the global economic impacts associated with virtual and ......the global economic impacts associated...

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TheGlobalEconomicImpactsAssociatedwithVirtualandAugmentedReality

PreparedbyLauritsR.Christensen,WesMarcik,GregRafert,andCarlettaWong1I. IntroductionThisstudyestimatestheprojectedglobaleconomicimpactsassociatedwiththespreadofvirtualandaugmentedreality(“VR/AR”)technologyoverthenextfiveyears.Virtualreality(“VR”)describesathree‐dimensional,computer‐generatedenvironmentinwhichapersoncanbecomeimmersed.Thatis,theenvironmentcanbeexploredandisdynamic,andthusaperson can interact with his or her surroundings. Obvious applications for VR includegamingandotherformsofvideoandentertainment(e.g.,viewingtelevisionprogramsandmovies),whileotheranticipateduses includemilitary simulations, improvededucationalexperiences, skill development for healthcare professionals, and enhanced shopping andadvertisingopportunities.2Augmentedreality(“AR”)isareal‐worldenvironmentcombinedwithcomputer‐generatedsensory input such as sound, video, and graphics, and is designed to enhanceaperson’sperceptionofrealitybyoverlayingtherealworldwithadditionalinformation.ABIresearchprojectsARtobeabouthalfthesizeofVRintermsofunitsshippedoverthenextfiveyears,andforecaststhatgamingandentertainmentwillbelessprominentforAR,accountingfor21percentofunit shipmentsover the same timeperiod.ABIresearch’s largestprojectedareas for AR aremedicine, including surgery and diagnosis (35 percent), and industrialapplicationsrelated to logistics,automotivework,and factory floors(31percent).3OtherexamplesofapplicationsforARincludeenhancednavigationthatusesaphone’scameraincombination with GPS information, reporting aircraft instrumentation information to amilitarypilot,enhancededucationinschoolsandforotheroccupationaltraining,location‐basedadvertisingcampaigns,andaugmentedshoppingexperiences.4In estimating the projected economic impacts associatedwith a new innovation such asVR/AR,itisimportanttonotethatwhenagiveninnovationisfirstreleasedtothemarket,suchasthepersonalcomputer,itssuccessisdifficulttopredict.Inparticular,atthetimeofitsintroduction,itisunclearinwhichareasitwillbeused,theextentofitsadoption,andthetechnologiesandrelatedecosystemsthatwillbedevelopedthatbuilduponit.

1TheauthorsareallemployedbyAnalysisGroup,Inc.FundingforthisstudywasprovidedbyFacebook,Inc.2Seehttp://www.techrepublic.com/article/9‐industries‐using‐virtual‐reality/;http://www.socialmediatoday.com/content/how‐ecommerce‐augmented‐and‐virtual‐reality‐will‐redefine‐retail‐experience.3ABIresearch,"Gaming,Augmented,andVirtualRealityMarketDataRelease,"Q3,2015.4Id;http://newtech.about.com/od/softwaredevelopment/a/Applications‐Of‐Augmented‐Reality_2.htm;http://www.socialmediatoday.com/content/how‐ecommerce‐augmented‐and‐virtual‐reality‐will‐redefine‐retail‐experience.

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For the above reasons, it is challenging to predict the economic potential of VR/AR. Toaddressthischallenge,weutilizearangeofapproachesandpotentialadoptionscenariostocharacterize the inherent uncertainty in any economic potential estimates. We firstconsider a “conservative approach” that estimates economic impact only in the form ofrevenues from VR/AR headset sales. We then consider a more optimistic “comparableapproach” that infers additional economic impacts that could be realized as a result ofVR/AR adoption based on observed impacts associated with similar devices, namelysmartphonesandtablets.For both of these approaches, we consider a range of VR/AR adoption forecastsrepresentingaplausiblesetofpossiblescenariosthatcouldberealizedoverthenextfiveyears,fromalow‐endbasedonadoptionbyonly“innovators”toahigh‐endestimatebasedonmorewidespreadadoption.Indoingso,ouranalysisofeconomicimpactreliesonthirdpartyforecastsofVR/ARunitsoverthenextfiveyears.SuchforecastsareestimatesbasedonnumerousassumptionsincludingthepotentialaddressablemarketforVR/AR,adoptionrates,andapplicationswhereVR/ARisprojectedtobesuccessful.Giventheneedtomakeanumber of assumptions, there exists awide range of estimates for the spread of VR/ARtechnology. As an example, ABIresearch forecasts 52.4 million VR and AR global unitshipmentsin2016‐2018,with35.7millionofthoseforVRand16.7millionforAR.Overthenext five years through 2020, that forecast increases to 160million total units shipped,withVRaccountingfor107millionandAR,53million.5Incontrast,analternateforecastbyKZero predicts 80.2millionVRunits corresponding to $10.9 billion over the 2016‐2018period.6YetanotherforecastbyUBSpredictsonlyapproximately17millionworldwideVRdevice shipments over the sameperiod, reaching approximately72millionover the fiveyearperiodfrom2016‐2020.7Whilewedonotendorseanyonesetofforecasts,ouranalysisreliesonchoosingasetofunit forecasts fromwhich to estimate economic impact. In order to consider a range ofplausible scenarios over the next five years, we rely on forecasts developed byABIresearch,8 a technology market intelligence company, but adjust them to representthreepossiblegroupsthatcouldadoptVR/ARinthattimeframe:alowerboundscenarioinwhich only innovators purchaseVR/AR, amedium scenario inwhich both innovatorsand early adopters purchase VR/AR, and an upper bound scenario ofmore widespreadadoptionincludinginnovators,earlyadoptersandanearlymajority.9Werefertotheseaslow,medium,andhighadoptionscenarios.Ouradjustments to theABIresearch forecasts 5ABIresearch,"Gaming,Augmented,andVirtualRealityMarketDataRelease,"Q3,2015.6KZeroWorldwide,“VRMarketSizing,”atSlides11and18.7Seehttp://www.ft.com/intl/cms/s/2/dae861ee‐b275‐11e5‐b147‐e5e5bba42e51.html.8ABIresearch’sVRestimatesarebasedonconversationswithcompanies,earlysalesforreleasedmodelsanddeveloperkits,plannedreleaseddates,andindustryknowledge.TheirARestimatesarealsobasedonconversationswithpotentialenterprisecustomers.Insomecases,estimatesmaybeunderstated;forexample,GoogleCardboardalonehasalreadysurpassedABIresearch’sforecastof2.6millionVRMobiledeviceunitsin2014‐2015,havingsold5millionunitstodate.Seehttp://mashable.com/2016/01/27/google‐cardboard‐user‐numbers/?utm_cid=mash‐prod‐nav‐sub‐st#sEH0EjJNFqqn.9Theterms“innovators,”“earlyadopters,”and“earlymajority”areusedtoconformtotheterminologyusedbyKZero.

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arebasedonKZero’ssegmentationof itsVRforecasts into these threegroups,whicharebasedon technologyadoptioncustomersegments identified inEverettRoger’s landmarkstudy Diffusion of Innovations.10 KZero forecasts that in 2016 innovators will represent14%ofVRunits,dropping to12% in2017and11%in2018;whileboth innovatorsandearlyadopterswillrepresent52%,45%,and42%ofunitsinthoseyears,respectively.In order to estimate forecasted VR/AR units in 2016‐2020 for these three groups, weapplied theKZeropercentages to forecastsprovidedbyABIresearch for totalVRandARunits,andassumedthe2018percentageswouldholdfor2019‐2020.AsshowninTable1,we estimate low adoptionwill represent 18.5million units sold in 2016‐2020, mediumadoptionwillrepresent68.5millionunits,11andhighadoptionwillrepresent160millionunits.

10KZeroWorldwide,“VRMarketSizing,”atSlides7and11;http://www.ondigitalmarketing.com/learn/odm/foundations/diffusion‐of‐innovation/;http://www.ondigitalmarketing.com/learn/odm/foundations/5‐customer‐segments‐technology‐adoption/.1168.5millionunitsformediumadoptioniscomparableinsizetoABIresearch’sgamingandentertainmentindustryprojectionsforVR/ARtotaling71.9million.ABIresearch,"Gaming,Augmented,andVirtualRealityMarketDataRelease,"Q3,2015.

