Chinese Internet companies

and e-commerce players jump

on the VR bandwagon

September 2016

Asia Distribution and Retail

E-com

me

rce · B

usin

ess M

od

els · In

no

vation

In this issue…

I. Overview of virtual reality (VR) – Page 3

• What is VR?

• Types of VR gears

• VR content development is the next big thing

• History of VR – Key milestones

• Difference between VR, AR and MR

• Global VR market at a glance

II. VR in China – Page 10

• China’s VR market offers enormous potential

• VR applications in China’s Internet and e-commerce sectors

• Implications for traditional retailers

• Going forward

2

OVERVIEW OF VIRTUAL REALITY

3

Chinese Internet companies and e-commerce players jump on the VR bandwagon

What is VR?

• Virtual reality (VR) is a user immersion experience.

– VR immerses a user in an imagined or replicated world, like videogames, movies, or flight simulation; or simulates presence in the real world.

• VR has 3 Is.

– The 3 Is include: immersion, imaginative and interactive.

4

Source: “Profiles in innovation: Virtual & Augmented Reality – Understanding the race for the next computing platform” January 2016. Goldman Sachs and "White paper of VR industry development" April 2016. Ministry of Information and Technology, China.

Immersion

Imaginative Interactive

The 3 Is of VR

Dior Fashion Show SS2016 Source: nowfashion.com

Ikea VR Experience – Pilot VR mobile app launched in April 2016 Source: The verge

Types of VR gears

• To experience VR, users need to put on a head-mounted display (HMD) or a pair of 3D glasses to view the projected 3D image.

• The user can ‘visit’ different places and experience different types of VR contents.

• Currently, there are four major types of VR gears in the market:

5

Source: “Profiles in innovation: Virtual & Augmented Reality – Understanding the race for the next computing platform” January 2016. Goldman Sachs ; "White paper of VR industry development" April 2016. Ministry of Information and Technology, China; and “Virtual reality for beginners: Everything you need to know to wrap your head around VR.” July 2015. PC World.

1) Mobile headsets

Freefly VR (Source: Freefly website)

2) PC-powered headsets

HTC Vive (Source: HTC website)

3) Console headsets Playstation VR, to be released in October 2016

(Source: Playstation website)

4) Untethered VR headsets

Samsung Gear VR

(Source: Samsung website)

VR content development is the next big thing

• VR content is seen as one of the major challenges for developers; it is considered as the key differentiator to create customer loyalty.

• Currently, the development of VR contents focuses largely on entertainment and gaming.

6

Source: “The Deloitte Consumer Review – Digital Predictions 2016” March 2016. Deloitte.

• Globally, a number of consumer products companies have ramped up efforts to generate new and exciting VR contents.

– Nestlé teamed up with Google to create a VR experience which transported users to Brazil’s coffee fields as part of the marketing for Nescafé brand. Viewers needed to download the Nescafé 360 app before putting their phone into a Google Cardboard viewer. They could then turn their heads in any direction to experience the coffee fields via the mobile app.

Source: official website of Nescafé 360

History of VR – Key milestones

7

Source: Various Internet sources, compiled by Fung Business Intelligence. * Playstation VR to be released in October 2016.

1930s

• First mention of VR -

A fiction by Stanley

Weinbaum

• 1952: Paper 3D Glasses by Polaroid

• 1962: The “Sensorama”, possibly the first VR

system created by filmmaker Mort Heilig

• 1963: TV glasses by Hugo Gernsback

• 1965: “The Ultimate Display” by Ivan Sutherland

• 1968: “Sword of Damocles” by Ivan Sutherland,

considered as the first VR and AR HMD system.

• 1991: Virtuality, a gaming

machine in gaming arcades

• 1993/ 94: VR headsets developed

by gaming enterprises including

Sega, and Atari

• 1995: Virtual Boy by Nintendo

1950s – 1960s 1990s

2012-2013

2014-2016

• 2014: Invention of Google cardboard/

Samsung Gear VR innovator edition

• 2015: HTC Vive

• 2015 Mar: Samsung Gear for Galaxy S6

• 2016: Oculus Rift

• 2016: Playstation VR*

• 2012 Apr: Google glass by Google (ceased

production starting from Jan 2015)

• 2012 Jun: Oculus rift prototype by Palmer

Luckey

• 2013: Vuzix M100 Smart Glasses, an Android

based wearable computer enhanced with a

wearable monocular display.

