THE HTC Vive is a virtual reality system created through a partnership between Valve  (one of the PC industries leading game developers) and HTC (a hardware manufacturer, focusing on phones and tablets). The device is quite similar to the better known Oculus Rift (owned by Facebook) in multiple ways: both devices require a tethering to the PC, are more expensive than traditional consoles, and even look quite similar. However, the key area in which these two devices are different is the software company that is backing each: Facebook in the case of Oculus and Valve in the case of the Vive . While Facebook is an incredibly well funded backer with some experience in gaming, I believe HTC and Valve is better suited to make a virtual reality system suited for mass use in PC gaming as it blends the experience of an actual hardware maker with that of an actual game developer. That being said, I feel that both systems are effectively fighting an uphill battle in the near term, as costs are way too high relative to the benefit that virtual reality brings to the gaming world in its current form. In this post, I will first analyze the business model of the Vive and discuss how it will create and capture value, next I will discuss several important trends that have swept the PC gaming industry over the past 3-5 years, and finally make a set of recommendations that I believe Valve and HTC should consider to maximize the success of their new system. 
Business Model of the Vive: Value creation and capture
Virtual reality has potential to disrupt the gaming industry as it offers an immersive experience that allows users to feel like they are actually “in” the game, rather than playing something on a screen. The HTC Vive creates value for the end consumer by serving as the hardware for V/R designed games to function. Users who purchase the device (and who have a PC that meets the required specifications) will be able to run any VR game compatible on the platform. The graphics are competitive compared to other gaming consoles, though limited by the specs on the computer the system is linked to, the device is supposedly quite comfortable (though I have doubts about how comfortable any VR set is to wear for more than an hour or two), and has an unique safety feature where a camera detects furniture and walls near the user and alert them to prevent a collision. 
The Vive creates value for game developers by establishing a mechanism for their games to be played and a set of standards to adhere to throughout the design process. Additionally, developers can list games on the Steam store, owned by Valve, to get immediate access to a pool of millions of gamers.
The Vive captures value in two main ways: through direct sales of the device and from royalties from developers on games that are purchased. The Vive currently costs around $800 to purchase, and unlike many other expensive consoles that lose money on direct sales, HTC makes a profit on each Vive sold (though I could not find what the margin is). Additionally, the company collects a royalty of approximately 30% on every title sold through the Steam Store to be played on the Vive. With favorable economics, the Vive can serve as a money maker for both HTC and Valve even if “mass adoption” does not occur. 
Overview of recent trends in PC gaming
I believe that by recognizing recent trends that have swept over the PC gaming industry over the past five years, Valve and HTC can take action today to improve the market potential of the Vive into the future. There are three major trends that I have identified:
1) A shift away from “immersion” style games to highly competitive online multiplayer games – While a lot of games have historically been fun because the user puts him or herself in the position of the protagonist and feels “immersed” in the game, recently games have shifted to be more about the actual competitive aspect. League of Legends, Hearthstone, Dota 2, CS:GO, and Day Z are all games that revolve around users playing the same game over and over, but have blown up in popularity due to the replay ability created by facing human opponents online. All of these titles have millions of users that often log hundreds of hours each month playing against other players, and few of them can actually port well to a virtual reality environment (as they are, with the exception of counter strike, third person games where it wouldn’t make sense to view the game from one characters eyes) 
2) A dramatic increase in demand for watching other players play via streams on Twitch – More than I would have ever thought possible, there is currently enormous demand for watching people play videogames (in part due to the increased competitive nature, as players are constantly looking to understand how to improve in their game of choice). Twitch was bought by Amazon for just under 1 billion dollars in response to this trend.
3) A focus on “free to play” and “cheap to play” models that are monetized through micro-transactions – Part of the way new titles like “league of legends” were able to gain such massive player bases was that they are dropping the old “pay to play” model for a “free to play” one where anyone can download their game for free. These games are usually monetized by in game micro transactions. Generally speaking, the most popular games are also do not have the “best” graphics, which allows pretty much anyone who owns a laptop to participate without spending $ on a decked out gaming PC that can cost thousands of dollars. This is important because PC gamers are becoming increasingly resistant to the idea of shelling out large amounts of money to play games. 
My recommendations to HTC/Valve
- Think critically about how to integrate your platform with Twitch. Twitch is increasingly becoming the means that gamers learn of new titles and products and can serve as an incredible medium for demonstrating how much fun this system is for users. Consider partnering with popular streamers on Twitch to play your new system live in front of hundreds of thousands of players to generate demand for it.
- Either develop (through Valve) or partner with a developer to create a competitive online game that benefits from the immersion aspect of virtual reality. First person shooters seem like the perfect fit, and perhaps a virtual reality version of Valve’s incredibly popular “counter strike” series could be a great way to merge competitive gaming with virtual reality. Titles with infinite replay ability through competition could serve to generate huge demand for the Vive.
- This isn’t exactly rocket science, but the price of the Vive needs to drop if mass adoption is to ever occur. At $800, it is simply too expensive for the vast majority of gamers to justify purchasing the Vive, no matter how cool they may find the technology. I was almost surprised when I read that the Vive is profitable – it seems like the company would be much better off losing money on each console to generate mass adoption, and then making the money back through royalties
- Come up with better ways to make the Vive more social. Perhaps my biggest concern with the Vive and virtual reality in general is that it is extremely centered around the person using the headset, which is inherently anti-social as it blocks out other people in the room from one’s vision while simultaneously making it very hard for someone sitting on the couch next to you to understand what you are experiencing, as they aren’t wearing the headset.
While I am generally bearish on V/R when it comes to gaming in the short term, I believe that if HTC/Valve follow these recommendations, they will be well suited to form a profitable niche in the gaming world that can potentially be rolled out to the masses if they can get the cost of the system down in the future.