Table 1Projections of VR/AR Units Shipped (MM)

2016 – 2020

Year Low Adoption Medium Adoption High Adoption2016 1.2 4.4 8.42017 2.0 7.3 16.42018 3.1 11.6 27.72019 4.9 18.1 43.12020 7.3 27.1 64.4Total 18.5 68.5 159.9

Notes:

Sources:

[2] Projected units for Low Adoption and Medium Adoption are calculated by taking the High Adoption projected units and multiplying by the corresponding KZero percentage for each year. Percentages for 2019 and 2020 are assumed to be the same as 2018. It is also assumed that the percentages for VR are the same for AR.

ABIresearch, "Gaming, Augmented, and Virtual Reality Market Data Release," Q3, 2015; KZero Worldwide, "VR Market Sizing," at Slide 11, available at: http://www.kzero.co.uk/blog/consumer-virtual-reality-market-worth-13bn-2018/.

[1] Projected units include ABIresearch estimates for VR Standalone, VR Mobile, VR Tether, and AR Smart Glasses.

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We then use our VR/AR forecasts based on the above low, medium, and high adoptionscenariosintwocomplementaryapproachestoestimatetheeconomicimpactsassociatedwithVR/AR. In the first approach,wedevelopa conservativebaseline thatassumes thatthe only economic impact associated with VR/AR are the funds that consumers areforecastedtospendonVR/ARheadsetsoverthenextfiveyears.ThisisconservativeinthatitdoesnotaccountfortheassociatedecosystemthatcoulddeveloparoundVR/AR,suchasaccessories and VR/AR applications, or the innovations that build on VR/AR and thatcannot be easily predicted today. Using this approach, we forecast that global VR/ARrevenues for 2016 to 2020will total approximately $2.8 billion for low adoption, $10.3billionformediumadoption,and$24.0billionforhighadoption.12Inthesecondapproach,weutilizepastintroductionsofsimilartechnologiestohelpinformthelikelyimpactsofVR/AR.Inparticular,weviewsmartphonesandtabletsassufficientlysimilartechnologiestoVR/ARtoallowustouseanestimateoftheireconomicimpactstoinferthepotentialeconomiceffectsassociatedwithVR/AR.Althoughcleardifferencesexistbetweensmartphonesandtablets,andinitialadoptionofthesedevicesfarexceededwhatis projected for VR/AR in the first five years, the expected uses of the devices and theecosystems theywould create are expected to be similar: for example, their use (1) forentertainment,suchasgaming,aswellasviewingtelevisionprogramsandmovies,(2)forcommunicationwithco‐workers,friends,andfamily,and(3)byprofessionalsforexampleintheeducation,healthcare,andretailsectors.Moreover, similar to smartphones and tablets, VR/AR is also expected to emerge as aplatformforamyriadofapplications,advertising,andcommerceopportunities.GivenhowinnovativeVR/ARtechnologyis,newappswillneedtobedesignedanddevelopedfromtheground up,13 much like they have been for smartphones. In this regard, Digi‐CapitalpredictsthatAR’s“addressablemarketissimilartotoday’ssmartphone/tabletmarket”and“couldopenupasimilarsoftwareandserviceseconomytotoday’smobilemarket.”14And,VRhas thepotential to create truly innovative, immersive contentexperiences thathavenot been experienced before. Blending VR with AR through augmentation with haptictechnologyopensupevenmorepotential. According to industryanalysts,VR/AR is “thenexttechnologymegatrend,thenextevolutionofcomputing,and…hasthepotentialtobeasprofoundatechnologyplatformasthesmartphonetoday.”15

12WeestimatethecombinedeffectofVRandARsincebothsharemanysimilaritieswithsmartphonesandtablets,andbecauseVRandARhavesignificanteconomicpotential.However,ARheadsetscurrentlyprimarilyservetheenterprisemarket,makingARprojectionsmoreuncertainduetothedifficultyofpredictinglargeenterprisecontracts.IfARheadsetsareexcludedfromourconservativeapproach,weforecastthatglobalVRrevenuesfor2016to2020willtotalapproximately$1.9billionforlowadoption,$6.9billionformediumadoption,and$16.1billionforhighadoption.13Seehttp://www.ft.com/intl/cms/s/2/dae861ee‐b275‐11e5‐b147‐e5e5bba42e51.html.14ForVR,Digi‐Capitalpredictsanaddressablemarketofprimarilycoregamesand3Dfilesplusnicheenterpriseuserswith“consumersoftwareandserviceseconomicssimilartocurrentgames,films,andthemeparks.”Seehttp://fortune.com/2015/04/25/augmented‐reality‐virtual‐reality/.15Seehttp://www.foxbusiness.com/technology/2015/06/11/why‐virtual‐reality‐will‐be‐bigger‐than‐smartphones/,citingPiperJaffrayanalystGeneMusterandBarron’sTiernanRay.

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In using smartphones and tablets to help inform the likely impacts of VR/AR, we firstdevelop an econometric approach to estimate the relationship between GDP levels andsmartphoneand tabletsales,whilecontrolling forothermacroeconomic factors thatalsoaffect GDP. Using this estimated relationship between GDP and smartphone and tabletsales, alongwith data on smartphone and tablet ownership costs, we then estimate themultiplier associated with the average cost to a consumer of acquiring and using asmartphoneortabletoveritslife,relativetotheaverageimpactofasmartphoneortableton GDP. Thismultiplier captures the additional GDP impact of smartphones and tabletsoverandabovewhatconsumersspendtoownthosedevices.ThisadditionalGDPimpactrepresentstheeconomicactivityassociatedwiththeecosystemthathasdevelopedaroundsmartphones and tablets, including, for example, applications development, accessories,andproductivityenhancements,anddoesnotincludemoneyspenttopurchasedevicesandpayformonthlyphoneanddataplans.We find that the impact of an additional smartphone or tablet on GDP represents amultiplier of approximately 4.3 times the cost to the consumer of owning the device. Inotherwords, forevery$100spentonadevice,anadditional$430of totalGDPbenefit isgenerated. We can then apply this multiplier to projected VR/AR headset revenues for2016‐2020,effectivelyscaling theper‐uniteconomic impactofasmartphoneor tablet tothe projected size of the VR/ARmarket in the next five years. This yields an additionalestimatedglobaleconomicimpactofVR/ARrangingfrom$11.8billionforlowadoption,to$43.7 billion formediumadoption, to $102.0 billion for high adoption in the 2016‐2020timeperiod.Thus,weestimatethetotaleconomicpotentialofVR/ARtechnologyoverthenext fiveyears couldbe$14.6billion for lowadoption, representing theadditionof$2.8billion in headset revenues and $11.8 billion in additional multiplier effect capturingrelated ecosystemsof economic activity. This total economicpotential could reach$54.0billionformediumadoptionorcouldbeupto$126.0billionforhighadoption.OurresultsaresummarizedbelowinTable2.16

16IfARheadsetsareexcludedfromourcomparableapproach,weestimatethatforVR,theadditionaleconomicimpactfor2016to2020willtotalapproximately$7.9billionforlowadoption,$29.4billionformediumadoption,and$68.5billionforhighadoption.Thus,weestimatethetotaleconomicpotentialofVRtechnologyoverthenextfiveyearscouldbe$9.8billionforlowadoption,representingtheadditionof$1.9billioninheadsetrevenuesand$7.9billioninadditionalmultipliereffectcapturingrelatedecosystemsofeconomicactivity.Thistotaleconomicpotentialcouldreach$36.3billionformediumadoptionorcouldbeupto$84.6billionforhighadoption.

