Facebook, Google, Others Look to Benefit as Virtual Reality Starts to Resurface

NEW YORK (TheStreet) -- Since the 1990's, virtual reality has been a much-hyped and equally stalled technical dream rather than a revenue-generating promise. But as the space begins to take shape, thanks to companies such as Facebook (FB), Google (GOOG) (GOOGL) and others, there is one question for investors: which technology and which company will make it big?

Virtual reality consulting company KZero is mapping the several prominent augmented reality and augmented virtuality projects that have started to surface. For now, the technology is still in development, and whatever revenue streams are beginning to trickle in are from limited developer releases rather than from consumer retail sales or enterprise applications.

Facebook (FB) recently announced that it has created a fully featured "avatar" mapped to users' facial features via cameras and its Oculus Rift headset. The company spent $2 billion to buy Oculus -- a head-mounted VR device which almost single-handedly jump-started the industry.

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Virtual reality allows the brain to believe a computer generated world is real, using optical and other sensory stimulation. Augmented reality and augmented virtuality are a bit different.

Augmented reality is a way to see the real world, albeit enhanced with computer imagery. Special effects in movies, including animated characters interacting with "real" backdrops or even people, are the most common forms of the technology today. By contrast, augmented virtuality can insert images of real people into a virtual world where they interact with each other and their cyber surroundings.

After two decades of mobile device and software development, and with sturdier infrastructure, virtual reality is finally moving forward this year, and quickly.

According to KZero's latest report, "Consumer Virtual Reality State of the Market," both VR hardware and software sales will be worth $5.2 billion in the next three years. Andreessen Horowitz, a Silicon Valley-based venture capital firm with $4.2 billion under management, calls VR the top technology to watch this year.

Facebook is not alone in making an investment in VR.

Google has just unveiled a project in development. Its Jump platform is now testing goggles made out of cardboard. AR and AV products are also in development at Sony (SNE), Microsoft (MSFT) and Nintendo (NTDOY). Samsung's (SSNLF) wireless gear also positions the company as an early leader in the mobile space.

Yet for all the projects now available in developer release, this is still an industry that is feeling its way.

"The truth is that VR is overhyped," said Brian Blau, research director of mobile and wireless consumer technologies at Gartner. "Investors need to think of VR as a new platform and one that will require significant nurturing before the rewards will be discovered, and this applies to a large or small company," he said.

Issues of format and interoperability -- not to mention user acceptance -- recall other tech battles like that of Betamax vs. VHS or progressive vs. interlaced high definition. These issues are expected to play a large role in defining winners and losers.

This year, the largest investments in both hardware and software are being made by larger Internet and computer firms that are already household names.

"It's companies like Samsung, Oculus and Microsoft who have the most to lose if they don't create a defendable technology platform and ecosystem," said Blau. "The market is theirs for the taking. The level of investment will need to match the level of ecosystem market share they want to capture."

Right now it also appears that Facebook and Google might be following similar paths to monetization, no matter how much money Facebook paid for Oculus.

"The Facebook side of the company is focused on user data and an app ecosystem that reaches and connects the world together," said Blau. "For now, Oculus needs to build that device business with partners like Samsung, as they can't produce the components themselves. The competition may not be with companies like Samsung, but Valve or Sony."

The reality of the matter, virtual or not, is that "it's still too early to tell who will own or dominate the space," according to Rebecca Lieb, digital advertising and media industry analyst at Altimeter.

"There are other platforms in development," said Lieb. "Oculus Rift, with the hefty investment from Facebook, might enjoy first mover advantage -- or be disadvantaged by high expectations but low adoption. It remains to be seen. There isn't a product out there yet."

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