does have a massive developer following given its top rankings in many DE categories, which gives them a platform from which to work.  We doubt Samsung is expecting its own developers to generate such content but will incentivize  the communities built around its products to build content for whatever AR/VR platform it releases.  This will be similar to Apple’s AR/VR approach, where Apple knows that despite the ‘coolness’ that an Apple AR/VR device might have, if there is little to do with it, it will see strong initial sales and weak long-term growth.
Both Samsung and Apple seem to be focused more on AR than VR, with the understanding that Meta has been seeding the market for VR to gain share, while losing a considerable amount of money.  W expect that neither company wants to enter into that scenario and are willing to let Meta rule the consumer market, while picking niches in both AR and VR that can carry higher ASP’s.  That is where we expect both to concentrate in the first two year’s of entry into the XR market, and both have the capabilities to ‘encourage’ developers to create applications and content for their platforms, rather than pin hopes on the blossoming of the Metaverse.  It is going to be a long battle for XR supremacy, but if we had to bet we would expect both companies to pursue similar paths toward such product development.

AR/VR is a controversial subject in the CE space, with some CE companies making big bets on the technology, while others are still skeptical as to the validity of the technology as a competitor to more typical visual modalities.  We understand that those who have a stake in the AR/VR world will be far more optimistic about its prospects than the average Joe, and we therefore take most forecasts, especially those in the out years, with a grain of salt, and rightly so as estimates, even for this year, have come down considerably.  For example an estimate made in 2020 for XR unit shipments in 2025 has been reduced from 43.5m units to 23.8m units, with similar changes in earlier years.  That said, our attention to the space is predicated on the eventual adoption of XR by a number of major CE companies, whose motivation is not to promote a ‘new world’ or lifestyle, but to sell devices, assumedly the goal of all CE companies.
We do believe that the adoption of XR will be somewhat generational, with those that have grown up with smartphones as an extension of their bodies and personalities more willing to accept the notion of XR without the trepidation that comes from a generation that grew up with radio and TV as ‘social media’, and that will take time, but we believe the adoption of XR by Apple (AAPL) will help to legitimize XR and push it further into the more consumer oriented spotlight.  We do see a bit of a divergence between the two components of XR, with AR being the more practical application and VR having a more entertainment oriented focus, although AR will continue to have a smaller share of the XR unit total at least for the next year or so.  We also expect the two segments to merge somewhat, with a number of devices allowing the user to use the headset as an AR device, while also providing for a ‘blocking’ system that will allow the user an immersive VR experience.
Aside from the potential usage characteristics for XR, there is another important aspect of XR devices that needs to be addressed, that of ‘wearability’, and by wearability we do not mean how comfortable a headset might be but more how it looks to the outside world.  We have all seen pictures of those wearing VR headsets wildly gesticulating as they stand in the middle of a room or sit on a couch, and that is certainly an image that does not serve to entice a broad swath of consumers to try such a device, although it is likely quite attractive to the gaming population.  More to the point would be AR headsets, which are slowly evolving into devices that are close to normal glasses, thanks to optical solutions like pancake lenses, that reduce the bulk behind AR headsets, which makes them more practical for their use as an ‘everyday’ item that can be worn without the stigma of a VR headset, and will eventually become unobtrusive to consumers.
Of course there are many practical applications for both AR and VR, but while VR unit volumes are substantially higher than AR unit volumes, we see AR as the more ubiquitous device for the long-term, especially from a generational standpoint, with the information currently presented on a smartphone display projected in front of you, without blocking normal vision, a way of reducing the need to look at a screen that you have to take out of a pocket as it is always on and in front of you.
Right now, we have to look at the XR space more from the standpoint of a typical consumer device, and as almost all consumer devices have a visual interface, we start with the displays that have been and will be used in AR and VR devices.  There are a number of existing and potential displays that have been and can be used in AR and VR devices, so we offer a bit of a primer on what they are, how they work, and our data on which are gaining or losing traction.  We note that these displays tend to be more complex to manufacture than smartphone displays, particularly as they are situated within millimeters of the user’s eyes, making the resolution and pixel pitch[1] key metrics.  Such displays are considered ‘near-eye’ displays and while they are typically produced on display production lines similar to those used to produce CE displays, their characteristics are pushing the technology needed to satisfy near-eye criteria toward less typical production methods.
Most CE displays are based on a glass or plastic substrate, and while those platforms are certyainly acceptable for typical CE displays, the higher tolerances of near-eye displays have pushed development toward silicon-based displays, which are just beginning to show merit as to reducing the feature sizes needed for near-eye displays.  What makes this even more attractive to display producers is the processes use equipment that display producers already have on the fab floor, particularly semiconductor lithography tools that are used to make display TFT backplanes.  This gives the DoS (Display on Silicon) world a path into the future that requires potentially less capital and infrastructure than would be the case for a ‘new’ display technology, and gives the industry an easier path to building pilot DoS lines to further develop the technology.
That said, the AR/VR industry still has the necessity of having access to mass production that can keep costs at reasonable levels and that tends to lean toward existing display modalities, so we looked at all of the AR/VR devices produced since 2013 and traced the display types used in those devices.  Not all of the device manufacturers have been forthcoming about the type of display used, so there is an ‘unknown’ component, but we broke down the display usage into groups for those that disclosed the information, using the manufacturers ‘classification’ as to the type of display.  In some instances there were nuances that made us wonder if the AR/VR brand was accurately portraying the dive display, but without disassembling a multitude of AR/VR headsets, we took the brand’s word at face value.
This broke down the displays into eight categories based on four technologies, Liquid Crystal displays (LCD), OLED displays, LED displays, and DLP, which we describe in brief below.