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It is important to note that we have estimated the effect of VR/AR on the economy, asmeasured by GDP. However, the impact of VR will extend beyond the economy, withexperts predicting a range of social benefits. For example, research has found thatimmersive virtual reality experiences have been shown to engender racial sensitivity,greaterempathyforthosewithdisabilities,respectfortheenvironment,andanincreasedwillingness to help others.17 Research also shows VR can effectively convey healthmessagesbyshowingpeopletheeffectofpoorhealthchoicesontheirfutureselves.18ARhas also been shown to have social benefits, for example in education through learninggains, increasedstudentmotivation,andfacilitatinginteractionandcollaboration.19Someof thesesocial impactswillhaveeconomicconsequences,whichmaybeaccounted for inourestimates.Forinstance,ifexperientialeducationthroughARleadstoincreasedstudentengagement and, thus, more qualified and productive workers, wemay pick up on thiseffect in our economic impact estimates. However, there are also benefits to individualsandsocietythatarenotaccountedforinourmodels,bothtangibleandintangible.Weleavetheestimationoftheseeffectstofutureresearch.In what follows, we describe our methodology for estimating the potential economicimpactsofVR/ARindetailinSectionII.Usingthismethodology,wethendiscussarangeofpotentialeconomicimpactsinSectionIII.II. MethodologicalApproachIn estimating the potential economic effects associatedwith a relatively new technologysuch as VR/AR, it is important to recognize the difficulty associated with accurately

17Seehttp://www.fastcoexist.com/3041200/could‐virtual‐reality‐make‐us‐better‐people.18Id.19Bacca,J.,Baldiris,S.,Fabregat,R.,Graf,S.,&Kinshuk.(2014).“AugmentedRealityTrendsinEducation:ASystematicReviewofResearchandApplications.”EducationalTechnology&Society,17(4),133–149.

Table 2Estimated Economic Impact of VR/AR Technology ($B)

2016 – 2020

Low Adoption Medium Adoption High Adoption[1] Conservative Approach ($B) $2.8 $10.3 $24.0[2] Comparable Approach ($B) $11.8 $43.7 $102.0[3] Estimated Total Economic Impact ($B) $14.6 $54.0 $126.0

Notes:[1] From Table 3.[2] From Table 6.[3] = [1] + [2].

Sources:Table 3; Table 6.

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predicting its future economic impacts. This stems from the fact that it is challenging topredict,apriori, theareasinwhichVR/ARwillbeused,theextentofadoptionofVR/AR,the technologies that will be developed that build upon VR/AR, and the associatedeconomicimpacts.This ishighlightedbythe illustrativeexampleof thehistoryofmovingpictures, inwhichnumerousdevelopmentsoccurredthatcouldnothavebeenpredictedattheoutset.Whenfilmwas first introduced in the late1800s, it representedanew, innovativemedium forrecordinganddistributingcontenttoconsumers.20Beforemovingpictures,theonlywaytoexperience places, events, and entertainment beyond photographs, static pictorialrenderings,orwrittenandverbaldescriptions,wasbybeingpresentandviewinglive.Withtheadventoffilm,arangeofcontent,fromnewstomotionpictures,becameaccessibleasmoving pictures at designated times in designated places (i.e., theaters).21 Subsequentinnovationinthemovingpictureindustryexperiencedvaryingdegreesofsuccesswiththemostsuccessfulbuildinguponpriorinnovationsandleadingtothedevelopmentofrelatedecosystems.Decades after the inventionofmovingpictures, the introductionof the television, a verysuccessful innovation, made moving picture content even more accessible to individualconsumersbybringingitintotheirhomes.Televisionsallowedforarangeofcontenttobebroadcastsimultaneously,stillatdesignatedtimes,givingconsumersmoreviewingoptionsin the comfort of their own homes.22 An ecosystem related to television developed thatincluded the manufacture of televisions, television production studios, and televisionadvertising.23Following television, the next phase in the evolution of moving pictures content wasrecordedvideodistribution,firstthroughvideocassettesandlaterDVDs,alongwiththeirrelated playback machines.24 These devices relaxed the time constraint on consumingvideocontentbyallowingconsumerstoviewwhattheywanted,whentheywanted.Alongtheway,theviewingexperiencewascontinuallyenhancedbyadvancesinresolution(i.e.,highdefinition)anddisplaytechnology.25On‐demandviewingwasevenfurtherenhancedbytheinnovationofon‐demandstreaming,whichsignificantlydiminishedtheimportanceofplaybackmachines,videocassettes,DVDs,andlivetelevisionshows.26

20Seehttp://www.britannica.com/art/history‐of‐the‐motion‐picture.21Seehttp://www.britannica.com/art/history‐of‐the‐motion‐picture;http://www.clpgh.org/exhibit/neighborhoods/downtown/down_n71.html.22Seehttp://www.britannica.com/art/history‐of‐the‐motion‐picture/The‐war‐years‐and‐post‐World‐War‐II‐trends#toc284132.23Seehttp://www.emmytvlegends.org/resources/tv‐history;http://www.nytimes.com/1995/07/18/us/last‐us‐tv‐maker‐will‐sell‐control‐to‐koreans.html;http://www.detroitnews.com/story/opinion/2014/10/22/americans‐make‐tvs/17680951/;http://www.historyoftelevision.net/history_tv_ads.html.24Seehttp://www.aes.org/aeshc/docs/recording.technology.history/notes.html;https://transition.fcc.gov/omd/history/tv/documents/76years_tv.pdf.25Seehttp://blogs.reuters.com/data‐dive/2014/12/17/a‐very‐brief‐history‐of‐television‐displays/.26Seehttp://www.washingtonpost.com/wp‐dyn/content/article/2005/06/14/AR2005061401794.html;http://www.forbes.com/sites/dadehayes/2013/07/08/six‐reasons‐why‐dvds‐still‐make‐money‐and‐wont‐

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At present, mobile viewing is a quickly growing medium for viewing content.27 Thisinnovationallowsviewers towatchmovingpicturecontentwherever theyhappen tobe.An ecosystem that includes smartphone and tablet manufacturing, providing wirelessinternet connections, and mobile applications and ads has developed as part of thepopularity ofmobile devices.28 The evolution ofmoving pictures has thus evolved fromviewingcontentatsettimesandsetlocationstoon‐demandviewinganywhere.Critically,the innovationofmobileviewingwasbuiltuponprevious innovations suchas televisionand recorded videos. VR/AR technology could be poised to become the next successfulwave in this history of technological innovation. According to the Financial Times, VR“couldbecomeasbigascinemaandtelevision,”29thuspotentiallyclaimingitsplaceasthenext phase in the way consumers consume innovative content including videoentertainment.The example of motion pictures discussed above illustrates the unpredictable path ofinnovation. Given the challenges associated with predicting the future of a giveninnovation,wetaketwocomplementaryapproachesinestimatingthepotentialeconomicimpactsofVR/ARoverthenextfiveyears.

a. Conservative(Sales‐Based)ApproachInthefirst,whichwetermthe“conservativeapproach,”wepredicttheeconomicimpactofVR/ARtechnologybyestimatingthesizeoftheVR/ARheadsetmarketplace.Todoso,weestimatetherevenuethattheseproductswillgenerateoverthenextfiveyearsbyrelyingon two sources of data: projected sales shipments of VR/AR headsets and the expectedaveragesellingpriceof theseheadsets.Thesalesshipment forecastdataareprovidedbyABIresearch30 and adjusted by KZero estimates to arrive at forecasts for three potentialadoption scenarios: low adoption representing 18.5 million headsets shipped between2016 and 2020;medium adoption representing 68.5million headsets, or high adoption

die‐anytime‐soon/;http://www.businessinsider.com/online‐streaming‐is‐making‐the‐dvd‐obsolete‐2013‐1;http://www.theguardian.com/media‐network/2015/feb/05/netflix‐subscription‐services‐television‐ad‐revenues.27Seehttp://www.nytimes.com/2012/02/09/business/media/young‐people‐are‐watching‐but‐less‐often‐on‐tv.html?_r=0;http://www.ericsson.com/res/docs/2015/consumerlab/ericsson‐consumerlab‐tv‐media‐2015.pdf;http://www.forbes.com/sites/markhughes/2015/03/21/the‐millennial‐trends‐that‐are‐killing‐cable/.28Seehttp://www2.deloitte.com/content/dam/Deloitte/se/Documents/technology‐media‐telecommunications/Digital‐Democracy‐Survey‐DDS_Executive_Summary_Report_Final_2015‐04‐20‐tmt.pdf;http://www.gartner.com/newsroom/id/2939217;http://www.pewinternet.org/files/2015/03/PI_Smartphones_0401151.pdf;http://www.businessinsider.com/mobile‐web‐vs‐app‐usage‐statistics‐2014‐4;http://www.businessinsider.com/mobile‐video‐advertising‐growth‐2015‐5.29Seehttp://www.ft.com/intl/cms/s/0/b29a3106‐9761‐11e5‐9228‐87e603d47bdc.html.30ABIresearch’sVRestimatesarebasedonconversationswithcompanies,earlysalesforreleasedmodelsanddeveloperkits,plannedreleaseddates,andindustryknowledge.TheirARestimatesarealsobasedonconversationswithpotentialenterprisecustomers.

