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Virtual Reality Is Killing Arcades In China

Over the last couple of years, we’ve seen a plethora of news articles about how virtual reality was going to save the classic arcade. The theory goes that the VR equipment is too expensive for home users, so it creates an opportunity for operators to pony up the big bucks to buy it and then make their money back by charging per game to play it. Even Nolan Bushnell, the inventor of Pong, is trying to hype the technology as the industry’s savior. From the MIT Technology Review.

“While several high-end headsets were released last year that can bring virtual-reality experiences to your living room, adoption of the technology is still in its earliest days for a bunch of reasons—it’s still bulky, expensive, and there isn’t all that much to do once you’ve got it on your face. More than two million headsets were shipped worldwide in 2016, according to an estimate from market researcher Canalys, but this figure pales in comparison to the popularity of, say, video game consoles (sales of the leading one, Sony’s PS4, topped six million during the 2016 holiday season alone). Consumer virtual reality will likely catch on as prices come down and headsets improve. In the meantime, though, a number of companies are betting that consumers may be happy to pay a much smaller amount to try the technology with their friends at, say, an arcade, theme park, or bowling alley.”

It’s tempting to fall into this trap, but from an operator’s perspective VR is a terrible deal. Operators are being asked to pay top dollar for technology that is all but guaranteed to plummet in value over the very short term. Other than buying a brand new car and driving it a mile, I can’t think of a way that you could lose money faster between what you pay and what you’ll be able to get for it down the road.

Another limitation for operators is that while you may be able to provide a room for VR people to wander around in today, as new VR tech is unveiled, we’re going to see the stage expanded from 100 square feet to the entire world. Instead of viewing just the games in your headset, you’ll see the real world with game play overlayed. Kids can go to the park and relive the knights of the round table or parking garages to shoot aliens. As the tech allows more real world places to be explored, it’s going to make a cramped arcade seem pretty lame in comparison.

VR is already heading for mass market acceptance, but it’s demand isn’t being driven by gamers who want to pay big buck to play video games, but like the BETAMAX that came before it, by people who want to watch pornography in their homes.

Even if an operator can make a little bit of money for the next few years, once VR achieves critical mass, it will crush whatever revenue stream that operators are dreaming of. Don’t believe me? Just check out what is happening in China.

Last year, an eye popping 35,000 virtual reality arcades opened up in China. A year later 22,000 of them have closed.

That is an incredible failure rate over such a short period of time and one that should serve as a sharp warning to anyone considering investing in the VR games. Maybe Dave and Busters can afford to take losses on the games longer than Chinese startup arcades, but I doubt that most North American operators are going to fare much better using the tech in their game rooms and will only end up in debt at the end of the day.

The problem essentially boils down to consumers not being willing to pay a premium for the experience. Tech In Asia, describes the problem perfectly in their article, on the Chinese VR boom and bust.

“Enterprising store owners leaping into VR are finding it impossible to charge fees comparable to cinemas or bowling alleys for a VR experience. One VR arcade owner told iHeima that he saw eager queues when charging US$1.50 for a 30-minute session, but everyone vanished when it rose to US$5. From that kind of revenue it’s impossible to pay the rent.”

Even if the game was sold out all day, at $1.50 per half hour they are only earning $30 a day. With retail rents in North America running $1 – $2 a square foot, there’s no way to make the math work, even if you assume that Americans will pay more to play the games.

The real world data streaming in from China should serve as a canary in the quarter mines of North America. Operators who spend large amounts of money on elaborate VR setups will soon find their small VR rooms being replaced by the entire world as a stage. As the setups get cheaper, smaller and more portable, the virtual arcades will seem more expensive, bulky and limited. I’d love to be proven wrong on this one, but I think the arcade VR trend is more hype than hope.