When Facebook released its first Oculus Rift VR headset in early 2016, Hollywood was excited about a new era of immersive filmmaking that would finally allow audiences to step into the worlds they had long admired from afar. Five years later, the path to that future seems as windy as ever.

That's not for a lack of interest from filmmakers. The 2021 Sundance Film festival, for instance, which opened its doors online Thursday, features VR films from Argentina, Poland and the U.S.

"In terms of the creative community, it has never slowed down," said Sundance New Frontier selection chief curator Shari Frilot. "It has always continued to expand." Whether these VR filmmakers can find an audience for their works outside of the festival circuit, and perhaps even turn their works into commercial success stories, is another story altogether.

While big companies whole-heartedly embraced immersive short films as a way to showcase VR in the early days of the medium, commercial support for narrative and cinematic VR experiences has taken some significant hits in recent years. Viacom pulled the plug on its VR R&D unit, Viacom Next, in 2018. A year later, Google shut down Spotlight Stories, an internal studio that had produced a number of award-winning immersive and VR films with A-list creators like Glen Keane, Justin Lin and Aardman Animations.

Hulu and Samsung shut down their respective VR film distribution apps last year. And in November, Intel wound down Intel Studios, a massive volumetric capture stage that had been used to film VR experiences like Reggie Watts' interactive music video. Smaller creators haven't fared much better: A number of independent VR studios, including Here Be Dragons and Future Lighthouse, closed their doors. Others changed course to focus on blockchain tech, AI avatars or more utilitarian VR experiences.

"The biggest overestimate in the early days was the predicted rate of headset adoption," said filmmaker Chris Milk, whose startup, Within, produced and distributed cinematic VR experiences before changing course to launch Supernatural, a VR fitness app. After Facebook's acquisition of Oculus for $2 billion in 2014, VR pundits and market research companies alike predicted millions of VR users within a matter of years.

Some of that can be attributed to the wishful thinking common to the hype cycle for new technologies, but there was also some early evidence for real demand: Samsung sold over 5 million units of its Gear VR viewer and heavily promoted cinematic experiences as a gateway to virtual worlds. However, most of those devices ended up collecting dust, according to former Samsung exec Nick DiCarlo. "It didn't have that recurring usage," DiCarlo recently told Protocol. "It never crossed the chasm."

Challenges ahead

One of the many companies caught up in the hype cycle was Venice, California-based Wevr, which collaborated with Samsung on a pioneering interactive VR series for the Gear VR. Encouraged by the enthusiasm of early adopters, Wevr launched a Netflix-like subscription service for narrative VR in late 2016 — and quickly realized that the market simply wasn't ready. "Clearly, that was an error," admitted Wevr CEO Neville Spiteri. "That was a timing error on our part. We were caught up in the exuberance."

"It's easy to get swept up in that," said Maureen Fan, CEO of VR animation startup Baobab Studios. "All of us who started [VR] companies, it's because we fell in love with it. We saw the potential and were like: Why doesn't everybody else see it already?"

Baobab released its first animated VR film "Invasion!" in 2016, and has since put out a steady stream of films and experiences featuring some of Hollywood's biggest stars including Oprah, Ethan Hawke, Lupita Nyong'o, John Legend and Ali Wong. Many of the studio's stories have been plotted by Eric Darnell, whose writer and director credits include animation blockbusters like "Antz" and "Madagascar." Its latest film, "Namoo," which premiered at Sundance last week, was directed by Pixar veteran Erick Oh, and Baobab has repeatedly been called "the Pixar of VR."

Despite those major credentials, Baobab has deliberately been operating on a shoestring budget. "I don't think people seem to realize that we're 10 to 15 people," Fan said. "We've just been very conservative with the cash, even with VR in its heyday." Baobab raised $31 million from tech and media investors including Comcast Ventures and 20th Century Fox. "Normally, when you raise all this cash, you just funnel it to scale," Fan said. "But I just didn't believe that it was the right time, so I stretched it out."

The rapid pace of VR hardware development represented another significant challenge for immersive storytelling startups. In addition to betting on Transport, Wevr also spent years working on a high-profile VR experience with "Iron Man" and "The Mandalorian" director Jon Favreau called "Gnomes & Goblins." It released a first teaser in 2016, when the VR world was still squarely focused on PC-based headsets for high-end experiences.