• Liquid Crystal Display (LCD) – A display in which light is generated by a BLU (backlight unit), which passes through or is blocked by a liquid crystal material.  The liquid crystal is ‘controlled’ by TFT (Thin-film Transistors) circuitry that can shift the optical characteristics of the liquid crystal to let the light through or block it.  If the liquid crystal is ‘open’, the light passes into a color filter, essentially a sheet of red, green, and blue phosphors that change the white backlight to their respective colors.
• OLED Displays (OLED) – A display that uses phosphorescent and fluorescent materials that emit light when controlled by a TFT system similar to that used in LCD displays.  In small OLED displays, the OLED materials are arranged to form a pixel composed of red, green, and blue OLED materials, each of which can be individually controlled.  Since these materials are self-emissive, there is no need for a color filter.
• LED displays (LED) – As mentioned above, LCD displays require a backlight that is usually an array of LEDs (Light-emitting Diodes), and in most cases the term ‘LED display’ is used to mean an LCD display that uses an LED backlight, however, there are also display technologies that are based on the LEDs themselves as emitting devices.  In some cases individual red, green, and blue LEDs are used as self-emissive components, similar to the way OLED materials are used, and in other instances single color LEDs are used, using a number of methods for converting the color of the light (more below).
• DLP (Digital Light Processing) – This technology uses a white light source that is split into primary colors.  Three micro-mirror chips for each pixel, which are individually controlled, reflect the prism’s light or block it, to create each pixel’s color combination.  More commonly used in cinema projection systems, the technology is rarely used in near-eye devices.

While those are the main near-eye display categories, there are a number of ‘flavors’, as noted below:

