5 Business Models for XR in The Next 5 Years

In a previous article, we discussed why paid VR content is already dead. Over the next 5 years, XR content creators will need to adopt alternative business models to monetize an increasingly more mainstream audience, less willing to pay upfront for XR content. The same transition took place on the mobile market over the last decade. Today, in terms of revenue, paid mobile apps account for less than 4% of the global app market.

Similarly, in 2019 only 18% of VR apps were free to play. This number will increase to 80% by 2030. If you are a XR content creator planning a series of new titles over the next couple of years, you need to be smart about monetization. Releasing a paid VR or AR app is not a great way to prepare to scale and execute on a 5-year vision.

In other words, want to build a killer app? Go freemium and explore alternative business models – this is the best way to prepare you for success by 2025. In this article, we review 5 alternative sources of revenue for your VR apps, illustrated by examples of companies that have used them successfully.

Paid extensions
Granted, this one is very similar to paid content, with a major twist: the app is initially distributed free in the store to get feedback and get users familiarised with the content. As interest builds up, paid extension are released for users to access more content or new levels.

This ‘try before you buy’ approach works by getting users to discover content for free before deciding if they want to commit to it. With clever mechanics, it can incentivize users to pay to keep playing or to keep their collectables.

Antu Kananen, CEO or Koukoi Games, successfully experimented with this for their title ‘Cave Digger’, generating more downloads upon launch that they would have with a paid title, and monetizing their hardcore users later on, incorprating their early feedback. The studio is now following this approach for two new games.

Subscriptions
Viveport pioneered the subscription model by opening a ‘Netflix for VR’: $99 a year for access to over 600 titles at no extra charge. It includes a free trial too. 

Following the Netflix or Spotify model, subscriptions are popular for content that is consumed regularly. However, it still requires a strong financial commitment, therefore will mainly be adopted by existing hardore users who see it more beneficial than paying for apps individually, rather than helping new users discover content for free. Over time, multiple services are likely to compete on content and try to differentiate via exclusives releases. 

In-app purchases
With 70% of mobile games revenue coming from in-app purchases, it is clear that this model was to be replicated in XR. Pokemon GO has raked over $2B in revenue from virtual goods and upgrades that can be purchased through the app. In VR, virtual collectibles will no doubt become very popular.

However, this requires a critical mass of players, as less than 2% of users normally end up paying for upgrades – the ‘whales’. E-sport platform Fortnite is an outlier here, with a reported 70% of its users have spent money on the platform.

In addition, in-app purchases generally require a strong in-app economy to incentivize users to constantly spend their purchases, which is hard to put in place and requires dedicated resources to design.

Marketplaces
In 2016, Mark Zuckerberg said that VR would become the most social platform yet. We’re not quite there yet, but once people are able to communicate in virtual worlds with limited friction, they’ll also be able to do business and buy/sell virtual goods to each other. As a content creator, you can take a commission in the middle for facilitating that transaction.

This might sound farfetched, but VR world Somnium Space is already doing it. Currently, they sell virtual land in their VR world, that users can purchase via cryptocurrency to build upon, or sell to each other. Over the last 12 months, they have processed $400,000 worth of transactions. Land price has increased by 3x and Somnium’s ARPU (Average Revenue per User) is close to $1000, which is about 2000x higher than the industry average!

The virtual goods industry is expected to reach $180B by 2025. As more and more people adopt headsets, VR marketplaces will take a share of that growing market and become a sustainable revenue channel for developers

Advertising
Advertising is an obvious channel, powering websites since the early days on the Internet, and over 30% of mobile games revenue. It is the only channel to monetize the long tail of a userbase (often up to 98% of the users) who are not willing to spend any money. But old school intrusive advertising, such as popup banners or interstitials will not work in immersive environments.

Indeed, breaking immersion in XR will ruin the user experience, so the industry needs an advertising model that puts the end-user first. Fortunately, this is what my company Admix has been working on for the last 2 years. We developed a Unity plugin enabling content creators to identify areas of their content that will be sold to advertisers: a billboard in a street, a video on a screen and even a 3D area for product placements.

We then sell this ‘virtual estate’ to a wide network of advertisers, fully programmatically. The result is a seamless, highly contextual experience for users: a sports brand could take over a football stadium’s billboards, which makes it totally native and non-intrusive since the ads are within the content.

In our first year trading in 2018, we have served close to 1B ads in over 100 apps, with top developers generating $50k a month in revenue. The non-intrusiveness of the medium means that content creators can place more ads, which increases their revenue without affecting user retention.

Takeaway
The key to a successful monetization strategy is to understand your players and combine the above models to get the most out of your userbase. Fortnite has done this very successfully, by combining a strong in-app economy with subscriptions and extra paid content packages, generating $2.4B dollars from their 200M monthly players in their first year of activity.

As XR grows past early adopters, business models will evolve beyond paid content. It’s a decade-long transition starting now, similar to what happened on the mobile market. As a creator, if you’re serious about your long term strategy, you need to start planning with this in mind. Embracing future business models today will put you ahead when they are fully adopted!

If you want to hear more or discuss, I’ll be at CES Vegas next week talking about this at DreamlandXR – get in touch!