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Reality bites for China's VR industry

Most businesses struggling to make profits in saturated market

Despite the initial excitement, many VR businesses are already struggling. (Photo by Mariko Tai).

BEIJING -- Virtual Reality has taken China by storm with thousands of arcade shops and headset startups scrambling into the industry, aiming to reap the rewards from what was once called the nation's "next big thing." However, in many cases they are already tasting the bitter reality of no profits, and even bankruptcy.

The findings are from research by Hubei Century Network Technology, a Chinese video game platform provider based in the central province of Hubei. Based on surveys and discussions with 3,000 VR arcades shops across China, the research found only 26% were making a profit. Profit contributions from VR itself were almost non-existent even among the profitable businesses, and many were using other services, like food and beverages catering, to offset losses.

VR-value, an information provider to the industry, unveiled similar findings on China's microblogging site Weibo. Of 35,000 VR arcade shops which opened last year across China, only 20% are making profits, according to VR-value. Government-owned media outlet also recently reported that 90% of VR startups have declared bankruptcy.

The situation is very different from a year ago when many startups were expecting a bright future. The industry was projected to grow almost tenfold between 2016 and 2020, according to Internet consultancy iiMedia Research Group, and many entered the market dreaming of success.

But most are now being compelled to revise their rosy projections. Zhang Yue, chief executive and chief technology officer at VR experience shop Meteorite in Beijing, is one of them. "Our original plan to expand into three more cities this year has been tangled up in investor concern," he said. It was just April last year when he opened the Beijing shop with his investors, at a cost of roughly 3 million yuan ($437,000).

At Meteorite, most customers only come once or twice at the most, said Zhang. Although profitability has not been the top priority for them, Zhang and his investors are now focusing more on studying the VR business and its development at the Beijing branch.

The harsh reality of the VR industry was "not too surprising," said Zhang. "Last year, many rushed to enter the VR industry blindly without understanding much about its technology or establishing a sufficient business model."

Not dead and buried

But it is too early to conclude that the VR business in China will soon be dead and buried. It is rather at an early stage of the development cycle for new technology, according to Skye Chen, an investment analyst at CL Securities Taiwan.

Despite explosive growth last year, "this year is a pause year for new technology development, most likely a wireless headset or improvement in the smartphone sector," she said. Although this year's slow growth is within expectations, the VR business is perhaps not best-suited for smaller companies, she said. "VR experience requires more than just a good headset. It is a combination of the latest Artificial Intelligence-related technologies, software, in addition to having a complete eco-system and content." It is often hard for smaller companies to bring all these resources together, she added.

It is the bigger, better-resourced companies which will most likely reap the industry's rewards, Chen believes.

Such companies are not taking back their bets on the business. The nation's leading internet search engine Baidu announced on Tuesday, through its investment arm Baidu Ventures, its participation in a $27 million investment round for U.S. based VR and augmented-reality company 8i. Baidu said it will cooperate with 8i in future VR product development.

For iQIYI, Baidu's video streaming affiliate, "VR is still one of the biggest focuses of our business," the company said on Friday. It has distributed a series of VR content elements on its platform and "response has been very good," the company said. Looking ahead, iQIYI plans to roll out its first VR headset at the end of next month, and is also launching VR video games for smartphones.

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