The real profits lurking in a virtual world

Pokmon Go, the phone game craze, was only the beginning of a real revolution in some very smart technology. Investors should strap on their headsets and get involved, says Chris Carter.

You've decided to treat yourself to a new kitchen. Rather than tromp around Ikea, or click through cupboard designs online, you head to your nearest showroom, don a headset, and start building a holographic kitchen, right there in front of you.

As you flick through the digital catalogue, you spot a template you like but the cupboards are wrong, and the countertop is an ugly colour. No problem, beams the sales assistant, who is also wearing a headset, and has been observing your progress. You can customise your kitchen as you see fit changing sizes and colours with a flick of your wrist or a pinch of your fingers.

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Before long, your dream kitchen is all around you you can even walk around it and test how the layout works in practice, as you move from hob to fridge to dishwasher. There's something not quite right, but you can't figure out what it is. The sales assistant pulls up some data it's clear from the way that your gaze has continually been drawn to them that the handles on the cupboards are irritating you. You flick through alternative designs, pick one you like and there you have it, your ideal kitchen.

It sounds like science fiction. But it's already here. The headsets in this example are HoloLenses, created by Microsoft. American DIY chain Lowe's is already using the HoloLens to allow potential customers to customise their kitchens. But the really clever part is that the technology also analyses which aspects of the kitchen the customer is paying attention to. It can then overlay a "heat map" onto the life-size virtual kitchen.

Say, as above, you've spent more time looking at the cupboard handles than anything else (without even being aware of it), then they will show up as bright red on the heat map. The technology identifies them as a problem area, checks what you've been saying, and comes up with tips to help you find exactly what you're looking for. You could say the HoloLens knows you better than you know yourself.

Smoothing the process of buying a kitchen is just the start. The HoloLens can create three-dimensional projections holograms of practically anything, from a beating heart to a car. Designers at Swedish car maker Volvo are already using the HoloLens to perfect their latest models, while astrophysicists at Nasa's Jet Propulsion Laboratory are using the HoloLens to explore the Martian landscape using images and data beamed back to Earth by the Mars Curiosity rover, without having to go anywhere near a rocket. And many more applications are on the horizon.

The software behind HoloLens is "open source", which means that anyone can write their own "apps" (software applications) for the headset. If you know how to write code, you can buy a "development edition" HoloLens from Microsoft for £2,719. Businesses can buy a commercial version, which includes various "enterprise features", for £4,529. As well as Lowe's and Volvo, other big companies working with the HoloLens include carmakers Volkswagen, Saab and Audi, aircraft maker Airbus, and German steel producer ThyssenKrupp. Meanwhile, Cambridge University is using the HoloLens to test whether engineers can check bridges for cracks remotely.

Now, before we get too carried away, this technology broadly termed "virtual reality" is still in its early stages. But Microsoft is far from having the field to itself. Several major tech firms are scrambling to join the race. Earlier this year, Apple poached Jeff Norris, one of Nasa's leading experts in this field. It's not letting on why, but you can draw your own conclusions. What is clear is that more and more companies are taking this technology seriously. It's perhaps at a similar stage to where smartphones were in the early 2000s, just before they really took off.

This technology could transform whole industries not just manufacturing and design, but medicine, architecture and entertainment too. That's why investors should wrap their heads around it before the revolution really gets going. There remains a fair bit of disagreement over exactly how to define the various different varieties of virtual reality. But broadly speaking, there are three related technologies here: virtual reality, augmented reality and mixed reality.

Virtual, augmented and mixed reality explained

Virtual reality (VR) is entirely immersive. You might remember it from its false dawn in the 1990s, when the first clunky video-games headsets emerged. You put on the headset essentially just a screen that surrounds your eyes. What you see completely fills your field of vision and, in theory, is so realistic, that your brain is fooled into believing it is real like stepping into another world. If, for example, you watch a VR clip of a rollercoaster ride, then you should feel every dip and turn on the track. This is known in the industry as "presence". Examples of VR headsets include Facebook's Oculus Rift, HTC's Vive, and Samsung's Gear all of which are so far targeted mainly at gamers.

Augmented reality (AR) is best thought of as a digital overlay on top of the real world. You can still see "reality" through the device's screen, whether that is in the form of a headset, or simply the screen of your smartphone. The best-known recent example was last summer's video-game craze, Pokmon Go. Players would hunt for and capture cartoon creatures (the eponymous "Pokmons") which were overlaid on the real world, as viewed through the device's camera. Other uses of this technology could include, for example, viewing a tin of baked beans at the supermarket.

Again, using the camera on your smartphone (assuming it's connected to the internet), you would be able to see all the information you could ever want to know, such as nutritional facts and promotions, or even recipes. Or you might point your smartphone at an artefact in a museum, or a painting in a gallery, and call up its history, critical opinions, or the artist's own commentary.

AR still has some way to go. But as analyst Tim Bajarin notes in Time magazine, it is "a potential goldmine of technological innovation over the next several years". Apple's iPhone 8, due for release at the end of the year, is widely expected to include AR features. Indeed, Apple boss Tim Cook has made no secret of his enthusiasm for the technology, seeing it as offering wider commercial potential and applications than VR proper, which for now, has mostly been developed for entertainment purposes. Google, meanwhile, has created an AR platform called Tango, which allows users to see virtual overlays on their smartphones.

