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Intel's Augmented Reality Plan: Vuzix

Summary

Virtual Reality is going to be huge, augmented reality is going to be even bigger.

With backing from Intel, and large customers sampling, Vuzix stands to be a contender.

Expect the company to shift focus squarely to the enterprise customer.

The next 12 months will determine the company’s success.

Thesis: Virtual reality and augmented reality are going to be huge markets. Intel (NASDAQ:INTC) is desperate to be a player in this arena and one of their biggest bets is an investment in a company hyper-focused on this space, Vuzix (NASDAQ:VUZI).

Virtual reality is getting the press, but augmented reality is where it's at

When Facebook bought Oculus Rift for $2 billion in 2014, it marked a sea change for the virtual and augmented reality industries. Most people knew that, like graphene and robotics, virtual reality ("VR") was a thing of the future. A near certainty to occur, with timing being the issue. However, the landmark acquisition caused a total reset in investor attitudes toward VR. Virtual reality went from being the future to being a must-have current investment for any technology company focused on the consumer.

"The number of VR companies that we saw before late 2014 was very limited," said investor Mike Rothenberg of Rothenberg Ventures, "If Oculus is acquired and now you know it has the backing of Facebook and it's definitely going to come to market, that definitely de-risks (potential investments). You want to know the ecosystem is happening."

As you can see from the chart above, investment in the VR and AR (augmented reality) space has been booming. And these are not small players or strictly venture capitalists looking to develop a new market. Instead, a look at the landscape now in this space reveals a true "who's who" of the tech world. According to Goldman Sachs, the seven firms best positioned to benefit from virtual reality and augmented reality are the following: GoPro (NASDAQ:GPRO), Facebook (NASDAQ:FB), Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL), Microsoft (NASDAQ:MSFT), Advanced Micro Devices (NASDAQ:AMD), Samsung (OTC:SSNLF) and Sony (NYSE:SNE).

Big names, big money…the virtual reality space is happening. However, I believe that there are several reasons investors should ignore the hype and pay less attention to VR, instead focusing on augmented reality.

The first reason to focus on AR over VR is the end user. Augmented reality is coming to market with products focused on the enterprise customer. Products in this area are productivity enhancers - imagine DHL employees scanning boxes and recording deliveries all from a headset that fits like glasses. They now have two hands free, don't need to take a scanner from their belt, and their ability to move and deliver items has just increased dramatically.

From a market standpoint, selling to enterprise firms like DHL is much preferable to selling to the consumer market. You have one buyer that can order many thousands of units. A buyer that will return to you for replacements and upgrades. And a buyer that is not a trend chaser.

This is opposed to VR where the end customer is, quite likely, a teenager or gen-xer. Buyers who are going to be more concerned on looks and millisecond latency of the hardware on the platform than something like raw functionality and productivity enhancement.

The ability to control the end product is a second reason for AR to succeed over VR. If you remember the early days of the X-Box, Microsoft's sales were suffering from a lack of developers producing games for their platform. VR manufacturers will always be subject to product cycles and fickle consumers chasing hot games. Augmented reality developers need only be concerned on acquiring and then keeping enterprise customers - a much stickier market.

"Virtual reality is about to go mainstream, but a lack of content threatens to hold it back," - Tony Scherba, TechCrunch.com, April 3, 2016.

In order for a market to take off, there has to be a reason for users to want to use the product. Virtual reality might sound like a neat idea (which it totally is), but until there is a significant increase in the number of developers producing quality content, there is not going to be a compelling reason for consumers to get all excited about plunking down a thousand dollars or more on a device. This is not the case with AR, as an enterprise only requires one application to be run on a device to make it beneficial. Thus, the enterprise market for augmented reality should accelerate past the consumer focused virtual reality market.

The final reason for investing in AR over VR is in the applicability of the product. Virtual reality immerses users in a new world. Picture your teenager alone in their bedroom with a total immersion headset, blocking out the real world while jumping around and shooting aliens. It might be the best gaming environment, but it certainly isn't social and won't be happening anywhere beyond private locations.

On the other hand, it is very easy to imagine oneself wearing a pair of glasses that contain your cell phone. The lens of the glasses provides you with all the functionality of a smartphone - email, text, calling, directions…etc. Suddenly, by simply wearing a stylish pair of shades, you have complete access to your personal digital assistant, with the added benefit of never butt-dialing anyone again.

It's the pure functionality and usefulness of augmented reality that gives it a significant advantage over virtual reality. As the chart below shows, analysts agree that AR will be the larger market.

This is a nascent industry just in its infancy. And, there certainly is room for lots of competitors to take a share of the market as it develops. With the right backing (deep pockets, strong technology platform) some companies are going to make a killing.

Intel missed mobile, they don't want to miss AR/VR

When looking at the previous list of players in the AR/VR arena, a strong combination of both hardware and software companies are present. These are all powerhouses in their fields and, collectively, would make life very...


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