Sensorama

The Ultimate Display

Virtual Boy

Virtuality

Difference between VR, AR and MR

8

Digital environment that shuts out the real world.

Virtual reality (VR) Augmented reality (AR) Mixed reality (MR)

What is it? A complete immersion in the virtual world

An overlay of digital imagery onto the real world

An overlay of digital imagery onto the real world; objects can be viewed from different angles and distances; do not offer any physical resistance when touched or pushed because they do not have any mass

Users’ experience

More on immersion More on real time interactivity

More on real time interactivity

Examples of HMD

HTC Vive, Samsung Gear VR, Oculus Rift

Google glass Microsoft HoloLens, Magic Leap and Canon MREAL System

MR the virtual objects will get bigger and vice versa. And whenever you moved around it, you can see the virtual objects from different angles and perspectives. Just like the behaviour of real objects; Users can interact with their concepts in virtual objects form as if they were exist in front of them Flexibility

Digital content on top of your real world.

Digital content interacts with your real world.

VR AR MR

Global VR market at a glance

9

scale of the Chinese VR market was RMB 1.5 billion (USD 230 million) in 2015, and it is expected to reach RMB 5.6 billion in 2016. By 2020, its scale is forecasted to exceed RMB 55 billion. http://www.allchinatech.com/9392-2/

first billion dollar year in 2016, with about $700 million in hardware sales, and the remainder from content. vast majority of commercial activity to focus on video games. We estimate sales of about 2.5 million VR headsets and 10 million game copies sold

Global VR market

* Estimated value Source: “The Deloitte Consumer Review – Digital Predictions 2016.” March 2016. Deloitte.

2016 US$1 billion

2020 US$13.5 billion

CAGR: 43%

Trends: • Gaming will remain the most common VR content and a key growth

driver for the industry. • Mobile-based VR will grow faster than PC- and console-based VR

products; it will account for 30% to 35% of total VR revenue in 2016.

Total market size of global VR market*

VR IN CHINA

10

Chinese Internet companies and e-commerce players jump on the VR bandwagon

China’s VR market offers enormous potential

11

scale of the Chinese VR market was RMB 1.5 billion (USD 230 million) in 2015, and it is expected to reach RMB 5.6 billion in 2016. By 2020, its scale is forecasted to exceed RMB 55 billion. http://www.allchinatech.com/9392-2/

first billion dollar year in 2016, with about $700 million in hardware sales, and the remainder from content. vast majority of commercial activity to focus on video games. We estimate sales of about 2.5 million VR headsets and 10 million game copies sold

Total market size of China’s VR market*

Consumer sentiment:

• Consumers are having a positive attitude towards VR. According to a research conducted by Mojing, State Advertising Research Institute, China and Chiming Consultancy, more than two-thirds of surveyed respondents aged between 15 – 39 were highly interested in the technology.

• Among those who have experienced VR, they have high affinity towards VR because they truly enjoy the immersion experience. Currently, they experience VR mainly in games, movies and travelling.

2020 US$ 8.5 billion

CAGR: 36%

2016 US$ 865 million

* Estimated value Source: "China VR usage and behavior study" March, 2016. Mojing, State Advertising Research Institute, China and Chiming Consultancy; and "VR Industry Report 2016" March, 2016. Tencent.

Increasing support from the government and other official bodies

The Chinese government and other official bodies are supportive towards the development of VR

in China.

12

Source: “China to set standards for VR and AR technology.” All China Tech. 9 May, 2016 and "White paper of VR industry development" April 2016. Ministry of Information and Technology, China.

Chinese media outlets Caixin Group and Sina Newshave also launched their own VR projects.

Cover of the White Paper on VR, issued by MIIT in April 2016

Chinese government

• VR is coined as one of the newly emerging

technologies in China’s 13th Five-year Plan.