• Mini-LED – Essentially an LCD display, but with much smaller LEDs in the backlight, giving a higher level of control over each pixel.
• QLED (Quantum Dot) – Similar to the Mini-LED above, these displays use quantum dots to narrow the spectrum of the LED light and enhance the color characteristics.  In some cases, the quantum dots can be used as a substitute for the color filter, shifting the white light to red, green, and blue, rather than filtering to preserve brightness.
• LCoS (Liquid crystal on Silicon) – Similar to DLP and LCD, LCoS uses liquid crystal to reflect or block the RGB light sources, and is based on a silicon substrate.  LCoS is also used for projection devices but has been used in some near-eye displays.
• Micro-LED – Micro-LED displays are based on self-emissive LEDs that are either a single color or have a red, green, and blue LED for each pixel.  In single color micro-LED displays quantum dots are typically used to shift the single color light to RGB as RGB micro-LEDs are relatively difficult to produce.
• Micro-OLED – Similar to more typical self-emissive RGB OLED displays, micro-OLED displays are produced on silicon and do not use typical evaporative OLED material deposition.  While there are a number of potential micro-OLED processes, rather than the masks used to create pixels with OLED materials, micro-OLED displays are created using photolithography on silicon.
• eQD – While not in our data for existing AR/VR headsets, we note that at some point in the future we expect that quantum dots will also be used as a self-emissive light source, likely based on silicon photolithography.  Right now QDs are typically used as ‘color shifters’ converting one color of light to another, a step above phosphors which filter out other colors.  By electrically or optically stimulating QDs, they give off light that is easily tailored to specific colors.  Not yet a product but one that will inevitably be used in near-eye displays.

As noted above, we traced the evolution of Ar and VR display technology back to the early days of XR and mapped the progress (or demise) of each technology according to the number of devices that used the technology.  This data is not unit based in terms of units sold but based on the technology share of the number of models available to consumers on a yearly basis.  While this would not be a basis for determining which technology ‘sells’ the most units, it does show trends, especially the right-hand column noted as ‘unreleased’.  This represents those AR and VR devices that have been announced but have yet to be released and would represent the (hopefully) leading edge of AR/VR display technology.  While Figure 1 and Figure 2 show the composite AR/VR Display history and Figure 3 shows the combined totals, the AR/VR Display History Individual Charts (Figure 4 - Figure 12) tell more of a story.
LCD is still the Oculus 2 (FB), the only release in 2014 contained an OLED display, giving it dominance that year, and while OLED has seen its share decline in both AR and VR over the last few years, Figure 11 shows that Micro-OLED is gaining traction over the last two years, and in those devices still unreleased.  Mini-LED, Micro-LED and QLED near-eye displays are still in the emerging category, while DLP has disappeared.  LCoS, as a reflective technology remains viable for AR (Magic Leap (pvt)), but we expect micro-OLED and modern optics will lessen its appearance.
Once again, we note that regardless of the forecasts for XR, the CE space is always looking for new hardware to sell, and while AR/VR is a bit different than your usual CE fare, it has the potential to become another revenue source for CE companies and the display industry.  As few CE devices are not display oriented in some way, we focus considerable attention to the display space to spot trends, both in the near-term and on a long-term basis.  Should a large CE company decide that XR is a viable consumer product, the media will blast the web with headlines about the merits of AR/VR and how it will change the world and the way we see it.  Therefore, we look to keep one step ahead and look to spot trends and direction that will move the XR space ahead or delay its (2nd or 3rd) ‘dawning’.


[1] Pixel pitch is the distance from the center of a pixel to the center of an adjacent pixel and is usually measured in millimeters or microns.

VR, in our view, is hardware still looking for an application, and while gaming seems to be the application of choice for those who value the VR experience, the VR industry continues to tout its use in other, seemingly more legitimate applications, such as VR classrooms, VR in medicine, VR in business, VR in travel, and of course, VR in shopping.  That said, gaming is the largest category for VR application, and while there are great differences in estimates for the VR gaming market itself, we expect that VR gaming sales are second only to VR hardware, with all of the other applications being secondary, other than shopping, which, in what are somewhat stunted forms currently, likely become the largest VR applications down the road.
That said, we came across a VR application that struck us by its very strangeness, the use of VR in psychedelic psychotherapy, a field that must rely on clinical trials given the Federal illegality of many psychedelic drugs.  Psychedelic therapy, which can be used for PTSD, anxiety, OCD, and other cognitive and social disorders, is difficult on its own, as it is expensive and must be done in a strictly controlled setting with trained clinicians, but Enosis Therapeutics (pvt), a small firm located in Melbourne, Australia has developed four VR applications that the OVID Clinic (pvt) in Berlin is using as part of its psychedelic psychotherapy, an adjunct to the clinic’s Ketamine-based therapy.
The VR applications are (company words):

