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There are a lot of innovative models happening in the Chinese market; It’s not only about the market size, nor about the platforms, but also new business models that can be explored
Ryan Wang is the co-founder and general partner of China and San Francisco-based venture capital firm, Outpost VC. He recently presented on VR in China at the Silicon Valley Virtual Reality convention in San Jose, California, where he talked about what’s happening with virtual reality in China, his bets on the region, and why the US and China need each other in our new reality. This is an edited transcription of his presentation.
A quick history of VR in China
The VR boom starts in China roughly around Q3 2016. The VR companies and VR revolution in China are actually happening in some kind of pattern. For example, in Q3 2016, the start of VR in China, there are a number of companies from Shenzhen that manufactured cardboard like products and ship it worldwide. When we come to Q4 in 2016, there are a lot of VR headset makers trying to understand what’s happening with the Oculus SDK2 and they’re trying to ship a similar product.
Between Q1 and Q2 of 2016 in China, 360 video became extremely hot in China. It’s the hottest sector for startups and for public companies to make investments in. In Q3, a lot of companies are working on some kind of VR content, and in Q4, a lot of companies are switching from the content creation space to the B2B solution space.
Today, we are looking at fully booming VR ecosystem in China.
Why mass adoption will happen in China first
We talk a lot about how Chinese companies are copying business models in the US, but more and more, we talk more about copy by the US instead of copy by China. I try to learn a lot about US model innovation in China, so during my last trip to China, I actually visited 20+ cities. You can’t always stay in Tier 1 cities. Sometimes, you need to go to Tier 2, Tier 3, Tier 4 cities, or even some rural areas, to really understand what is the situation — who are the customers, and what they do.
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They put the whole VR solution in this truck. They drive this truck to the rural areas in China. They offer the villagers in these rural areas — people who have never heard about VR, who have never tried a VR experience — they charge them 50 to 100 RMB (US$7.25 to 14.50) so that they can have their once in a lifetime VR experience.
This type of experience to us is OK, but to them, it’s awesome. They all get so excited to try it, even though it’s not cheap for them. When I show this picture, a lot of people say “this type of business model is not very sustainable,” but the reality is, if you have to question it, you’re underestimating the population in China.
VR Arcades in China will be the main driver for adoption
At this point, there are over 10,000 VR arcades in China. One of the counterintuitive facts here is that 60 per cent of customers are actually female customers. Over 70 per centof arcades are operating at a loss at this point.
The worse thing is no industry standard has been established.
Business leaders are working very hard to set up the industry standard. We’re actually working with a few of the top companies in the VR arcade space to talk about how we can set up a dedicated distribution channel to import some high-quality foreign content to distribute to VR arcades in China.
That’s why I think it’s still a great opportunity, although from the data, it doesn’t look very good. The biggest challenge for the industry is not that we don’t have a big enough installation base. Right now, we have 5 million plus headsets out there. That’s not a big number, but at the same time, that’s not a small number. The biggest problem at this point is that there are no real VR users.
For me, I have all the toys at home, but I don’t spend a long time in VR every day. By the end of the year, there could be a group of people who actually spend two to three hours in VR every day. These types of people will be the true VR users, will be the real VR users — and that’s going to give a lot of hope to the industry. The the first group of adopters for virtual reality, most likely in China, is going to come from the VR arcades.
Culture matters
We all know that at the end of the day, China will be the biggest market. At this point, only a few people are aware that right now, VR has actually been adopted faster in China, and most likely, adoption is going to happen faster in China than the US.
To understand this, you need to have a pretty good understanding of the social structure, the culture, and people’s entire way up there. Over the years I’ve formed a thesis.
Number one, when we look at who is driving the ecosystem, in the US its Facebook, Google, Apple … all the big tech companies. In China, we not only have Alibaba, Tencent, Baidu, Huawei, Xiaomi – these kinds of leading tech companies – we also have the government. The most important driver is that China is a government led society and right now, the Chinese government is pushing virtual reality. They are trying to push the adoption of this technology and stimulate the ecosystem so that it happens faster.
Secondly, if we look at the equation from the consumer side, consumers in the US have a different mindset compared to consumers in China. In the US, people find that new technology is not often times good. It’s not super easy to use, it’s not very affordable, so it’s not adopted. They say “hey, let’s wait until its good enough.” But in China, people are not happy with what they have today. They have a more adapting mindset. If something is slightly better, most likely they’re waiting to try it and they are waiting to use it. There’s a huge difference between the consumer mindset.