— The government will issue a series of

regulations on content production,

terminal displays and platform

development in 2016.

• The Ministry of Industry and Information

Technology (MIIT) issued a White paper on VR

in April 2016, outlining the development of VR

in China. It covers the characteristics and

features of VR technology, current usage of VR

in different industries, future developments

and suggestions on government policies to

support VR development.

Increasing support from the government and other official bodies (Cont’d)

– The MIIT also plans to formulate national and

industrial standards for VR/ AR

• Currently, Electronics Standardization

Institute under the MIIT has begun to

solicit public opinions on VR/ AR

standards.

• Audio Video Coding Standard

Workgroup of China (AVS Task Force),

under the MIIT, is planning to start R&D

work on VR coding and technology. This

has already received support from

Peking University, Tsinghua University,

University of Science & Technology

Beijing, Huawai, Tencent, LeTV, iQiyi and

Mojing on VR content development.

13

Source: “China to set standards for VR and AR technology.” All China Tech. 9 May, 2016 and "White paper of VR industry development" April 2016. Ministry of Information and Technology, China.

Chinese media outlets Caixin Group and Sina Newshave also launched their own VR projects.

Increasing support from the government and other official bodies (Cont’d)

Xinhua News Agency

• Xinhua News Agency, the official press agency of the Chinese government, launched a VR/AR channel on its website in May 2016.

• Xinhua has also set up a research and development team for VR/ AR.

14 Source: “China to set standards for VR and AR technology.” All China Tech. 9 May, 2016 and "White paper of VR industry development" April 2016. Ministry of Information and Technology, China.

Chinese media outlets Caixin Group and Sina Newshave also launched their own VR projects.

Front page of the VR/ AR channel

VR news/ reports from authoritative

organizations

VR/ AR market news

New product testing

VR/ AR forum

Software download

VR applications in China’s Internet and e-commerce sectors

• Recently, some Internet giants and e-commerce players have put more focus on VR/ AR technologies and come up with related initiatives or strategies. They are eager to push VR beyond entertainment and gaming.

15

VR applications in China’s Internet and e-commerce sectors – Case: Alibaba

Alibaba: BUY+ PLAN

16

Alibaba’s Ant Financial to launch VR Pay in September By Ke Jin - August 8, 2016 http://www.allchinatech.com/alibabas-ant-financial-to-launch-vr-pay-in-september/

Source: “Alibaba launches Buy+ VR, AR at Maker Festival for Taobao e-tailers”. 3 August, 2016. CNBC. * Taobao Maker Festival is an offline shopping event targeting millennial consumers.

a 3D AliPay cashier counter will jump out. Users can log into their AliPay accounts in three ways: 1. Gazing at a single point for a few seconds as a sign of confirmation; 2. Nodding the head, which is made possible by using gyroscope technology and special algorithms; 3. To make specific gestures, which requires devices other than a VR headset, like a sensor or a controller.

To own the headset Taobao used for Buy+, Jing would have to spend about 7,000 yuan ($1,050). http://www.brandchannel.com/2016/07/25/alibaba-buy-plus-vr-shopping-072516/

GM Lab Alibaba set up Gnome Magic Lab (GM Lab) for VR/ AR technology development in March this year. The Lab works on VR and AR technologies to help sellers on Alibaba platforms to build their own 3D product inventories, with a long-term goal of helping businesses set up VR stores.

• Alibaba held an official debut of its VR shopping product Buy+ at the Taobao Maker Festival* in July 2016. BUY+ plan will be launched by GM Lab via Taobao, Alibaba’s C2C platform.

• Shoppers can wear Alibaba VR headsets to browse products such as clothes and fashion accessories on a model, with 360-degree view. Shoppers can call for virtual guides to showcase items – before adding items to the shopping cart. Compared to viewing the items via a regular PC, shoppers can look at the products from different angles.

VR applications in China’s Internet and e-commerce sectors – Case: Alibaba (Cont’d)

M&A/ INVESTMENT

• Alibaba led a new funding round of US$793.5 million for Magic Leap, a U.S.-based MR startup in February 2016. Magic Leap was valued at US$4.5 billion.