Encouraged by positive responses, Wevr doubled down on the project. But when it finally released a full version in late 2020, the VR industry had moved on. Facebook had released two versions of its Oculus Quest all-in-one headset, and announced that it would stop selling PC-based hardware. HTC, once at the forefront of PC-based VR, had become a minor player.

"The challenge was that we locked ourselves into certain product goals, and the industry was changing quickly around us," said Wevr director Jake Rowell. "When we started the second version of 'Gnomes & Goblins,' the Quest didn't even exist. It wasn't even on the radar. By the time we shipped, the Quest was what everybody was moving towards."

"We made many mistakes along the way," Spiteri said. Still, being a startup also gave Wevr the opportunity to do a lot with a little and opportunistically embrace projects that generated actual revenue. In addition to "Gnomes & Goblins," Wevr also released an experience in VR centers run by location-based entertainment startup Dreamscape. "We did focus on ensuring that we figured out a way to survive," Spiteri said. "And so now, here we are."

In addition to staying small and nimble, narrative VR startups also had to find the right kinds of funders who were willing to make long-term bets. "When we got investors, I didn't want somebody who expected immediate returns," Fan said.

Others weren't that patient, leading to startups and Hollywood studios alike trying to sell their VR short film to a minuscule consumer base, efforts that unsurprisingly didn't lead to commercial success. "The possibility technology was so young, it was a little bit like putting your 5-year-old out to pay the rent," Frilot said.

What's next?

Fast forward to 2021, and there suddenly is real money on the table. Not Hollywood blockbuster money, but enough money to build small but sustainable content businesses. Facebook has yet to release any sales numbers for its Oculus Quest 2 headset, but CEO Mark Zuckerberg revealed in September 2020 that more than 35 developers had made over $1 million with VR content sales.

That was before the release of the Quest 2, which surpassed the number of active users of the original Quest in just seven weeks. Earlier this month, Facebook's hardware chief Andrew Bosworth told Axios that the company was now working with "lots of successful profitable VR developers."

There's only one problem: Most of that money is going to game developers, and marketing for the Quest has focused heavily on games like "Beat Saber" and "Superhot VR."

"Games are on a much faster trajectory," Fan said. By growing the audience of VR overall, gaming could ultimately also help narrative VR, with players looking for other forms of entertainment to take a break from first-person shooters, she argued. "That being said, VR headsets aren't marketed as such," Fan said. "Our ability to draw new audiences is limited by how much marketing we do on our own."

For Baobab, part of that marketing, and of ultimately building a profitable business, has always been the idea of taking stories beyond the confines of VR. "To our investors, the company that I pitched was a studio that creates IP and characters that transcend any medium," Fan said. In 2016, Baobab struck a licensing deal with Hollywood heavyweight Roth/Kirschenbaum Films to turn its first VR experience "Invasion!" into a feature film.

More recently, Baobab partnered with Penguin Random House on a series of books that will accompany future VR experiences. "I'm really excited about going into different mediums so that [more people can] experience our stories and characters," Fan said. At the same time, Baobab wants to stay true to the medium it started with. "Our first love is VR, so we'll always be in the VR space," she said.

Wevr, for its part also plans not to put all of its eggs in one basket anymore. The startup is collaborating with a major Hollywood studio on a still-unannounced project that will launch both in VR centers as well as on regular VR headsets. It is also looking to take some of its existing projects, including "Gnomes & Goblins," and turn them into multi-platform experiences that can be accessed from non-VR devices. At the same time, Wevr is looking for ways to help other companies enter the space by turning some of its internal development tools into B2B products.

Ultimately, narrative companies may have to take cues from some of the VR gaming titles that are now growing in popularity. Asked about good examples for the future of immersive storytelling, Milk pointed to the VR game "Half-Life: Alyx." "I lived inside of that story for three days straight," he said. "I was saving the earth, and it was my story, my reality, that I was living day to day. It was incredibly affecting."

Milk argued that VR storytellers too often try to compete with traditional filmmaking, but that's not where they should be focusing their efforts. "Your favorite Netflix show is likely going to be more compelling to you than the best VR short produced this year. That won't be forever, but it is the reality for most right now," he said. "We need to deliver a more compelling story than your TV can. We're not there yet, but after living inside of 'Half-Life' for three days straight, I'd say we're not that far off."