• Grounding – Used during the preparation, dosing, and ‘integration’ stage of the therapy session, providing a transition space from daily life to therapy.
• Surrender – Used during the dosing stage, providing an ‘awe-evoking’ scenario that helps the patient to engage more deeply with their trip and sets the focus on their intention.
• Rescue – Used during dosing, known as ‘digital diazepam and reliably and transiently pulls the participant out of the experience if it becomes counterproductive..
• Anchoring  - Used during all stages of therapy to create a multi-sensory memory library.  Expands tangible connections between insights and creates a multi-sensory mind map as the meaning making process unfolds and invites users to revisit and consolidate their recorded insights into a memory library.

Whether you believe the company’s theories about how VR can be used in conjunction with psychedelic psychological therapy or not, you have to give the company credit for coming up with a novel use for VR.  While we are not sure that a VR environment is tolerable for anyone micro-dosing psychedelics, we can’t rule out the concept as we have yet to experience it, however we expect we would rely more on the clinical results from other studies rather than our own potential experience.  One typical aspect of those under the influence of psychedelic substances is the loss of reference points, sometimes relating to one’s body, and a similar loss of the sense of space, which are also analogous to the phenomena many experience in VR.  Whether the experience of using both psychedelics and VR intensifies or reduces those phenomena is an open question for most, but we expect the potential use of VR in psychedelic psychological therapy is not an application that will move the needle in the VR world.
Watch the Company promo here: https://youtu.be/l_B8OMsQ7xM
 

As always we take long-term estimates for new CE products with a grain of salt with the understanding that rarely are products out substantially ahead of timelines and volume estimates exceeded, but we understand the necessity for some to extrapolate  earlier growth rates in order to stimulate interest or sell products.  The AR/VR product space has been just such a new product sector, falling short of promises made as far back as 2013 when Google (GOOG) Glass (AR) appeared as well as the Oculus Rift VR headset, with pundits forecasting that the global population would soon be walking around wearing AR glasses, no longer having to pull out a smartphone or ask for directions, while those at home would spend their days gazing at endangered species in Africa or climbing the Alp, virtually of course.
As far as consumer products go, AR/VR headsets and associated accessories are small potatoes, and despite the exhortations over 27% y/y increase in VR unit shipments this year, the total count is likely just under 14m units, and at a average ASP of ~$400, it’s a $5b market as compared to the TV set market of ~$100b or the smartphone market of $520b.  That said, there are many that see the growth of the AR/VR space, led by the still somewhat nebulous Metaverse, as the next mass market CE product, and one that will spread like wildfire across the globe.
While they wax poetic about AR/VR, there are a number of obstacles in the way of such mass adoption, despite the notion that Apple (AAPL) will be joining the AR/VR headset world in the ‘near’ future.  VR headsets are uncomfortable and even the most ardent supporters admit that they fatigue rather quickly in the VR environment, while AR glasses are considerably less so and are nearing designs and capabilities that are near acceptable norms.  Progress has certainly been made toward bringing down the weight and bulkiness of VR headsets over the last few years, while improvements in optics and display design and capabilities continues to improve ‘wear-time’, but smartphones allow you to communicate with the world and TVs allow you to access a vast repository of information, entertainment, and content, while VR headsets allow you to play games.  We are not criticizing VR gamers, but there is very little VR content outside of games and the ability to create VR content is limited to a relatively small segment of the global population.
So what is missing are applications.  Not FP shooters, MMOs, or BC miner games but applications that provide that enhance that connection folks desire from their phones, their TVs, or social media.  Yes, one day there will probably be enough content that one could spend hours a day prancing through Transylvanian castles alongside Dracula or tending a curio shop on some obscure exoplanet, but VR needs a killer application that adds to an individual’s ability to communicate with others, and despite the pitfalls of social media and the low quality offerings of most streaming services, the estimates won’t really matter until such an application is found.  The success of Twitch (AMZN) or Tik Tok (pvt) prove out that isolating folks in a VR world, no matter how interesting, is really a distraction to the desire to stay connected to friends, family and the world in general, and the direction that VR application developers need to go.  AR is far less isolating, and applications that allow AR glasses wearers to share what they see with their friends should be relatively easy to create, and some of the AR applications that we have mentioned in the past, particularly face-to-face language translation give AR a place in the real world, but if one is looking to forecast units, it should be based on applications as an application that becomes popular will drive the improvements in hardware faster than any government subsidy or industry-sponsored development program would.  Sort of “if you build it, they will come” for the application and “If they come, you will build it…” for the hardware.