OTHERS

• Ant Financial, Alibaba’s financial service affiliate announced that it will launch a VR-based payment services (VR Pay) in late September.

• VR Pay will allow users to complete transactions without removing their HMD. When users place an order, VR Pay will present them with a 3D Alipay checkout counter.

• Users can log into their Alipay account via the HMD in three ways: by gazing at a single point for a few seconds; nodding their heads within the VR headset; or making a specific gesture with their hands, which requires users to hold a sensor or a controller. Users need to key in their password at the end to complete the transaction.

17

Alibaba’s Ant Financial to launch VR Pay in September By Ke Jin - August 8, 2016 http://www.allchinatech.com/alibabas-ant-financial-to-launch-vr-pay-in-september/

Source: “Alibaba’s Ant Financial to launch VR Pay in September”. 8 August, 2016. All China Tech.

a 3D AliPay cashier counter will jump out. Users can log into their AliPay accounts in three ways: 1. Gazing at a single point for a few seconds as a sign of confirmation; 2. Nodding the head, which is made possible by using gyroscope technology and special algorithms; 3. To make specific gestures, which requires devices other than a VR headset, like a sensor or a controller.

To own the headset Taobao used for Buy+, Jing would have to spend about 7,000 yuan ($1,050). http://www.brandchannel.com/2016/07/25/alibaba-buy-plus-vr-shopping-072516/

Screen shot of Baidu VR+ VR product evaluation

VR applications in China’s Internet and e-commerce sectors – Case: Baidu Baidu: Personalized streaming

18

Baidu VR+ • Website: http://ivr.baidu.com/ • Baidu has officially launched a VR

community (Baidu VR+) on 31 May, 2016.

• It provides a platform to share and exchange information on VR trends for both VR users and developers.

• Contents provided include technology information, VR games, online video streaming, and VR product evaluation, etc.

VR information

VR games

VR online streaming

VR learning

VR developer

VR community

VR applications in China’s Internet and e-commerce sectors – Baidu (Cont’d)

VR channel on Baidu online video streaming

• Website: http://v.baidu.com/channel/vrgame/virtreal

• Baidu launched a VR video streaming channel under Baidu online streaming in December 2015.

• The channel offers VR games, VR online video streaming and VR news updates.

19 Screenshot of Baidu VR streaming channel

VR games

VR online streaming

VR information

What is VR?

VR applications in China’s Internet and e-commerce sectors – Case: Baidu (Cont’d)

VR web browser

• Wesbite: http://vr.baidu.com

• Baidu launched China’s first VR web browser on 15 September, 2016.

• Main function of the web browser has include panoramic viewing, online video streaming, navigation and downloading, etc. It can also help users convert normal web pages into VR versions.

20

Source: Official website of Baidu VR web browser

VR applications in China’s Internet and e-commerce sectors – Case: Baidu’s iQiyi

21

Build the world’s largest Chinese language VR service platform by forming partnerships with several development firms

Transform itself from an online video site into an online content platform, providing videos (iVR Panaroma Cinema), games (iVR GameRoom) and e-books

Develop a new mobile app that makes its movie and game offerings compatible with any kind of HMDs

Offer VR partner incentive programs which help developers to make copyrighted online films, drama shows and games

Help hardware manufacturing partners to sell 10 million VR headsets and mobile VR devices, as well as produce at least 10 VR films and 100 VR games that will be free for all of its subscribers

Baidu’s iQiyi: Personalized streaming

• iQiyi.com is a subsidiary of Baidu which specializes in video streaming services. The company is keen to expand its VR offerings:

• Currently, iQiyi.com also provides marketing, production and other operational assistance to more than 300 VR content and device manufacturing partners.

VR applications in China’s Internet and e-commerce sectors – Case: Tencent

Tencent: Own VR ecosystem

• Tencent officially announced its VR plan in December 2015. Major initiatives include:

– Launched its own HMD for mini consoles and PCs in March 2016

– Release another version for consumers in the latter half of the year

– Develop VR technologies on mobile and all-in-one PC in Q317, which is similar to VR Gear

– Introduce a VR cinema in the near future

Other initiatives:

• The company is now recruiting VR developers globally, and providing support to selected developers in four areas – payment system, social network system, distribution network and accounting system.

