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The VR gaming centers of the future may not survive the crisis of today

VR centers and arcades were growing quickly before the pandemic. Now, the industry is seeing furloughs, layoffs and pivots.

People wearing VR headsets

Customers of The Void, one of many location-based VR companies hit hard by the pandemic, put on their headsets in Anaheim, California in July 2018.

Photo: Veronique Dupont/AFP via Getty Images

The COVID-19 crisis hit most tech companies hard, but it buried Sandbox VR. "We went from a relatively healthy business," CEO Steve Zhao said, "to zero revenue." Sandbox was operating 10 VR centers in North America and Asia that allowed groups of customers to step into virtual worlds. Every one had to close due to shelter-in-place orders. "Literally, 100% of the revenue is gone," Zhao said.

At the end of April, Sandbox laid off 80% of its staff. Among the departures were then-CEO Siqi Chen and many of the company's key developers. Left with a skeleton crew of 20, Zhao is now trying to figure out not only how to reopen existing locations but survive. "We have to rethink our strategy," he said.

Sandbox VR is not alone in its struggles. Numerous operators of VR centers and arcades, including The Void, Dreamscape, Zero Latency and Spaces, have been forced to shut down their retail locations amid the pandemic and are now facing major financial and logistical challenges. It's an abrupt change of fate for an industry that just months ago was seen as a pivotal booster of VR, and heralded by some as the future of theme parks and other forms of location-based entertainment.

'We're going to address it head-on'

Among the more prominent companies in the still-nascent industry is The Void. Founded in 2015 and backed by Disney and James Murdoch, The Void has been operating more than a dozen VR centers across North America, Europe, Asia and the Middle East, selling experiences based on Hollywood franchises like "Ghostbusters," "Star Wars" and "Jumanji."

Guests put on a custom headset connected to a backpack that includes a computer to render VR graphics and a rumble vest for tactile feedback. The absence of cables allows customers to roam across a stage outfitted with walls, doors, levers and other physical props that correspond to the virtual worlds they enter.

It was mid-March when the company decided to pause its owned-and-operated locations. "They all went dark on the morning of the 18th," Chief Marketing Officer Jamie Apostolou said. The company furloughed its retail personnel, while the rest of the staff has been busy working on reopening plans, which it aims to detail in the coming weeks. "There is a lot of work to do," Apostolou said.

Key to reopening any VR center will be addressing safety concerns. "When you go somewhere where you have something that you put on your face that someone else has put on their face … that's a challenge," Digi-Capital Managing Director Tim Merel told the audience of the Augmented World Expo in May.

"We already had a very tough and robust cleaning process," Apostolou said. But now he figures that's not enough. Though The Void in the past hid a lot of the operating minutiae from its audience, believing it would detract from the magic of the experience, it aims to be more upfront going forward. "We're going to address it head-on," he promised.

People on a "Star Trek" VR ride Guests on the Dave & Busters VR ride during the Star Trek Convention at the Rio Hotel & Casino in Las Vegas in July 2019. Photo: Gabe Ginsberg/Getty Images

In addition to robust cleaning of headsets, props and the space itself, The Void will include social distancing indicators in its locations, and initially operate them under limited capacity. "We will be taking a conservative approach out of the gate," Apostolou said.

The Void's locations include the Mall of America near Minneapolis, the World Trade Center complex and the Grand Canal Shoppes at the Venetian in Las Vegas — in other words, costly prime real estate. Operating these locations profitably with limited capacity and increased staffing won't be easy, even if consumers eventually return. "It's going to be a challenge for everybody, ourselves included," Apostolou admitted.

From billion-dollar forecasts to a 'tsunami'

That kind of caution stands in stark contrast to the optimism that dominated the industry over the past couple of years. While headset sales remained below expectations, location-based VR began to bring in some real money, and became a light at the end of the tunnel for VR and out-of-home entertainment alike.

In late 2018, Dave & Buster's said its first-ever VR ride was the biggest game launch in the company's history. "It was a dynamic, fast-growing industry with global reach," said Greenlight Insights analyst Alexis Macklin.

Greenlight, which focuses on augmented and virtual reality market research, estimated early this year that the location-based VR market would grow to a $34.6 billion business by the end of 2020. "This means absolutely nothing now," Macklin said during a presentation at AWE. She cautioned that consumers may not be willing to pay for VR attractions well into 2021, adding, "We eventually expect the location-based entertainment market to recover."

Merel was equally cautious: "We are taking a negative view on location-based entertainment in both the short and medium term," he said, "and we are hoping for a recovery in the long term."

Not everyone is willing to wait that long. Like the rest of the industry, location-based VR startup Spaces had to shut down all of its VR rides and experiences in the U.S., China and Japan over the past couple of months. "COVID-19 felt like a tsunami for us," said co-founder and CEO Shiraz Akmal. With no immediate recovery in sight, Spaces pivoted to build an application that allows VR users to teleport, via avatars, into Zoom video calls. "We like to keep busy making things," Akmal said. "We can't sit around waiting a year for something to return."

The Spaces team hasn't given up entirely on location-based VR. "It's still a business and an area that we think has a lot of potential to deliver amazing experiences," said co-founder and CTO Brad Herman. But the company is not confident of a quick recovery, especially for startups like theirs that partnered with theaters and theme parks. "Even if parks open up, which they are trying to do," Akmal said, "we don't see them spending money on building new things for a while."

At Sandbox VR, Zhao has abandoned much of the company's 18-month roadmap, which included ambitious plans to build an SDK for outside developers. Instead, the company wants to focus on perfecting the safety and fidelity of its existing attractions to offer returning consumers the best possible experience. "When they do go out, we want to make sure to give them a good reason to," Zhao said.

Sandbox VR will also put a bigger focus on Asian markets, where the recovery is faster than in the U.S.. Still, Zhao acknowledged the location-based VR industry faces an uphill battle for some time to come. "We are all collectively suffering right now," he said.

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