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representing160millionheadsets.31Average sellingprices forVRheadsets areobtainedfromKZero,32andareestimatedtobe$150.33ItisimportanttonotethatthisapproachislikelytobeconservativebecauseitassumesalowersalespriceforVR/ARheadsetsthaniscurrently observed (which reduces our economic impact results),34 strictly includes thesalesofheadsetsandexcludesallrevenuesthatcouldbegainedthroughsalesofperipheralproducts (e.g., computers, software, and input systems), and it excludes relatedapplicationsandinnovationsthatbuilduponVR/AR.

b. Comparable(Econometric)ApproachIn the second approach, which we term the “comparable approach,” we utilize pastintroductions of similar technologies to help inform the likely impacts of VR/AR. Inparticular, as discussed above, we view smartphones and tablets as sufficiently similartechnologies to VR/AR, and use estimates of the economic impacts of smartphones andtabletstopredictthepotentialeconomiceffectsassociatedwithVR/AR.WebelievethattheuseofsmartphonesandtabletsasaproxyforVRandARtechnologyisareasonablecomparisonbasedonthewaybothofthesetechnologiesareusedandreliedupon. The iPhone and iPadwere first released in 2007 and 2010, respectively;35 today,users of these devices can keep all of their contacts in one place, navigate using GPSfunctionality, communicate over voice, text, email, and video, read documentselectronically, takepictures,recordvideos,surfthe internet,watchmoviesandtelevisionprograms, listen tomusic, connectvia socialmedia, andplaygames.Additionally, tabletsprovidemorecomputingpowerandalargerscreen,36which,forexample,lendstabletstomorepopularuseforentertainmentandproductivityrelatedtasks.37

31SeeTable3.ABIresearchdefinesARandVRas“ARandVRdifferprimarilyintheirscreenusage;ARoverlaysinfoontopofnaturalvisionwithpass‐throughtechnology,whileVRcompletelyobscuresauser'svisionwithdisplay.”ABIresearch,"Gaming,Augmented,andVirtualRealityMarketDataRelease,"Q3,2015.32KZerodefinesavirtualrealitydeviceas“apieceofhardwareresemblinggoggles.Auserplacesthisunitontheirheadandseesadigitalimageonadisplayasopposedtoseeingthereal‐worldaroundthem.”KZeroWorldwide,“ConsumerVirtualRealityStateoftheMarketReport,”March2014,Version1.2,atSlide2.33KZeroWorldwide,“VRMarketSizing,”atSlide17.34 The$150averagesellingpriceweuseonlyrepresentsVRheadsets.ARheadsetsarecurrentlyprimarilytargetedfortheenterprisemarketatmuchhigherpricepoints,forexamplearound$2,000(basedonconversationswithABIresearch).Thus,theeconomicimpactofARbasedontheconservativeapproachmaybeevenhigherthanweestimateduetohigheraveragesellingprices. 35TheiPhoneandiPadarebothconsideredtobethefirstoftheirkind,andhaveledtothedevelopmentofmanysimilardevices.Seehttp://www.nytimes.com/2007/06/27/technology/circuits/27pogue.html;http://www.nytimes.com/2010/04/04/technology/04ipad.html.36Seehttp://www.pcworld.com/article/2602917/laptop‐vs‐tablets‐how‐they‐compare‐for‐true‐productivity.html.37Eventhoughtabletslacktheabilitytomakephonecalls,mosthavemoreprocessingpowerandthereforemorefunctionalitywithotherprograms.Seehttp://www.pcworld.com/article/247387/5_ways_tablets_are_better_than_laptops_or_smartphones.html;https://www.catalystmr.com/wp‐content/uploads/2010/11/iPad_Effect_Mag_merged_1110.pdf;http://techcrunch.com/2011/02/12/10‐reasons‐to‐buy‐a‐tablet‐and‐5‐reasons‐not‐to/.

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Smartphones and tablets are now indispensable tomany industries and have increasedproductivityoftheglobaleconomy.38Forexample,smartphonesandtabletshaveenablednear instantaneouscommunicationthathasbecometheexpectationforthoseconductingbusiness.Thesedevicesallowemployeestostayconnectedbyemail,text,voice,andvideowhilegivingthemtheability toworkon‐the‐go.39Currently,healthcareprofessionalsusesmartphonesandtabletstoaccesshealthrecords,communicateandconsultwithpatients,access textbooks, guidelines and medical literature, and track vital signs of patients.40Smartphones and tablets have also become an important part of the education system,allowingstudentstoaccessvirtualtextbooks,participateinlearninglabs,andcreatetheirownpersonalizedlearningenvironments.41VR/ARislikelytobethenextmajortechnologicaldevelopmentinlinewithitssmartphoneandtabletpredecessors.Thistechnologyhaspromisingapplicationsinthesameindustriesas smartphones and tablets, and eventually may surpass the economic contributions ofsmartphonesandtablets.42Someindustryinsiders,suchasOculusfounderPalmerLucky,believe that VR/AR “could replace smartphones for mainstream users” in the future,“becoming the tech industry’sdominant computingplatform.”43 In addition to enhancingsmartphone capabilities such as navigation, communication, and entertainment, VR willcreate opportunities for new experiences such as virtual meetings and conferences,44doctorssimulatingriskysurgeriespriortooperating,45andallowingfortheinteractionsofvirtual classmates.46Similarly,ARalsohaspracticalapplications for the future, includingheadsupdisplaysinvehiclesandtheabilitytoturnblueprintstolifebeforecommittingtothemanufacturingprocess.47EducationprofessionalsalsohopethatVR/ARcanbeadaptedtotheclassroom,allowingkidstotaketoursofmuseumsandplacesthatarenotfinanciallyaccessible,or toexperiencephenomena in3‐D tohelp conceptualizeabstract concepts.48Ultimately, these advances in technology draw strong comparisons to the benefits thatsmartphonesandtabletscurrentlyprovide,makingthemagoodproxyforwhatVR/ARcancontributeeconomically.

38SeeWilliams,Chris,GabrielSolomon,andRobertPepper,“Whatistheimpactofmobiletelephonyoneconomicgrowth?”Deloitte,GSMA,andCisco,November2012.39Seehttp://www.business2community.com/mobileapps/rolesmartphonesbusinesses01012882#oAmwAETjFWLae6Xy.97.40Seehttp://www.ncbi.nlm.nih.gov/pmc/articles/PMC4029126/.41Seehttp://www.edweek.org/dd/articles/2013/02/06/02reading.h06.html.42Seehttp://techcrunch.com/2015/04/06/augmented‐and‐virtual‐reality‐to‐hit‐150‐billion‐by‐2020/#.zowrkeu:R0vA.43Seehttp://www.ft.com/intl/cms/s/2/dae861ee‐b275‐11e5‐b147‐e5e5bba42e51.html.44AltspaceVRiscreatingsoftwarethatallowsbusinessestohostmeetingswithvirtualavatars.Theapptracksheadmovementstoallowformorenonverbalcommunication,whichcannotbecapturedwhiletalkingonthephone.Seehttp://www.latimes.com/business/lafivirtualreality20150109story.html.45Seehttp://www.livescience.com/44384‐oculus‐rift‐virtual‐reality‐uses‐beyond‐gaming.html.46Seehttp://www.ign.com/articles/2015/12/09/9‐things‐virtual‐reality‐r‐will‐change‐other‐than‐games.47Seehttp://www.huffingtonpost.com/brandon‐gorrell/chevy‐someday‐augmented‐reality_b_4137851.html;http://www.techrepublic.com/article/microsoft‐hololens‐what‐does‐it‐mean‐for‐business/.48Seehttp://www.vrs.org.uk/virtualrealityeducation/;http://www.usatoday.com/story/tech/2015/09/28/google‐rolls‐out‐virtual‐reality‐field‐trips/72825732/.