• Other than building its own VR ecosystem, Tencent is also actively investing in Altspace VR, a VR social network platform; and investing in overseas content developers Epic games and Glue Mobile.

22

去年12月，腾讯正式公布了Tencent VR SDK

及开发者支持计划，并首次系统的阐述了在虚拟现实领域 的规划 http://news.iresearch.cn/content/2016/07/262226.shtml

The miniStation, developed in partnership with Lenovo, is an Android-powered cube and the more powerful version of the system is said to connect to a VR headset.

VR applications in China’s Internet and e-commerce sectors – Case: JD.com

• On 6 September, 2016, JD.com announced its VR/ AR strategies. – VR is identified as one of the core R&D

directions of the alliance

– A standard modelling tool will be provided for platform users to create VR/ AR content for e-commerce applications

– A VR content sharing platform will be set up

– To reach out to end-consumers, JD.com has also launched the website for its VR community (vr.jd.com)

• To support the development of China’s VR industry, JD.com has lined up with more than 30 enterprises to form a VR/ AR alliance. These enterprises include VR/ AR hardware developers, content developers and VR coding developers.

23

Snapshot of JD.com’s VR/ AR strategy press conference on 6, September, 2016 Source: PC online

JD.com: Form a VR/ AR alliance

VR applications in China’s Internet and e-commerce sectors – Case: Mei.com

• Mei.com, a luxury flash sales platform, set up a VR fashion center in Shanghai in September this year.

• In the VR fashion center, visitors can try on different styles and looks after putting on the VR glasses; and play with a 360-degree mirror installed with cameras.

• Mei.com wishes to develop a more fashion-oriented approach through providing a more experiential experience to its customers, on top of finding the right brands and products.

24

Mei.com: Set up a VR fashion center

A Hong Kong celebrity, Carina Lau (刘嘉玲) tested out a VR headset with Mei.com CEO Thibault Villet Source: Jing Daily

Source: “Mei.com merges virtual reality with fashion as it launches cross-border e-commerce”. 15 September, 2016. Jing Daily.

Implications for traditional retailers – VR experiential centers

• Over 3,000 VR experiential centers have been set up since 2014*; most of which are for entertainment and gaming.

• Examples of VR experiential centers include:

– Suning announced in May 2016 that it targets to build 300 VR centers in the nation in three months’ time

– Gome teams up with Mojing to set up 350 VR experiential zones in April 2016

– Wanda Group set up the biggest VR center in Beijing’s Bird Nest in March this year

– Aomicom has set up eight VR experiential centers in Beijing, with four self-operated shops and another four originally designed as “Room Escape” game rooms.

25

Source: “China virtual reality industry report 2016”. March 2016. iResearch.

VR technology is still new to many Chinese consumers. Some traditional retailers have set up experiential centers to let consumers learn and experience VR technology.

VR game in Wanda VR experiential center in Bird Nest, Beijing Source: Fung Business Intelligence

Aomicom VR experiential center - The center is set up as a ‘pop-up’ store in Xidan Joy City, Beijing , eight outlets in total in Beijing Source: Fung Business Intelligence

Implications for traditional retailers – Virtual fitting room and dress up mirror

• Some retailers have partnered with e-commerce players to provide virtual fitting room service.

• Virtual fitting room allows consumers to try on their clothes with a customized virtual model.

• To create a customized virtual model, shoppers can provide their own photos, body measurement, etc. to the website.

• Shoppers can freely browse and try on any items.

26

Source: ctoutiao

Implications for traditional retailers – Virtual fitting room and dress up mirror (Cont’d)

• Dress up mirror, a modified version of virtual fitting room is being used in a number of fashion boutiques and shopping malls.

• Customers are invited to stand in front of the big mirror with camera; customer’s image will then be shown.

• Images of different tops and bottoms will also be displayed at the left and right hand side of the mirror. Customer can freely drag and drop the items available on the image.

