Why Are Tech Giants Investing in AR and VR?

All of the tech giants are investing at virtual reality (VR) and augmented reality (AR). For players like Apple, the target business model is obvious: sell high-end, polished consumer experiences at healthy margins. The same generally true of other hardware players such as Samsung and HTC. Sony and Microsoft are investing not to profit on hardware, but to profit on the ecosystem around the hardware.

But why are advertising companies like Facebook and Google investing in AR and VR? And how will direct response (Google’s dominant revenue stream) and brand advertising (Facebook’s dominant revenue stream) work in AR and VR?

Facebook and Google are investing in AR/VR as defense. The historical precedent is clear: Google bought Android as a defense mechanism to reduce the risk that Microsoft would dominate mobile. Although Android itself isn’t directly materially profitable to Google, Google leverages Android as a source of control over the technology ecosystem to ensure unfettered access to Google’s revenue engine: search.

Mark Zuckerberg has stated that he wishes that Facebook controlled a mobile OS. Why? Because he would prefer that the OS support social sharing through Facebook’s social networks as effortlessly as possible. Zuckerberg wants to create a social OS. This would make Facebook’s products even stickier, draw more engagement to Facebook properties, and ultimately generate more profit.

Given the power that Apple and Google exert over their respective mobile ecosystems, it’s natural that both advertising-based tech giants are investing heavily to control the AR and VR ecosystems of the future. What revenue opportunities do VR and AR offer Google and Facebook?

AR and VR present the greatest advertising canvases conceivable. AR and VR UXs will offer, on a per person basis, orders of magnitude more ad inventory that can be hyper targeted more precisely than ever before. That is the perfect combo for advertisers: scale, precision, and context.

OS makers dictate the rules of the game for their respective hardware form factors. The OS explicitly allows and disallows certain actions by 3rd party apps. Beyond supporting modal, foreground applications, iOS and Android define how apps can interact with the lock screen, home screen, notifications, hardware controls, and silicon components. Android is far more extensible than iOS, but even Android places explicit limits on developers. For example, 3rd party developers can’t replace the notification engine.

Mobile has eaten the world because smartphones have come to consume the white spaces in our lives: people turn to their phones to tweet, SnapChat, and check Instagram/Facebook while waiting at traffic lights and subway stations, at restaurants while waiting for a friend, and even in the bathroom. This has created an enormous opportunity to profit: attention is the world’s most valuable commodity. This is why Facebook has absolutely crushed it on mobile. Facebook controls a significant majority of attention for most users in a new advertising canvas (white space of people’s lives), and Facebook is selling access to that attention for enormous profit.

But mobile has, on a relative basis, hardly touched the active moments of our consumer lives: driving, eating, playing sports, watching movies, socializing with friends, etc. Yes, people play with their phones intermittently while doing all of the above, but one cannot read an actor’s bio and watch a movie at the exact same moment in time. Although Google Maps and Uber have transformed how all of us get around, none of us need to actually interact with our phones while we’re driving or Ubering (and in fact, we shouldn’t as a safety precaution). Audio cues are sufficient. No one uses their phone while playing sports.

AR and VR present an opportunity to layer in ads contextually into active parts of our lives. I’ll cover VR first, then AR.

Technically, VR is a modal activity. You can’t be doing something in VR and the physical world concurrently. But there will be virtual worlds that people can explore for hours on end with all kinds of virtual activities — games, Major League Drone Racing, virtual white boarding spaces, movies, porn, etc. These virtual environments will represent the ultimate advertising canvas for brand and direct response advertising.

For example, between drone races, Facebook/Google will present ads to buy similar drones and register for drone racing lessons. This represents the perfect combination of brand advertising — knowing who you are and creating purchase intent — with direct response advertising — efficiently finding and buying what you know you want.

Or while you’re drawing out the next UI in a VR whiteboarding space with a colleague who lives 500 miles away, you’ll see an ad for an app that helps you build better wireframes. The ad will show how you can literally drag and drop wireframe elements with your hands in virtual space, and interact intelligently with your whiteboard.

AR presents myriad awesome advertising opportunities. As you drive down the highway at 3PM, Google/Facebook will show you an ad to pull into McDonald’s in the next 15 seconds for a 15% discount on chicken salad. Google/Facebook know you haven’t eaten lunch today based on some health tracking, that you’re on a low-carb diet, and McDonald’s knows its slow time between lunch and dinner and will be glad to generate lower margin revenue during off-peak hours. AR is the perfect advertising medium for the physical world. AR presents the ultimate medium for gaming human psychology around scarcity. The opportunities for limited time offers are infinite!

Despite the huge opportunity mobile has presented, AR and VR represent advertising canvases that are orders of magnitude larger. The limitations that iOS and Android impose on 3rd party developers will be insignificant to advertisers relative the limitations that AR/VR OSes will impose on 3rd party apps and advertisers. There will no longer be a lock screen or home screen. Literally the entire world, virtual or physical, will be the “home screen.” The advertising opportunities are nearly infinite, and as such Facebook, Google, and the other tech giants are going to duke it out to dictate the rules of that experience.