Mixed reality (MR) is where most of the confusion lies. The above two technologies are fairly easy to understand. The best way to differentiate MR from AR is to remember that, whereas AR is a digital overlay on top of the real world, MR is an embedded digital reality in the real world, as tech website Recode.net explains. For example, a Pokmon creature in the game Pokmon Go never changes in size, no matter how close you get to it. That's because it is using AR. If that same Pokmon creature was part of an MR set-up, it would grow bigger as you got closer, and shrink as you moved away. You would be able to walk around it, and see the creature from all angles. You would be able to pick it up, or even throw it, all the while still being able to see the real world around you.

In short, the difference between MR and AR is that with MR, you can manipulate the virtual objects, which have a higher degree of interaction with their real-world surroundings. With AR, you can't. As AR evolves, there's bound to be some crossover between the two technologies. But for now, terms such as "next generation augmented reality" or "AR 2.0" usually refer to MR. Microsoft uses the term MR as opposed to AR to describe its HoloLens. After all, car designers at Volvo are not just looking at the virtual cars through the device. They are actively manipulating them.

There are significant challenges to overcome in developing these devices and software; but this represents some of the biggest investment opportunities in this emerging technology, as tech firms old and new rise to meet them (see the box below). The main challenges are threefold.

Creating an unreal world

Firstly, there's the question of capturing the light field. This describes the way an infinite number of light rays, whether from the sun or an artificial light source, are constantly bouncing off everything in all directions. The rays that bounce into your eyes allow you to see things, with the brain interpreting colour, intensity and direction. If, for example, light rays bounce off an apple and into your eyes, your brain "sees" it is green, round and on a table a few feet in front of you.

Now, multiply that to include everything in the room: the table the apple is sitting on, curtains, windows, even the sky outside. Taken together, that is your "light field". Specially designed light field cameras aim to replicate this in virtual worlds by capturing light from multiple vantage points.

Then there's the question of how you move around virtual worlds while physically existing in the real world. Inside-out tracking takes the form of cameras or laser sensors mounted on the headset. These allow the wearer to move around without walking into walls. It relays information to the headset such as speed of movement and direction. The hard part is relaying the information fast enough to feel real. If it is too slow (known as "latency"), the virtual display can feel disjointed, leading to motionsickness.

Lastly, retinal projection is what you would need in order to do away with headsets. Put simply, it is the beaming of light rays directly into your eyes, as opposed to using a headset. This isn't as dangerous as it sounds. After all, you are being subjected to retinal projection right now by the natural light bouncing into your eyes. But replacing this with artificial light is difficult given the huge number of variables involved.

Taken together, to achieve realistic MR, you would need to capture and replicate the light field and project the light rays into a user's eyes, all the while making adjustments for their movements. That's the challenge that the companies in the box below are trying to tackle. We're not there yet. But as the technology improves as it surely will the number of uses for VR, AR and MR will multiply exponentially, from medicine to space exploration. Eventually, the biggest problem of the technology particularly once it is headset-free could be keeping track of what is real and what isn't.

Ways to make real cash from virtual reality

None of the technology makers are pure plays. But as Microsoft (Nasdaq: MSFT) looks to branch out of operating systems, for decades its bread and butter, the tech giant is looking to lead the field in mixed reality with the HoloLens. And you have to hand it to Microsoft, it is doing just that. Its shares, on a heady price/earnings (p/e) ratio of 32, reflect that, having risen by 35% in the last year. However, the 2.26% dividend, flattered by the weak pound, is not to be sniffed at in these low-interest times. One for the watch list.

Facebook (Nasdaq: FB), which makes the well-regarded Oculus Rift VR headset, is too expensive for our liking. But it is worth keeping an eye on how the company fares with its recent foray into augmented reality for smartphones.Samsung Electronics (South Korea: 005930 or London International: SMSN) is much more reasonably priced on a forward p/e of nine. Its Gear VR headset, in which the wearer inserts their smartphone, is far cheaper than the Oculus Rift, and shipped 782,000 units in the first quarter of this year leaving its rivals in the dust.

Apple (Nasdaq: AAPL) has yet to fully show its hand with regards to AR, but it is planning to release AR-enabled glasses sometime this summer. However, you may recall Google (Nasdaq: GOOGL) tried (and failed) with the similar Google Glass concept a few years ago. And as has been the case for a number of years, so much with Apple depends on how the iPhone 8, which is expected to incorporate AR features, fares when it is released later this year. The shares have risen by 65% over the last 12 months, and it might not take much to bring them back down to earth. But who knows? If Apple's AR features do prove popular, it would boost demand for the technology as a whole. Meanwhile, Google has not abandoned the field altogether, hence its Tango AR platform.

A number of small, private tech start-ups have sprung up in recent years to tackle the issues with VR mentioned in the main article. Unfortunately, you can't invest in these yet, but Avegant, Lytro, Light Field Lab and Google-backed Magic Leap are all names to remember in an industry that could well see takeovers and consolidation over the next few months.

The development of fluid and realistic VR will required lots of processing power particularly for higher-end entertainment and industrial uses. As a result, chipmakers are increasingly taking an active interest in the technology. Intel (Nasdaq: INTC) even went as far as unveiling its own virtual-reality headset last year, named Project Alloy, as did Qualcomm (Nasdaq: QCOM) with the Snapdragon 820. AMD (Nasdaq: AMD) has produced hardware designed to speed up VR devices, which it calls LiquidVR. Not to be outdone, Nvidia (Nasdaq: NVDA) released its GeForce GTX 10-Series graphics processing unit.