​Meta’s (FB) Oculus Quest 2 is the best-selling VR headset, and while we expect Meta loses money on every Quest it sells, the idea of seeding the market to encourage consumers to try a new technology is certainly not a new one in the CE space, and the price of the Quest 2 ($300 to $400) is low enough to embolden consumers to take the plunge despite the rather limited content available to users.  While competitive XR headsets can run as high as $12,000 there are a number of soon-to-be released headsets that are expected to be priced in the $450 - $550 price category, with comparative specs to the Quest, but what makes this even more challenging for Meta is the price increase that they have just instituted for the Quest 2 headset, which will raise the price of the two models between 25% and 33%, along with accessories and refurbished headsets.
Understandably the company has indicated the need for the change in order to compensate for the increased cost of materials, silicon, and logistics, which it has likely been eating for the last few quarters, and with thye macro situation putting pressure on Meta’s base businesses, the word likely came down that it was time to at least catch up to those increases.  While it would be difficult for almost any CE brands to generate comparable share to the Quest VR line, there are a number of potential contenders, particularly Chinese brands, that will likely give Meta a run for their money, with Skyworth (751.HK) among the most aggressive as to price and Pico (pvt), owned by Chinese content giant ByteDance (pvt).   Skyworth is expected to release two VR models this year, both in the $450 to $600 price range, and PICO’s Neo 3Link, released in May, sells for ~$450, while the price of the Sony (SNE) Playstation VR 2 that was announced in February 2021, albeit not a stand-alone device, remains a mystery.
While VR is certainly far from being a consumer ‘must-have’, some CE companies are willing to stake a claim to the space with low-cost headsets that likely generate immediate losses but establish the name of the brand in the VR space.  For companies the size of Meta, Sony, and ByteDance the cost of R&D and production/sale losses can be absorbed, while smaller VR brands must still price far above to recover even part of their development and production costs, but the specter of inflation and slower economic growth could put a damper on even the largest companies’ efforts to build a VR name in the near-term as pressure to cover mounting costs pushes up the price of headsets at a time when the industry needs a lower price point to pull in potential buyers.  There are still wildcards in the brush, with Apple (AAPL) having the greatest ability to move the needle but we expect Apple will have more sensitivity to creating a profitable overall business that would encompass a premium priced headset and an absolute necessity for concomitant software sales before marching into the VR arena.