27

A dress up mirror available in the lobby of APM shopping mall in Bejing Source: Fung Business Intelligence

Implications for traditional retailers – VR experience zone

28

Source: Creativity online

Source: Official website of Shanghai Disneyland Resort and “Flying start for Innisfree China at Disneyland”. 27 August, 2016. Retail news Asia.

• Recently, South Korean beauty brand Innisfree has set up a in-store VR experience zone in its Shanghai Disneyland store.

• Customers can mount a bike and put on a HMD in the VR experience zone to go on a virtual visit to Innisfree’s home base of Jeju Island in South Korea.

• Thousands of visitors have already taken the virtual ride, and the concept will be rolled out this year to its flagship stores in Hong Kong, Indonesia, Singapore and Vietnam as well as the U.S.

Case: Innisfree in Shanghai Disneyland (Jeju Flying Bike)

Implications for traditional retailers – VR design software

29

Source: “Gome online officially launches its VR home décor system during it’s home décor festival”. 7 September, 2016. Read01.com

• Gome, China’s leading electrical appliances retailer, has partnered with Kujiale, a home renovation company to set up a home décor VR software for its Gome online platform. The new software was officially introduced during Gome online’s Home Décor Festival from 8-14 September, 2016.

• The VR design software enables designers to come up with VR home decorating solutions.

– Customers can view the home décor by putting on the VR glasses, which produce a panoramic picture of your home with the new design. Customers can freely fine-tune the design until they are satisfied.

Case: Gome VR home décor design software

Source: Science China

This showcases how the Gome online VR home décor system works. There are different styles available – home décor in American style, Chinese style or Japanese style. Different sizes of home setting are also available. Users can click on the pictures to have a more detailed view on selected home décor and design.

Implications for traditional retailers – VR advertising

• German automaker, Volkswagen, launched its first nation-wide VR advertisement in July 2016. The advertisement, directed by Taiwanese singer and actor, Jay Chou, leveraged on VR technologies to deliver immersive 360 degree experiences to viewers. Viewers need to put on their HMDs to watch the advertisement.

30

Source: “First time for Jay Chou to direct a VR advertisement”. July 2016. Madison Boom.

Source: Youtube

Case: Volkswagen VR advertising

Going forward

• Governmental support will continue to help drive the development of VR industry in China. – With the emphasis of VR in the 13th Five-year Plan and the publication of the VR White

Paper, more enterprises are expected to venture into the sector.

31 Source: “What does virtual reality do to your body and mind?” January 2016. Wall Street Journal.

• Technological advancement will create more sophisticated users; and VR content development is the key differentiator for winning consumers’ heart. – Developers are still at the stage of improving the hardware, i.e. the HMD.

Once the technology becomes more mature, that is when the HMD can become lighter (on average the glasses weight around 250g now) , and users no longer need to experience that much physical challenges such as headaches, nausea and eye strain occur while experiencing VR, users can focus more on the VR content they are seeing instead.

• Mobile VR is set to dominate VR usage. – Currently, no matter whether it is PC- or mobile- driven VR, there are certain

requirements on the hardware, such as the screen for mobile-driven VR and the configuration of PC. These will make VR less easy to reach out to general consumers.

– Yet, with the high penetration of mobile phone, it will be much easier for people to try out the technology using mobile phones instead of PC-connected ones.

Contacts

© Copyright 2016 Fung Business Intelligence. All rights reserved.

Though Fung Business Intelligence endeavours to have information presented in this document as accurate and updated as possible, it accepts no responsibility for any error, omission or misrepresentation. Fung Business Intelligence and/or its associates accept no responsibility for any direct, indirect or consequential loss that may arise from the use of information contained in this document.

Asia Distribution and Retail

Teresa Lam

Vice President

teresalam@fung1937.com

(852) 2300 2466

Renne Chan

Research Manager

rennechan@fung1937.com

(852) 2300 2465

Fung Business Intelligence

10/F, LiFung Tower,

888 Cheung Sha Wan Road,

Kowloon, Hong Kong

Tel: (852) 2300 2470 Fax: (852) 2635 1598

Email: fbicgroup@fung1937.com

http://www.fbicgroup.com/