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A portion of the economic impact of smartphones and tablets is associated with thebroaderecosystemrelatedtothesedevices.49Forexample,therearemillionsofdevelopersregisteredintheAppledatabaseforapplications,whichallowsforinnovationandcreationona largescale.OntheAppleAppStorealone, therewereanestimated1.2millionappsand75billiondownloadsasofJune2014.50ThesuccessofVR/ARwillbejustasdependenton the applications and media that will be created for these products and will rely ondevelopers to make content that can take advantage of the hardware provided bymanufacturers. This application ecosystem represents significant economic impactsassociated with smartphones and tablets, and a similar ecosystem has the potential tocontributesubstantialeconomicimpactsasaresultofVR/ARtechnology.51In using smartphones and tablets to help inform the likely impacts of VR/AR, we firstdeveloparobust,econometricapproach toestimate therelationshipbetweenGDP levelsand smartphoneand tablet sales,while controlling forothermacroeconomic factors thatalsoaffectGDP.Thefactorsforwhichwecontrolarecloselyrelatedtothecontrolsfromaseminal economic growth paper published by Robert Barro in May 1991.52 In it, BarroanalyzeshowGDPpercapitagrowthinacrosssectionofcountriesisexplainedbyasetofmacroeconomic indicators, including education, fertility andmortality rates, governmentconsumption,infrastructureinvestment,marketdistortions,andpoliticalinstability.53Ourfullyspecifiedmodelisalsoinformedbytwoadditionalpapersthatincorporatebroadbanduse and patent applications to account for the effects of a country’s broadbandinfrastructureandtechnologicalinnovationonGDP.54ThefullyspecifiedGDPmodel,whichisestimatedatthecountry‐andyear‐level,isstructuredas:55

49Seehttp://www.eweek.com/c/a/Mobile‐and‐Wireless/Smartphone‐Market‐Success‐or‐Failure‐10‐Critical‐Factors‐498307;http://www.businessinsider.com/mobile‐video‐advertising‐growth‐2015‐5;http://www.wsj.com/articles/SB10001424127887323551004578441130657837720;http://www.technet.org/wp‐content/uploads/2012/02/TechNet‐App‐Economy‐Jobs‐Study.pdf.50Seehttp://techcrunch.com/2014/06/02/itunes‐app‐store‐now‐has‐1‐2‐million‐apps‐has‐seen‐75‐billion‐downloads‐to‐date/.51 ARiscurrentlyprimarilyfocusedontheenterprisemarket,whichmayhavepotentialforevenlargereconomiceffects,forexampleduetosubstantialinvestmentinenterpriseapplicationsrelativetoenterprise‐relatedinvestmentsassociatedwithsmartphonesandtablets.Totheextentthisisthecase,ourcomparableapproachARestimatesmaybeunderstated. 52OurmodelproducedsimilarresultstoBarro’sintermsofthedirectionofcoefficients.Forexample,webothfoundpositivecoefficientsforbothprimaryandsecondaryeducationenrollmentandnegativecoefficientsforgovernmentexpendituresandinflation.Barro,Robert,“EconomicGrowthinaCrossSectionofCountries,”TheQuarterlyJournalofEconomics,106(2),May1991,pp.407‐443.53BarroalsoincludesavariablethatmeasurestheinitiallevelofGDPbecausehisdependentvariableisGDPgrowthpercapita,whichwasnotrelevantforourGDPmodel.54SeeCzernich,Nina,OliverFalck,TobiasKretschmer,andLudgerWoessmann."BroadbandInfrastructureandEconomicGrowth."TheEconomicJournal505‐530(2011);Ulku,Hulya,“R&D,Innovation,andEconomicGrowth:AnEmpiricalAnalysis,”IMFWorkingPaper,September2004.55AlthoughBarro(1991)usedGDPgrowthasthedependentvariable,weuseGDPlevelsforeaseofinterpretationofourresults.

12

,

, , , ,

, , , ,

, , ,

where:56

, is a country’s GDP in year t in country c, converted tomillions of constant

2014internationaldollarsusingpurchasingpowerparityrates.57

,isthenumber,inmillions,ofsmartphoneandtabletunitsshippedin

yeartincountryc.58

, is the ratioof the totalnumberof students enrolled inprimaryeducation

over the total official primary education age population in year t in country c,59which is expected to positively affect GDP through a more educated workforce,leadingtoproductivitygains.

, is the ratio of the total number of students enrolled in secondary

education over the total official secondary education age population in year t incountryc,60isexpectedtopositivelyaffectGDPforthesamereasonsas

,.

,isthenumberofbirthsthatsurvivetotheageof5perwomaninyeartin

country c,61 which is expected to negatively affect GDP because of an inverserelationshipbetweenhumancapitalandfertility;that is,aspotentialparents’timebecomes more valuable in line with increased human capital development, itincreasesthecostofraisingchildrentherebyreducingfertility.

56ExplanationsoftheexpectedrelationshipofeachvariablewithGDParebasedonBarro(1991),Ulku(2004),andCzernichetal.(2011).57ThisvariableiscalculatedbyconvertingannualGDPinlocalcurrencyforeachcountryto2014localcurrency,andthenconvertingthatintointernationaldollarsusingpurchasingpowerparityratesforeachcountryin2014.ThefollowingWorldBankvariableswereusedinthiscalculation:http://data.worldbank.org/indicator/NY.GDP.MKTP.KN;http://data.worldbank.org/indicator/NY.GDP.MKTP.CN;http://data.worldbank.org/indicator/PA.NUS.PPP.58StrategyAnalyticsdefinessmartphonesas“adata‐centric,cellularhandsetorcellularPDAwithabranded,high‐leveloperatingsystem.TheOSisopentothird‐partyapplications,encouragesdata‐centricactivities,andistypicallycapableofmulti‐tasking…Thesizeofthesmartphoneshouldbepocketable.”SeeStrategyAnalytics,"GlobalSmartphoneSalesForecastFor88Countries:2007to2020,"March2014.StrategyAnalyticsdefinestabletsas,“TheTabletcategoryreferstoamobileorportablecomputingdevicewhereinallcomponentsarecontainedwithinaslate‐shapedformfactorwithatouchscreen(operatedbyfingerorstylus)colordisplay.Screensizesaresplitamong6distinctranges:6.9"orless,7"‐7.9",8"‐8.9",9"‐9.9",10"‐10.9",and11"ormore.”SeeStrategyAnalytics,"Q32015:TabletOperatingSystemForecast‐Shipments,InstalledBase&byPriceTier2010‐2019,"August2015.59Seehttp://data.worldbank.org/indicator/SE.PRM.ENRR.60Seehttp://data.worldbank.org/indicator/SE.SEC.ENRR.61 , iscalculatedusing2variables:FertilityRateandMortalityRateUnder5(per1,000births).Thenumberofbirthsthatsurvivetoage5perwoman=FertilityRate*[1–(MortalityRateUnder5/1,000)].ThisissimilartoBarro’scalculation.SeeBarro,Robert,“EconomicGrowthinaCrossSectionofCountries,”TheQuarterlyJournalofEconomics,106(2),May1991,pp.407‐443,atpp.423‐424.Seealso,http://data.worldbank.org/indicator/SP.DYN.TFRT.IN;http://data.worldbank.org/indicator/SH.DYN.MORT.