We will skip our usual oratory about the unreliability of surveys, with just a nod toward those with samples large enough to be called ‘random’, as was the Thrive survey we note below given its 98,000 participants, but most interesting was the 23% of respondents who said they own or have used a VR headset, which remained the same since the last survey a year ago.  Non-VR users however seems quite disinterested in VR overall, with the query about why no interest yielding an ambivalent “Just Not Interested” (63%).  While the peak of consumer interest in VR was likely back in 2017, and those already involved seem satisfied, the challenge to bring VR back into the realm of consumer interest might not be an easy task.
65% of survey respondents indicated that cost was a factor in determining interest, and even the seeding of the VR headset market by Facebook’s (FB) Oculus 2 ($300 base price) does not seem to have changed general consumer perception about VR.  Application cost was also mentioned as a factor given the relatively high cost of VR application production, which gets passed on to consumers.  Latency has been a problem for VR, and while difficulties with VR generally do affect a portion of the population, latency is one area that is improving regularly, both at the hardware level and the networking level, and while VR will not generate enough momentum currently to encourage network improvement on its own, there is the possibility that more sophisticated hardware can tap into that potential.
One area in the VR space that we see as ripe for consumer concern is privacy and security, which we expect will become an even greater concern as the Metaverse becomes a bit more practical.  While only a bit more than half of cell phone users are concerned about stolen passwords, identity theft, and illegal tracking, the opportunities for such nefarious activities will expand as the Metaverse’s “Wild West” will open new pathways for cybercriminals to gather information.  Will application developers make their VR apps secure?  Probably not, until they have to, and if NFTs and cryptocurrencies are any example, criminals will use their own expertise to bypass rudimentary security practices, and with each publicized ransacking, wary consumers will move further from the VR world.
All in, VR has no killer application to draw in a doubtful public, and the survey results seem to indicate considerable resistance.  Even the questions about what VR applications might increase interest in a VR headset seemed mundane and a stretch in terms of applications that would excite consumers, and for virtual shopping to come in below pornography, does little to justify the expenses retailers seem to be willing to put behind the Metaverse, where they believe they can sell both real and virtual items.  Given in many cases retailers see the Metaverse as a salvation to the problem of a generational disinterest in brick and mortar shopping or just feel the need to have a presence, even if it is a passing fab, but even Apple’s potential entry into the space (see above), while it might push some to try VR, would need a killer application that has sustainability, and in that regard VR remains a product looking for an application.  Until one is found, unless they give them away, its going to continue to be a hard sell.

​There has been an endless outpouring of speculation, rumors, and flashy mock-ups of what is expected to be Apple’s (AAPL) first official announcement concerning the potential unveiling of its first AR headset and its ‘realityOS’ operating system at the Worldwide Developers Conference that begins today at 1:00PM ET.  The virtual event is expected to give information on iOS 16, iPadOS 16, macOS 13, watch)S 9, tvOS 16, and possible hints toward some hardware for the MacBook Air, the MacPro, and the long-awaited AR/VR headset that has been rumored for the last few months.
It seems however, that word has gotten out that Apple has told its suppliers to hold production until October, which would push out the release of any such product until 2023, rather than later this year.  Apple could still announce the reality OS at today’s event or in the near term, as developers need time to modify existing apps for the new headset, with Apple supposedly working on a migration tool to help developers adapt applications more easily.
While much excitement surround the potential for Apple’s entry into the AR/VR world, we believe if Apple is serious about the category as a major product line, it will take a considerable amount of time and product iterations to come up with what would be a practical AR/VR product.  With the category still in its infancy, and a trail of relatively unsuccessful products from other companies in its wake, we expect Apple to tread slowly and carefully, leaving as much time as necessary to its product development team before releasing even an early model, as this first iteration would be. 
To us, the real question is will the first release be an actual consumer oriented product or one designed to give app developers a platform on which to develop AR/VR content that would take advantage of the feature set that Apple will include in the reality OS, that will set it apart from others and allow Apple to create another proprietary ‘world’ of Apple AR/VR products to maintain a loyal customers base.  Apple’s delay (should that be the case) should not be looked at as a negative but more of an attempt to get their first product reveal as close to a practical product as possible.
While Apple has never been a technology leader in the sense of rushing to market with technological advances, their customer base seems to rely on them to make sure a technology is stable and benefits the user before they begin to capitalize on the trend.  This was quite apparent with Apple’s adoption of small panel OLED display technology which first appeared on the iPhone X in late 2017, over 10 years after the technology was used in early smartphones. 
We expect Apple is in no rush to jump start it AR/VR effort until it meets at least three goals.  First it needs to be technologically sound and reliable, second, it needs to serve a valid and practical purpose, and third it needs to be ‘cool’ looking, so postponing a potential release until issues are resolved would satisfy the first goal, allowing developers a physical and software development platform on which to work, could satisfy the second goal, while the 3rd will likely take a release that Apple might not consider ‘the actual product’ until it is able to apply its unique design qualities to make AR/VR its own.  We are not making excuses for a potential delay, but applying many of Apple’s historic principles to a new product line.  Maybe Apple will reveal all today and will prove us to have overthought the situation, but the company thinks differently than most.