Also, the infrastructure for VR is different. China is a purely mobile first market and the biggest mobile market. Mass consumer adoption of VR is going to happen with mobile VR. China will definitely have a unique advantage in that case.
It’s pretty clear to us the US is driving technology in the VR/AR space, but in terms of consumer adoption, China is leading.
What he would tell VR AR companies and investors
If we look at how the PC, internet, and mobile were adopted, we see the US had their own ecosystem, and then China started catching up. But for the VR AR industry, the situation is going to be different. It’s going to be a globalised adoption of VR and AR. The ecosystem is going to be global. So again, the US will be driving technology and China will be driving adoption. The speed of the circle is going to depend on how much capital is injected into this sector.
It doesn’t make sense when you go out and just talk about product-market fit. It doesn’t make sense when you talk about go to market strategy because the VR market at this point is so small that it’s kind of meaningless to talk about.
What’s more important is to understand which market is going to happen faster, and which market is going to be bigger. In the traditional start-up financing model in the US, we know that it’s super hard for any startup to break into a foreign market. They’ve all been a bit big — Series B, Series C type companies — so they have enough resources and bandwidth to think about going into a foreign market.
But we think that it’s really critical for VR/AR companies to build an early presence in China to get awareness for what’s going on. We’re saying, “Hey, you need to evaluate your business from day 1. You have to understand what’s going on. You have to know who are your peers. You need to be sensitive and have an awareness of the opportunity, and do something if you have what it takes to connect the dots.”
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Right now, the industry is facing a bigger challenge. What we really need is something that can bring the China VR community and the US VR community together. I’d like to leave this as an open question to you guys and would like to talk to anyone that has any ideas.
VR education will put headsets in more households
There are many differences in the education system in the US vs China. In the US, it’s more distributed, but in China, it’s more centralised. At the center of the system is the government. It’s always easier for any new technology to penetrate into a centralised system rather than a distributed system.
The other thing is there are more students in China than anywhere else in the world, but another reality is that Chinese parents care a lot about their kids’ education, and they are willing to spend money. On average, a Chinese household is spending 20 per cent of their household income on their kid’s education. In the US, that number is less than 5 per cent. It’s not only a big market; it’s going to drive adoption very quickly.
It’s very likely that the mass-market adoption of VR is going to happen with the VR education market in China. For the parents, if they say, “My kid’s friend – they all have VR headsets in their homes, but my kid doesn’t have a VR headset in my home, so I’ve got to buy one. No matter whether it’s effective or not, I can’t let my kid fall behind.” It’s a great way to introduce VR headsets to the families in China.
Right now, the US is the center of tech innovation. In a couple years, that’s all going to change
There are different ways it can happen. It could be technology IP, it could be content IP, it could be the content itself, or it could be some kind of software partner. Even if we can stick to the next steps, due to inflation and strong regulations, it’s harder and harder for Chinese money to leave China.
China is going to attract more talent from the US to move to China to boost the local high-tech scene in China. It’s not only about content, technology IP, content IP, software IP – it’s also about talent.
That will be the flow. Top talent in the industry will go from the US to China. They are working in the Chinese VR ecosystem. They are delivering high-quality stuff to the China market first.
In China, we’re at a stage where all the platforms have been set up, all the distribution channels have been set up, and the frame of the ecosystem has been built up. But in terms of quality of the content, the quality of the software … It’s not really there yet.
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The leading technology and the leading content [in the US].These guys don’t have a market to go to. They have the key stuff but they can’t commercialise it. But for these guys [Chinese companies], they have all the channels to commercialise, they have the market ready, but they don’t have the high-quality content.
There are a lot of innovative models happening in the Chinese market, as well. It’s not only about the market size; it’s not only about the platforms, but also new business models can be explored. For these new business models, some make sense for the US market. For those, it will be a copy to the US procedure, and people in the US are going to learn what’s going to happen in China, and they’re going to fight to create this similar market base in the US as well.
Actual money can be made from the domestic market. This kind of money can be reinvested into further R&D of the technology. This will help the whole ecosystem.
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