Train­ing Chi­nese eyes on al­ter­nate re­al­i­ties

▶ They’re spend­ing big, not on head­sets but on con­tent ▶ “China’s VR in­dus­try at this point … lacks core tech­nol­ogy”

Bloomberg Businessweek (North America) - - Contents - Edited by Dim­i­tra Kessenides Bloomberg.com

Hip-hop dancers, mil­i­tary marchers, and dare­dev­ils in winged suits are bring­ing China’s in­ter­net ti­tans into the world of vir­tual re­al­ity. The video stars are cen­tral play­ers in a $1.1 bil­lion global VR spend­ing spree by Alibaba Group Hold­ing, Ten­cent Hold­ings, and Baidu.

The three are tak­ing a dif­fer­ent ap­proach to the vir­tual-re­al­ity busi­ness from their over­seas com­peti­tors. In­stead of build­ing head­sets like Sony, Face­book, and HTC, the Chi­nese com­pa­nies are po­si­tion­ing them­selves as mid­dle­men: seed­ing startups and open­ing their plat­forms to con­tent and hard­ware de­vel­op­ers while they wait for a dom­i­nant head­set to emerge.

All three “want to fo­cus on cre­at­ing plat­form and con­tent,” says Ricky Lin, a Bei­jing-based an­a­lyst at Ire­search. “The is­sue fac­ing China’s VR in­dus­try at this point is that it lacks core tech­nol­ogy, so they need to hedge their bets.”

Baidu, Alibaba, and Ten­cent have a com­bined mar­ket cap­i­tal­iza­tion larger than Is­rael’s gross do­mes­tic prod­uct, and they serve 688 mil­lion in­ter­net users in China. Now they’re try­ing to get ahead in a do­mes­tic VR mar­ket ex­pected to reach 55 bil­lion yuan ($8.4 bil­lion) in value within four years, from 1.5 bil­lion yuan last year, ac­cord­ing to Guangzhou-based ii­me­dia Re­search. Iqiyi.com, a Bei­jing-based unit of Baidu de­vel­op­ing con­tent and hard­ware, says at least 200 startups are work­ing in China’s VR in­dus­try.

“A lot of peo­ple think this in­dus­try will ma­ture fast with the push of cap­i­tal and me­dia,” says Duan Youqiao, who over­sees Iqiyi’s de­vel­op­ment of a VR con­tent plat­form.

Im­mer­sive video and game ap­pli­ca­tions could be the first VR busi­nesses to ma­ture. VR con­tent dis­tri­bu­tion will rely heav­ily on stream­ing; about 504 mil­lion view­ers reg­u­larly use stream­ing sites, ac­cord­ing to China’s Min­istry of In­dus­try and In­for­ma­tion Tech­nol­ogy. Iqiyi is ex­per­i­ment­ing with stream­ing live con­certs. It wants to build the largest Chi­nese-lan­guage VR ser­vice and says the key to that will be an app suite mak­ing movies and games com­pat­i­ble with any head-mounted de­vice. “VR will be­come Iqiyi’s main busi­ness,” says Duan.

Alibaba, China’s big­gest e-com­merce com­pany, is de­vel­op­ing Vr-en­hanced shop­ping for its 400 mil­lion users. The Hangzhou-based em­po­rium has cre­ated 3D ren­der­ings of hun­dreds of prod­ucts and will is­sue stan­dards for mer­chants to cre­ate their own Vr-en­abled shop­ping op­tions.

Alibaba set up Gnomemagic Lab, named af­ter char­ac­ters from World of Warcraft, to cre­ate con­tent with its video stream­ing unit, Youku Tu­dou, and Alibaba Pic­tures Group. It’s also in­vested in Magic Leap, which prom­ises a head­set that su­per­im­poses images on the real world.

Ten­cent, whose Wechat and QQ in­stant-mes­sag­ing ser­vices have more than 1 bil­lion users com­bined, is in­creas­ing spend­ing on videos, games, and anime to keep cus­tomers en­gaged.

Orig­i­nal Force, a Ten­cent-backed com­pany spe­cial­iz­ing in com­put­er­gen­er­ated con­tent, is work­ing on VR movies. Orig­i­nal Force is also an in­vestor in Florida-based Pulse Evo­lu­tion, which cre­ated con­cert holo­grams of Michael Jackson and Tu­pac Shakur.

“The VR in­dus­try will change the way peo­ple en­gage in en­ter­tain­ment,” says Iqiyi’s Duan. “VR in the fu­ture could be a much larger in­dus­try than we imag­ine.”

The bot­tom line China’s do­mes­tic vir­tual-re­al­ity mar­ket is ex­pected to grow to $8.4 bil­lion in the next four years, from $229 mil­lion in 2015.

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