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,isthegeneralgovernmentfinalconsumptionexpenditureasapercentof

GDP in year t in country c,62 which is expected to negatively affect GDP due todistortingeffectsfromtaxationorgovernmentexpenditureprograms.

,is thegrosscapital formationasapercentofGDPinyeart incountry

c,63whichrepresentsinfrastructureinvestmentandisexpectedtopositivelyaffectGDPthroughincreasedeconomicactivityrelatedtosuchinvestment.

,isinflationasmeasuredbytheconsumerpriceindexinyeartincountryc,64

whichisexpectedtonegativelyaffectGDPbydiscouraginginvestment.

, is aworldwidegovernance indicator for the ruleof lawmeasuring the

extenttowhichagentshaveconfidenceinandabidebytherulesofsocietyinyeartin country c,65 which is expected to positively affect GDP because confidence ininstitutionssuchaspropertyrightsshouldencourageinvestment.

, is the totalpopulationofa country inmillions inyear t in country c,66

whichisexpectedtopositivelyaffectGDPasmorepeoplecanengageineconomicactivity.

, isthesumofresidentandnon‐residentpatentapplicationspercapitain

year t in country c,67 which is expected to positively affect GDP as a proxy forinnovation.

,isthenumberoffixedbroadbandsubscriptionsper100peopleinyeartin

country c,68 which is expected to positively affect GDP through facilitation ofinformationdisseminationandinnovation.

and areyeartandcountrycdummyvariables,respectively,representingyearandcountryfixedeffects.

Totesttherobustnessofourmodel,webuiltuptothisfullspecificationbyfirstregressing

, on only

, and the year and country fixed effects. Next, we added the

control variables from Barro(1991), followed by the addition of, based on

62TheWorldBankdefinesgeneralgovernmentfinalconsumptionexpenditureasincluding“allgovernmentcurrentexpendituresforpurchasesofgoodsandservices(includingcompensationofemployees).Italsoincludesmostexpendituresonnationaldefenseandsecurity,butexcludesgovernmentmilitaryexpendituresthatarepartofgovernmentcapitalformation.”Seehttp://data.worldbank.org/indicator/NE.CON.GOVT.ZS.63TheWorldBankdefinesGrossCapitalFormationas“Grosscapitalformation(formerlygrossdomesticinvestment)consistsofoutlaysonadditionstothefixedassetsoftheeconomyplusnetchangesinthelevelofinventories.Fixedassetsincludelandimprovements(fences,ditches,drains,andsoon);plant,machinery,andequipmentpurchases;andtheconstructionofroads,railways,andthelike,includingschools,offices,hospitals,privateresidentialdwellings,andcommercialandindustrialbuildings.Inventoriesarestocksofgoodsheldbyfirmstomeettemporaryorunexpectedfluctuationsinproductionorsales,and‘workinprogress.’”Seehttp://data.worldbank.org/indicator/NE.GDI.TOTL.ZS.64Seehttp://data.worldbank.org/indicator/FP.CPI.TOTL.ZG.65Thisvariable“Reflectsperceptionsoftheextenttowhichagentshaveconfidenceinandabidebytherulesofsociety,andinparticularthequalityofcontractenforcement,propertyrights,thepolice,andthecourts,aswellasthelikelihoodofcrimeandviolence.”Seehttp://info.worldbank.org/governance/wgi/pdf/rl.pdf.66Seehttp://data.worldbank.org/indicator/SP.POP.TOTL.67Seehttp://data.worldbank.org/indicator/IP.PAT.RESD;http://data.worldbank.org/indicator/IP.PAT.NRES.68Seehttp://data.worldbank.org/indicator/IT.NET.BBND.P2.

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Ulku(2004),andthentheadditionof,basedonCzernichetal.(2011).Smartphone

andtabletunitsremainpositiveandstatisticallysignificantineachspecification.ThedatausedinourregressionsareobtainedfromtheWorldBankandStrategyAnalytics.Specifically,weusetwodatasetsfromtheWorldBank,theWorldDevelopmentIndicatorsandWorld Governance Indicators, and smartphone and tablet unit shipment data fromStrategyAnalytics.69Thedataincludedinthemodelscoverthe2007‐2013timeperiodfor63countries.70The results from our econometricmodels are then used to predict the global economicimpacts of VR/AR for the 2016‐2020 time period. To do so, we use the estimatedrelationshipbetweenGDPandsmartphoneandtabletsales,alongwithdataonsmartphoneandtabletownershipcosts,toestimatethemultiplierassociatedwiththeaveragecosttoaconsumerofacquiringandusingasmartphoneortabletoveritsliferelativetotheaverageGDPimpactofasmartphoneortabletonGDP.Withthissmartphone/tabletmultiplierandVR/ARrevenueforecasts,weareabletoestimatearangeofglobalGDPimpactsofVR/ARforthe2016‐2020timeperiod.III. FindingsBased on the two methodological approaches described above, we estimated both a“conservative approach” and “comparable approach” for VR/AR’s potential economicimpact on the global economy for 2016‐2020. As described above, the conservativeapproach estimates the revenues from the sales of headsets, whereas the comparableapproach estimates the larger additional impact VR/AR may have by spurring theproduction of additional peripheral products and innovations, and potentially leading toincreasedworkplaceproductivity.Below,wediscusstheresultsofthetwoapproaches.

a. Conservative(Sales‐Based)ApproachInordertocalculatetheheadsetrevenuesassociatedwiththeconservativeapproach,weuseunitprojectionsdevelopedbyABIresearch71andadjustedbyKZeroestimatestoarriveat forecasts for threepotential adoption scenarios: low,medium, and high adoption.We

69ThevariablesfromtheWorldIndicatorDatasetincludes: , , , , , , , , , ,

, , , , , , , ,and , .ThevariablefromtheWorldGovernanceIndicatorsis , . , isfrombothStrategyAnalyticsdatasets.70Thedatawerelimitedto2007–2013because2007wasthefirstyearthatStrategyAnalyticsreportedsmartphonedata,and2013isthelastyearofdataavailabilityforseveralvariables.Thefollowing63countrieswithacompletesetofdataareincludedinthemodel:Algeria,Australia,Austria,Bangladesh,Belarus,Belgium,Bulgaria,Canada,Chile,China,Colombia,Croatia,CzechRepublic,Denmark,Ecuador,EgyptArabRep.,Estonia,Finland,France,Georgia,Germany,Greece,Hungary,India,Indonesia,IranIslamicRep.,Ireland,Israel,Italy,Japan,Kenya,KoreaRep.,Latvia,Lithuania,MacedoniaFYR,Mexico,Moldova,Morocco,Netherlands,Norway,Pakistan,Paraguay,Peru,Philippines,Poland,Portugal,Romania,RussianFederation,SaudiArabia,Serbia,SlovakRepublic,Slovenia,SouthAfrica,Spain,Sudan,Sweden,Thailand,Turkey,Ukraine,UnitedKingdom,UnitedStates,Uruguay,andVenezuela.

