Layoffs, a Building Sale and a Bet on Virtual Reality: Has HTC Bet Right This Time?

HTC Vive has won glowing reviews from the media and players. Now it faces the mass market.

After two or three quiet years, HTC's name is again mentioned alongside giants like Samsung and Facebook. This time, though, what has caught people's attention is not a phone.

Mobile World Congress (MWC), held every February, is the world's largest mobile phone trade show. This year the line in front of HTC's booth doubled back twice, and everyone had to wait more than an hour to get in.

Few of them had come to see HTC's phones. They were queuing to try its virtual reality headset, the HTC Vive Pre.

HTC itself gave more than half its floor space to Vive. Step off the escalator into Hall 7 and you see HTC's two exhibition areas, divided by an aisle. One side is the HTC Vive demo area. The other holds two rows of HTC phones that are no longer very new, with two more HTC Vive game demo stations squeezed in.

Wait in line for over an hour, and what you get is a virtual reality

I put on the headset, and after a quick calibration I found myself in something like a repair shop. Everything I could see was virtual; the staff and computers around me had vanished.

Following the system's prompts, I raised a hand and opened the iron door behind me. This is not like an ordinary game played in front of a TV with a controller or mouse. In Vive's world you reach out toward the objects in front of you, and the two wands in your hands track where your arms are — a bit like the Wii.

When the door opened, a blue-eyed P-body robot walked straight toward me. I don't play Portal 2 and was completely unprepared. The giant eyeball looked so solid that I stumbled back two steps.

On the 2160 x 1200 pixel screen, eyes used to Retina displays can still make out the pixels. When you get close to a wall of the demo room, a blue grid appears to warn you not to walk into it. All of this reminds you that nothing you see is real.

But once you can no longer see the edges of the "screen," your view turns as your head turns, and every step you take is a step in the game. It feels nothing like moving around with a controller and mouse in front of a monitor. Put simply, HTC Vive is already good enough to make you feel you have entered another world.

At the end of the demo, the four walls of the room gradually collapsed, leaving a bottomless steel framework all around me, and the last patch of floor under my feet was about to give way. I held my breath anyway, my hands slick with cold sweat.

Vive is HTC's last throw of the dice

Vlad Savov, a reporter for the tech news site The Verge who also tried the demo, later wrote: "I am now officially a Vive fanboy."

That is exactly the effect HTC wanted. Vive is also its last throw of the dice.

Since 2012, HTC's share of the phone market has been falling fast; it is now too small to register as a percentage. The company's market value has shrunk 96.5% from four years ago, to just US$612 million (about 4 billion yuan).

Virtual reality is the new opportunity HTC has found, and the story begins in mid-2014.

The HTC One M8, launched that March, was the last phone HTC truly put design effort into: an all-metal body, a virtual Home button, dual cameras, and the Dot View case that interacts with the screen. But it failed to reverse the decline of HTC's phones.

A month after the M8 launched, Scott Croyle, who had led HTC's phone design since 2008, also left the company. From then on, HTC's focus clearly shifted to virtual reality.

At HTC's MWC launch event in early 2015, the new HTC One M9 offered almost nothing new, yet the media and analysts in the room still raised their phones and cameras — to photograph the Vive virtual reality headset on the screen.

On stage, Jeffrey Gattis, HTC's head of global connected products, who had led development of the Re action camera, introduced the new product, whose look somewhat recalls Ghost in the Shell.

To make virtual reality, HTC cut jobs and sold a building

In June 2015, when HTC released its results for the second quarter of 2015, the whole company had only US$1.5 billion (9.8 billion yuan) in liquid funds left, and it was still losing US$150 million (980 million yuan) a quarter.

Meanwhile Gattis, the product head who had introduced HTC Vive on stage in March, was poached by the Silicon Valley startup Magic Leap. Magic Leap works on AR technology; it raised more than a billion dollars before announcing a single product, and it stands for the future.

To keep going, HTC announced in August that it would cut 15% of its global workforce, including a good number of engineers. In December, it sold its office building and the land under it in Taoyuan, Taiwan, for NT$6.06 billion (about 1.2 billion yuan).

For nearly a year, HTC, which had once flooded the market with models, did not release a single phone. Clearly, most of the money it saved went into its new business, Vive.

"Unprecedented!" That was the verdict of Nicole Lee, a writer for the tech blog Engadget, who tried the real hardware a month after HTC Vive was announced. The first-generation HTC Vive had no wands at that point, but that did not stop Lighthouse from tracking body movement.

Beyond the hardware, HTC's main job is finding partners

HTC Vive has two OLED screens, each with a resolution of 1080 x 1200. Lenses project the screens into a curved image that fills your entire field of view.

Once you put it on, each eye sees a slightly different image, which creates the 3D effect.

There is also an infrared camera at the bottom of the headset's front. To use it, you must install a pair of laser ranging devices in the room, which work with the headset to track your body movements.

Whether games or films, VR files need high resolution and frame rates, so they tend to be large and to place heavy demands on the computer's processor and graphics card. Vive needs at least 4GB of RAM, an Intel Core i5 chip, and an Nvidia GTX 970 graphics card.

All this only makes the images Vive receives look real. The images themselves have to be generated by a high-performance PC and the software running on it.

To win over software and game developers, HTC's first important partner was Valve. The game company behind the Half-Life and Portal series also owns Steam, today's main store for PC games.

Valve began preparing early to bring the games on its platform into virtual reality, and launched SteamVR. Its original partner was Oculus, today the hottest maker of virtual reality headsets.

But in May 2014, Facebook bought Oculus for US$2 billion. The game writer Graham Smith said on a podcast that after the acquisition, everyone at Valve was unhappy.

