Can Advertising Scale in VR? - Exploring Virtual Reality Marketing

VR Advertising: Exploring Revenue Potential and Recent Setbacks

Virtual reality presents a potential new avenue for revenue generation through ad placement. The immersive nature of VR is believed to foster heightened engagement with different types of display advertising.

Consider, for example, the possibility of virtual billboards appearing within a simulated urban environment or a digital recreation of a sports arena. This concept mirrors real-world advertising practices.

Recent Experiment and User Reaction

The discussion surrounding VR advertising was recently reignited following Facebook’s trial run of advertisements within the VR game, Blaston. As noted by Lucas Matney of TechCrunch, the initial response was largely negative.

A significant user backlash ensued, ultimately leading Resolution Games, the game’s publisher, to discontinue the advertising experiment.

Challenges for Facebook and VR Monetization

This situation highlighted the difficulties Facebook faces in monetizing VR through advertising, issues that are connected to broader challenges within its advertising ecosystem.

It’s important to acknowledge that this was a preliminary test designed to gauge the viability of VR advertising – a test Facebook successfully completed, albeit without achieving the desired outcome.

Ongoing Analysis of the VR Advertising Market

This event prompted a renewed examination of our ongoing analysis and market assessment of VR advertising as a whole.

Our findings indicate that both advantages and disadvantages exist, spanning both qualitative and quantitative considerations.

• Qualitative factors relate to user experience and brand perception.
• Quantitative factors involve measurable metrics like ad spend and return on investment.

Further investigation is needed to fully understand the long-term potential of VR advertising.

Advantages of Virtual Reality Advertising

The potential benefits of VR advertising stem from the factors previously discussed, notably the capacity for exceptionally high ad engagement due to the inherent immersive nature of the medium. In terms of immersion, VR surpasses all other forms of media, potentially leading to superior impression quality, enhanced brand recognition, and improvements in standard display advertising metrics.

Past trends indicate that VR may evolve towards a model incorporating advertising revenue. The development of VR mirrors that of other media which became increasingly reliant on advertising as they matured, including video platforms, social networks, mobile applications, and gaming – as evidenced by the experiences of companies like Unity.

Consider the following data: during its inaugural year, 75% of applications available on the Apple App Store were paid applications, a situation comparable to the current state of VR. This percentage decreased to 15% by 2014 and currently remains around 10%. Developers progressively realized that achieving wider reach necessitated offering free downloads.

Current dominant revenue strategies encompass in-app purchases, particularly within mobile gaming, alongside advertising. The central question is whether VR will mirror this evolution, with developers discovering that expanding their user base more rapidly is achievable through free applications utilizing “back-end monetization” strategies, such as ad integration.

This progression also aligns with shifts in audience demographics. Initial adopters are generally more inclined to pay for content and experiences. However, as a technology or medium gains broader acceptance, transitioning to a mainstream audience necessitates alternative business models that minimize initial costs and barriers to entry.

Samuel Huber, CEO of Admix, notes, “Currently, approximately 18% of applications within VR marketplaces like Steam and Oculus are offered free of charge.” He continues, “This is acceptable at this stage, as we remain in the early phases of the market, and the majority of users are early adopters. These users demonstrate a willingness to pay for content, much like their initial investment in unproven hardware, and generally possess greater disposable income than the average consumer.”

Challenges in VR Advertising

Despite the benefits outlined previously, virtual reality advertising presents certain drawbacks, particularly in its nascent stages of development. A significant portion of these challenges stems from the need for substantial user adoption.

Currently, VR technology hasn't achieved the widespread penetration necessary to fully attract advertising investment from major players like those on Madison Avenue. To illustrate, the existing installed base of approximately 16 million VR headsets represents less than 1% of the global smartphone user base.

Examining figures relevant to VR advertising specifically, the number of impressions any single application or game can anticipate is crucial. While successful titles such as Beat Saber boast several million users, the majority of games typically reach monthly active user bases in the thousands or tens of thousands.

This limitation significantly hinders the potential for substantial advertising revenue. Considering typical CPM (cost per thousand) rates for online display advertising, which generally range from $1 to $3 across networks like Google’s, higher-performing media often commands increased CPMs.

Let's assume, for illustrative purposes, a generous average VR ad CPM of $15. If a game publisher has 10,000 active users, each experiencing 10 ad impressions monthly, their annual ad revenue would total $12,600.

These figures are subject to variation, and adjustments to the input variables can be made. Remember that CPM represents the cost per 1,000 impressions, and a 30% revenue share is typically retained by the ad network (such as Facebook). Ultimately, broader VR adoption is required before advertising revenue becomes significant.

Both perspectives regarding VR advertising hold validity, though they are separated by a timeline. The optimistic outlook is likely to materialize in the long term, while the current, scale-dependent pessimistic view accurately reflects the present reality for most VR applications.

The revenue calculations previously discussed are based on current advertising market standards. Advertisers traditionally evaluate return on investment using CPM, but VR will eventually require unique metrics – similar to those used in augmented reality – that accurately reflect the depth of user engagement.

Beyond measurement, the formats of advertisements themselves will undergo evolution. The current discussion largely centers on display ads encountered during VR gameplay. However, we can anticipate the development of more valuable formats that involve deeper, more organic interactions between players and branded products.

Furthermore, mirroring the historical progression of media revenue models, a combination of approaches will likely emerge. While mobile applications have increasingly relied on ad support, premium, paid applications continue to exist, as seen in console gaming and entertainment.

Consumers will ultimately have the option to pay either through direct monetary cost or through ad exposure. VR developers will similarly have choices regarding their business models, mirroring the options available to mobile app creators. However, it may take several years for VR usage to reach the necessary levels for substantial ad monetization.