15

alsousetheexpectedaveragesellingpriceforheadsetsof$150fromKZero.(Inusingthisestimateof$150foraveragesellingprice, it is important tonotethat thisrepresents theaverageprice that is expected tobe observedover the2016 to2018 timeperiod forallVR/ARdevicesonthemarket.Weviewthisestimatetobereasonablebecause(1)althoughdevices such as Oculus Rift ($599) are currently for sale in themarketplace, other lessexpensivedevicessuchasOculusGearVR($99)andGoogleCardboard(withapriceaslowas $19.99) are also currently available, and (2) prices for consumer electronics tend todecreaseovertime.Finally,itisalsoworthnotingthattotheextentweusealowerpriceforVR/ARthanisultimatelyobserved,oureconomicimpactestimateswillbeconservativesincewemultiply projected sale prices by unit sale forecasts to arrive at our economicimpactestimates.72)Table3belowprovidestheresultsofthismethodandshowsthatglobalVR/ARrevenuesfor2016 to2020will total approximately $2.8billion for lowadoption, $10.3billion formediumadoption,and$24.0billionforhighadoption.73

71ABIresearch’sVRestimatesarebasedonconversationswithcompanies,earlysalesforreleasedmodelsanddeveloperkits,plannedreleaseddates,andindustryknowledge.TheirARestimatesarealsobasedonconversationswithpotentialenterprisecustomers.72 The$150averagesellingpriceweuseonlyrepresentsVRheadsets.ARheadsetsarecurrentlyprimarilytargetedfortheenterprisemarketatmuchhigherpricepoints,forexamplearound$2,000(basedonconversationswithABIresearch).Thus,oureconomicimpactestimatesforARareevenmoreconservative. 73IfARheadsetsareexcludedfromourconservativeapproach,weforecastthatglobalVRrevenuesfor2016to2020willtotalapproximately$1.9billionforlowadoption,$6.9billionformediumadoption,and$16.1billionforhighadoption.

Table 3Conservative Approach

Estimated Economic Impact of VR/AR Technology ($B)2016 – 2020

Year Low Adoption Medium Adoption High Adoption2016 $0.2 $0.7 $1.32017 $0.3 $1.1 $2.52018 $0.5 $1.7 $4.12019 $0.7 $2.7 $6.52020 $1.1 $4.1 $9.7Total $2.8 $10.3 $24.0

Note:

Sources:

[1] Estimated Revenue = $150 * Projected Units from Table 1. $150 is the average estimated unit cost for 2016 - 2018 from KZero. It is assumed that average price will not change after this period.

Table 1; KZero Worldwide, "VR Market Sizing," at Slide 17, available at: http://www.kzero.co.uk/blog/consumer-virtual-reality-market-worth-13bn-2018/.

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b. Comparable(Econometric)ApproachThe regression results from the comparable approach where we estimate the effect ofsmartphones and tablets on GDP can be found below in Table 4. Generally, we find theexpectedsignsonthecoefficientsinourregressionmodels.Forexample,largernumbersofbroadband subscribers are associatedwith higher GDP levels, and increased inflation isassociatedwithlowerGDPlevels.

Totesttherobustnessofourmodel,wefirstregressedGDPononlysmartphoneandtabletunits,andyearandcountryfixedeffects,asshowninTable4column(1).WhilethefixedeffectsshouldaccountforagreatdealoftheunobservedvariationinGDP,incolumns(2)to

Table 4Comparable Approach

Dependent Variable: GDP2007 – 2013

Independent Variables (1) (2) (3) (4)Smartphone + Tablet Units Shipped (MM) 14,370 *** 11,737 *** 11,782 *** 11,262 ***Enrolled in Primary Schooling (%) - 2,329 4,277 7,926Enrolled in Secondary Schooling (%) - 4,707 5,221 4,692Fertility Rate Adjusted for Child Mortality - 560,483 656,580 518,703Government Expenditure (% GDP) - (14,408) (19,783) (10,349)Gross Capital Formation (% GDP) - 5,947 6,734 9,211Inflation, Consumer Prices (%) - (2,615) (2,847) (3,141)Rule of Law Index - 178,640 * 162,580 * 188,500 **Total Population (MM) - 28,528 *** 28,952 *** 27,849 ***Patent Applications per Capita - - (20,686,010) 42,178,820Broadband Subscribers per 100 People - - - 14,257 *Constant 1,041,898 *** (2,897,555) * (3,251,124) * (3,481,985) *

# Observations 532 405 367 342

Adjusted R2 0.66 0.78 0.78 0.80

Notes:

[2] All specifications are fixed effect models, to account for both country and year effects.

[4] Number of observations vary between models due to specification differences and data availability.

Sources:

[1] GDP ($MM) is in millions of constant 2014 international dollars representing purchasing power parity. This variable is calculated using "GDP (constant local currency ("LCU"))," "GDP (current LCU)," and "PPP conversion factor, GDP (LCU per international $)," with 2014 as the base year.

[3] *** represents statistical significance at the 1% level. ** represents statistical significance at the 5% level. * represents statistical significance at the 10% level.

The World Bank, World Development Indicators, October 14, 2015, available at: http://data.worldbank.org/data-catalog/world-development-indicators; The World Bank Group, Worldwide Governance Indicators, October 2015, available at: http://info.worldbank.org/governance/wgi/index.aspx#home; Strategy Analytics, "Global Smartphone Sales Forecast For 88 Countries: 2007 to 2020," March 2014; Strategy Analytics, "Q3 2015: Tablet Operating System Forecast - Shipments, Installed Base & by Price Tier 2010 - 2019," August 2015.

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(4) we included additional control variables found in the economic growth literature.74Smartphone and tablet units remain positive and statistically significant in eachspecification.Focusingonour fullyspecifiedmodelofGDPshown inTable4column(4),whichprovidesthemostconservativeestimatedeffectofsmartphonesandtablets,wefindthateachsmartphone/tabletshippedisassociatedwith$11,262inadditionalGDP.75ThisresultisconsistentacrossthespecificationspresentedinTable4.76Another way to interpret the coefficient on the smartphone/tablet variable in our GDPregression is to compare it to the average cost to a consumer of acquiring and using asmartphoneortabletoveritslife.Thiscomparisonresultsinamultiplierthatcapturestheadditionaleconomicactivitystemmingfromsmartphonesandtablets,overandabove(andnotincluding)themoneyspentbyconsumerstopurchaseandownthedevicesovertheiruseful lives. Assuming, based on 2014 data across a set of countries, an averagesmartphone/tablet acquisition cost of $459, an averagemonthly wireless phone and/ordata plan of $70, and an average replacement time of 31months, the total cost is over$2,600 per device.77 Thus, the impact of an additional smartphone or tablet on GDPrepresentsamultiplierofapproximately4.3timesthecosttotheconsumerofowningthedevice.78ThesecalculationsaredetailedbelowinTable5.

74Specifically,weaddedcontrolvariablesbasedonBarro(1991),followedbytheadditionof , basedonUlku(2004),andthentheadditionof , basedonCzernichetal.(2011).75Because , ismeasuredinconstant2014internationaldollarsusingpurchasingpowerparityrates,thiscoefficientestimateisaswell.76Althoughnotprovidedinthisreport,weconductedanumberofsensitivities.First,givenconcernsaboutpotentialomittedvariablebias,weincludeddataonfeaturephonesales(i.e.,traditionalcellphones).Incontrollingforsalesoffeaturephones,thecoefficientonsmartphones/tabletsinourregressionincreased.Assuch,theestimateswereportinTable4areconservativeinthattheyultimatelysuggestalowereconomicimpactthanifwecontrolledforfeaturephonessales.WealsoattemptedtocontrolforsalesofPCsandgamingconsoles,butwereunabletofindsufficientlycomprehensivedata,andthusdidnotcontrolforPCorgamingconsolesalesinourmodel.Second,weinvestigatedthesensitivityofourstandarderrorstopotentialautocorrelationbyfirstclusteringourstandarderrorsbyyear.Thishadnoeffectonthesignificanceofthesmartphone/tabletcoefficientpresentedinTable4.WenextusedDriscoll‐Kraay’s(1998)covariancematrixestimatorthatproducesheteroskedasticity‐andautocorrelation‐consistentstandarderrors.InusingtheDriscoll‐Kraay(1998)covariancematrix,weallowedforAR(1),AR(2),andAR(3)processes.Aswithourclusteringbyyear,thishadnoeffectonthesignificanceofthesmartphone/tabletcoefficientpresentedinTable4.Andfinally,wefirst‐differencedourdependentandindependentvariablestoaccountforpotentialautocorrelation,andranourregressiononthesefirst‐differencedvariables.Thisalsohadnoeffectonthesignificanceofthesmartphone/tabletcoefficient.77Table5.Averagedevicepurchasepriceandmonthlyplancostsarereportedin2014internationaldollarsusingpurchasingpowerparityrates.784.3=$11,262/$2,647.