Steam is a platform built squarely for hardcore gamers. Facebook not only has its own game platform, but that platform is full of small games that keep nudging you to spend a little on in-game items as you play. Valve does not count those as games. The partnership was suspended and resumed only three months ago.

That was when HTC came to Valve with a rather different prototype. The first step of their partnership was to build some sample games to show other developers what HTC could do.

Chet Faliszek, a writer on Half-Life, explained the division of labor to QDaily: "Valve's engineers write the games, while HTC mainly handles how motion interaction in the game works on VR devices."

The two also work together on virtual reality development tools. Raymond Pao, vice president of HTC's new virtual reality technology unit, recalled: "Every month, two to four engineers from HTC's VR development department take turns flying to Seattle to learn."

Before joining the virtual reality program, Pao was in charge of software for all of HTC's Android devices and helped develop the HTC G1 (Dream), the world's first Android smartphone.

At the time, HTC's main business was still making Windows Mobile phones, and it worked closely with Microsoft.

Backing Android may look like a sure thing today, but back then many operating systems were competing on the market. Working with Google meant falling out with Microsoft.

But HTC bet right. Vive is another gamble. The phone business is declining, but layoffs and price cuts can still keep the company running for a few years.

Virtual reality, however, is still in its early days. If it does not take off as quickly as Android did, the HTC we know may cease to exist.

"My main job right now may be making sure every demo is stable enough."

In July 2014, because engineering units were being widely resold in China, Oculus announced it was halting sales of its second-generation Oculus Rift developer kit, the DK2, to China. Newer versions were out of the question.

That made developing for Oculus-based virtual reality devices in China quite difficult. HTC, which already had offices on the mainland, made China a key market.

In December 2015, HTC held a developer conference in Beijing. Before that, it had already developed demos with three partners. Pao personally tests each final version at least twice.

Wuyou Wofang was among HTC Vive's first partners in China. Its chief VR engineer, Lin Jiangyu, told QDaily that the tests mainly cover resolution, frame rate and stability.

He said one thing HTC cares about most is that the experience must not make people dizzy — something the vast majority of cheap VR headsets still cannot manage.

Wuyou Wofang's virtual showroom project has already gone commercial. The company wants property developers to replace physical show flats with virtual ones.

A good physical show flat can cost as much as 6,000 yuan per square meter to build. All of Wuyou Wofang's show flats, by contrast, are 3D images made from architectural drawings, which cuts the cost of selling homes.

On March 1, this venture, incubated inside a real estate company and one of HTC's early partners, bought 30 Vive Pre units. It plans to bundle them into a virtual show flat design service priced at 600 yuan per square meter and sell it to property developers.

VR already has some commercial uses. At the Consumer Electronics Show in Las Vegas this January, more than ten companies used HTC Vive to show off their products, including Intel, Dassault, Dell and Audi.

Most of them used VR as a marketing tool. A smart mattress company, for example, built a simple game in which you cross a log bridge, claiming the tension you feel is similar to how sleep deprivation feels, to draw in customers.

Another company hooked Vive up to a gym exercise bike so people could feel what it is like to ride a flying horse; its product will be sold to customers together with HTC Vive.

Pao told QDaily that his main job for all of 2016 is making sure these demos are stable. "We can't have a demo shown in North America for two months and HTC having to keep sending people over to fix it."

HTC is not the only one who wants virtual reality to take off. Will it get its wish?

In January, the US$599 Oculus Rift opened for pre-orders, and its sales page crashed within the first minute.

On March 1, the consumer version of the HTC Vive Pre sold 15,000 units in the first day of pre-orders.

Oculus's parent company is Facebook. Google, which makes cheap cardboard VR viewers, has put more than 2 million of them into users' hands.

Meanwhile, reports that Apple is building a virtual reality team keep piling up. Microsoft's US$3,000 HoloLens has also opened for pre-orders.

Apart from Amazon, every American tech giant has thrown itself into virtual reality. Even at the height of Google Glass, only Google was working on it.

Beyond the giants preparing for the future, many others in the industry are bullish on virtual reality and have piled in: startups, investors and chipmakers.

But besides believing in the new technology, each of them also has practical reasons.

Now that smartphones are everywhere, competition in app stores is fierce, and the bar for launching new apps and services keeps rising. If virtual reality really takes off, it will open an entirely new market. In a market starting from zero, company size matters far less — just as in 2008, a lone developer could earn millions of dollars by writing a simple iPhone game.

It is an opportunity for investors too. In content, video or hardware, the next Facebook could emerge. That looks far more attractive than funding food delivery companies to fight Baidu, Tencent and Alibaba.

As for hardware companies like Nvidia and Intel, they finally have a reason for people to buy new hardware. Nvidia says fewer than 1% of PCs today can run virtual reality. PCs, whose shipments have fallen every year since 2010, may yet find a new source of growth.

But when everyone has a financial reason to hope virtual reality comes true, their predictions about the market deserve suspicion. After all, people prefer to believe what they want to believe.

Some have already started pouring cold water on the idea.

John Markoff, a New York Times reporter and Pulitzer Prize-winning writer who has covered the tech industry for 29 years, told QDaily: "Every year people ask whether this is the year of virtual reality. But I can say this much: it will take at least ten years, or longer, for virtual reality to come down to an acceptable price."

Oculus founder Palmer Luckey says virtual reality becoming the next computing platform is ten years away.

Oculus is in no hurry; Facebook can keep it going on advertising revenue. But what about HTC, which has already sold its headquarters?

What happens next depends on how the mass market responds to these new products.