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Cost of Ownership for a Smartphone/Tablet2014

Variable Value[1] Average Cost of Smartphone/Tablet Cellular Plan $70[2] Average Smartphone Replacement Time (Months) 31.4[3] Total Cost of Cellular Plan $2,189[4] Average Cost of Smartphone/Tablet $459[5] Total Cost of Owning a Smartphone/Tablet $2,647[6] Estimated per Unit Impact of Smartphone/Tablet on GDP $11,262[7] Estimated Smartphone/Tablet Multiplier 4.3

Notes:

[3] = [1] * [2].

[5] = [3] + [4].[6] From Table 4.[7] = [6] / [5].

Sources:

[1] Calculated as the weighted average price for various types of smartphone and tablet cellular plans. An average plan was determined by averaging all plan prices together for each country with available data, inflating 2013 dollars to 2014 dollars using the World Bank's CPI Index, and then weighting each country's average by shipments in 2014. There were 39 and 38 countries used to calculate the weighted average smartphone and tablet price, respectively. It is assumed that all tablets use a cellular plan. All final numbers are reported in 2014 international PPP dollars.

Strategy Analytics, "Global Smartphone Replacement Cycle by Country," December 2014; Strategy Analytics, "Q3 2015: Tablet Operating System Forecast - Shipments, Installed Base & by Price Tier 2010 - 2019," August 2015; Strategy Analytics, "Global Smartphone Sales Forecast For 88 Countries: 2007 to 2020," March 2014; IDC, IDC Worldwide Quarterly Mobile Phone Tracker, 2015Q3, November 16, 2015, available at: http://www.idc.com/home.jsp; IDC Worldwide Quarterly Tablet Tracker, 2015Q3, November 16, 2015, available at: http://www.idc.com/home.jsp; FCC Fourth International Broadband Data Report, February 4, 2015, at 32, 90-100; The World Bank, World Development Indicators, October 14, 2015, available at: http://data.worldbank.org/data-catalog/world-development-indicators.

[4] Calculated as the 2014 weighted average selling price for both smartphones and tablets by shipment volumes. There were 29 and 6 countries/regions used to calculate a weighted average smartphone and tablet cost, respectively. Numbers are then converted into international PPP dollars first by multiplying by the exchange rate and then dividing by the PPP conversion factor. Final numbers are reported in 2014 international PPP dollars.

[2] Replacement time represents the global monthly replacement time from 2014 for smartphones.

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Applying this multiplier to projected VR/AR revenues from the conservative approachresultsinanadditionalestimatedeconomicimpactofVR/ARtechnologyof$102.0billionassociatedwiththepotentialecosystemofeconomicactivitythatcouldstemfromadoptionof VR/AR technology in the high adoption scenario.79 If, however, VR/AR shipmentsrepresentmediumadoption,theassociated68.5millionforecastedunitscouldhavea$43.7billion economic impact, while low adoption representing 18.5 million forecasted unitscouldhavea$11.8billioneconomicimpactoverthesametimeperiod.80ThesecalculationsaredetailedbelowinTable6.81Figure1displaystheseeconomicimpactestimatesforeachyearandadoptionscenario.

79WeapplythemultipliertoVR/ARheadsetrevenueswithoutaccountingforadataplanbecauseweassumemosthouseholdsowningaVR/ARdevicewouldalreadyhavetherelevantbroadbandand/orwirelessdatasubscriptionbeforeacquiringtheVR/ARdevice.Inapplyingthismultiplier,wealsonotethatwedidnotaccountforthecostofcomputers,gamingconsolesand/orsmartphonesthatmaybeusedinconjunctionwithVR/ARdevicessincewethinkitislikelythatmosthouseholdsarelikelytoalreadyhaveaVR/ARcompliant‐computer,gamingconsoleand/orsmartphonepriortopurchasingaVR/ARheadset.Totheextentourassumptionisincorrect,andmoreconsumerspurchaseacomputer,gamingconsoleand/orsmartphoneforthesolepurposeofusingaVR/ARheadset,oureconomicimpactestimatesareunderstated.80WealsoconsideredanotherlowerandupperboundfortheseestimatesofVR/AR’seconomicimpactassociatedwiththe95%confidenceintervalaroundthesmartphoneandtabletcoefficientestimate.Whilethepointestimateis$11,262andissignificantlydifferentfromzero,the95%confidenceintervalaroundthatestimateis$7,140onthelowendand$15,384onthehighend.Thismeansthereisa95%chancethatthetruevalueofthecoefficientfallswithinthatrange.TheadditionaleconomicimpactofVR/ARbasedonthelowendrangesfrom$7.5billionforlowadoptionto$64.7billionforhighadoption.Onthehighend,thatrangerepresents$16.1to$139.4billion.81IfARheadsetsareexcludedfromourcomparableapproach,weestimatethatforVR,theadditionaleconomicimpactfor2016to2020willtotalapproximately$7.9billionforlowadoption,$29.4billionformediumadoption,and$68.5billionforhighadoption.



Low Adoption Medium Adoption High Adoption[1] Estimated Smartphone/Tablet Multiplier 4.3 4.3 4.3[2] Estimated VR/AR Sales Revenue ($B) $2.8 $10.3 $24.0[3] Estimated Additional Economic Impact ($B) $11.8 $43.7 $102.0

Notes:[1] From Table 5.[2] From Table 3.[3] = [1] * [2].


20

Together,theconservativeandcomparableapproachesrepresentanaggregateestimateofeconomicimpact,includingboththerevenuesgeneratedfromsellingVR/ARdevicesinthenext five years aswell as additionalGDP thatwill potentially be generatedby economicactivityinthelargerVR/ARecosystem.WeestimatethetotaleconomicpotentialofVR/ARtechnology over the next five years could range from $14.6 billion in the low adoptionscenario,to$54.0billionformediumadoption,to$126.0billionifhighadoptionisrealized.Figure2displaysthesetotaleconomicimpactestimatesbyyearandadoptionscenario.82

82IfARheadsetsareexcludedfromouranalysis,weestimatethatthetotaleconomicpotentialofVRtechnologyoverthenextfiveyearscouldbe$9.8billionforlowadoption,representingtheadditionof$1.9billioninheadsetrevenuesand$7.9billioninadditionalmultipliereffectcapturingrelatedecosystemsofeconomicactivity.Thistotaleconomicpotentialcouldreach$36.3billionformediumadoptionorcouldbeupto$84.6billionforhighadoption.

Figure 1Comparable Approach



$0.8 $1.3 $2.0 $3.1$4.7$2.0

$3.4$5.4

$8.4

$12.6

$2.5

$5.8

$10.2

$15.9

$23.8

$5.3

$10.4

$17.6

$27.5

$41.1

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

2016 2017 2018 2019 2020

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ion

s of

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lars

High Adoption

Medium Adoption

Low Adoption

21

Overall,weestimatethattheeconomicimpactsofVR/ARcouldrangefrom$2.7billioninthemostconservativescenarioofestimatedheadsetrevenuesforlowforecastedadoption,up to a total economic potential of $126 billion if high adoption is achieved and thepotential for a significant global ecosystem of economic activity related to VR/ARtechnology is realized. Whether VR/AR remains a niche product or approaches massadoption with all the potential related developments for complementary products andapplications remains to be seen, but in either case (or more likely than not, if VR/ARtechnologyendsup somewhere inbetween),weexpectVR/AR to representa significantcontributiontotheglobaleconomyoverthenextfiveyears.

Figure 2Conservative and Comparable Approaches

Estimated Economic Impact of VR/AR Technology2016 – 2020

Note:[1] Numbers reflect the addition of both the Conservative and Comparable Approaches.

Sources:Table 3; Figure 1.

$0.9 $1.6 $2.5 $3.8$5.8$2.5

$4.2$6.7

$10.4

$15.6

$3.1

$7.1

$12.6

$19.7

$29.5

$6.6

$12.9

$21.8

$33.9

$50.8

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

2016 2017 2018 2019 2020

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ions

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High Adoption

Medium Adoption

Low Adoption