A Brief History of the Video Game

In the Autumn of 1961, Steve “Slug” Russell, Martin “Shag” Graetz and other members of MIT’s Tech Model Railroad Club were bouncing ideas around.  The club had been formed twenty years earlier, ostensibly for replica train enthusiasts but really for engineers who shared a passion for understanding how things worked and how to master them.  By the 1960s, the members’ interests were still hobbyist, but they had progressed from train circuits to transistors, core memory systems and experimental computers.

The department had just taken delivery of a new PDP-1 computer, designed and built by Digital Equipment Corporation, a company established by two former MIT graduates.  The PDP-1 was cutting edge design, but through today’s eyes resembles something from The Jetsons – a 1950s guess at what a futuristic machine should look like: the size of a wardrobe, covered in lights and diodes, attached to a typewriter and a hexagonal monitor with a circular screen, the type of thing you’d expect to see a WWII naval commander search for submarines on.  At the time, the students couldn’t get that excited about it either, so Slug and Shag were searching for a way to best demonstrate the PDP-1’s capabilities and potential to the department.

 “Somebody had built some little pattern-generating programs which made interesting patterns like a kaleidoscope,” said Russell in a 1972 interview with Rolling Stone.  “Not a very good demonstration.  Here was this display that could do all sorts of good things!  So we started talking about it, figuring what would be interesting displays.  We decided that probably you could make a two-dimensional manoeuvring sort of thing, and decided that naturally the obvious thing to do was spaceships.”

In December 1961, Russell sat down at the PCP-1 and began coding.  In April 1962 – the nickname “Slug” was bestowed upon him for the speed of his programming – he was finished.  The game he had created was Spacewar.  It immediately attracted a cult following within MIT, so much so that the computer laboratory was forced to shut down play except during lunchtime and after studying hours.

Spacewar was the original video game, and its creators the original hackers.  Spacewar would go on to inspire the arcade culture of the late 1970s, which begat the UK bedroom-coding games boom of the 1980s, which paved the way for the rise of Nintendo, then Sony, then Microsoft, then Apple as powerful gaming-platform owners and players in what is today a multi-billion pound industry across the globe.  Spacewar showed that video games would become a driving force in the progress of computer technology.  Video games made computers approachable.

The same thing is happening right now with virtual reality and augmented reality.

The VR and AR Boom

“Alright, so here we are in front of the, uh, elephants. Uh. The cool thing about these guys is that, is that they have really, really, really long, um, trunks and that’s, that’s cool.  And that’s pretty much all there is to say.”

As a piece of oration, it’s not exactly I Have a Dream, but the above dialogue – and the 19 second video clip which accompanied it – played a fundamental role in bringing the broadcasting industry into the digital age and changing the way in which people consume media.   The clip, named “Me at the Zoo” was shot by Yakov Lapitsky and featured Jawed Karim during a trip to the San Diego zoo.  It was uploaded by Karim on 23 April 2005 to his newly-launched website, YouTube, becoming the first video to be available through the platform.

Catalysts for pivotal events tend to have inauspicious beginnings.  Virtual reality is no different, only we can also add in a false-start along the way.

The term “virtual reality” in modern usage was popularised by Jaron Lanier’s VPL Research company in the late 1980s, and captured the public’s imagination with the promise of head-mounted systems and power gloves.  In 1992, Computer Gaming World foresaw “Affordable VR by 1994”.  However, whilst Hollywood was dishing up science-fiction tales of VR worlds jumpstarting mental and physical development (Lawnmower Man) or being used to access cybernetic brain implants (Johnny Mnemonic), reality gave us the nausea-inducing Virtual Boy.  The expectation far exceeded the consumer experience and the technology never saw mainstream adoption.

Fast forward twenty years and the virtual reality and augmented reality technology is finally able to make good on its promise.  Investment in the sector has exploded, and digital M&A firm Digi-Capital recently predicted that the combined AR and VR markets could be worth $150 billion by 2020.  To put that into some kind of perspective, that’s almost double the entire global video game industry or ten times the amount of global music sales.

Since Facebook acquired Occulus Rift for $2 billion back in 2013, there has been a huge amount of consolidation and investment in the sector.  A recent report by CB Insights shows Q4 2014 funding alone reaching $623 million across twelve different deals.  A significant part of this ($542 million) was the investment by Google and others in Magic Leap, a start-up developing a mysterious AR device built harnessing “special photons” the technology for which has been kept under wraps but has been described by Business Insider UK as “so badass you can’t believe it”.

[As a side note: maybe it’s because I’ve been recently writing about tech bubbles, but as much as I’m giddy with excitement about Magic Leap’s ideas for the future of VR and AR (and I am), on reading that description I couldn’t help but be reminded of Charles Mackay’s Extraordinary Popular Delusions and the Madness of Crowds.  Specifically, of the infamous company which went public at the height of the South Sea Bubble in 1720 and managed to raise £2,000 (£250,000 in today’s money) on the back of a pitch which advertised itself as “a company for carrying out an undertaking of great advantage, but nobody to know what it is”, and which (unsurprisingly) turned out to be a dud.  Google has over half a billion reasons for believing Magic Leap is a very different proposition.]

Q1 2015 saw 22 separate deals in the sector close, and the number keeps growing.  Recent deals include the $50 million investment into Jaunt to develop cinematic VR, the $24 million fundraising by Glyph, the VR headset manufacturer, and the $15 million raised by CastAR, the augmented reality gaming start-up.  Although it is video games / media platforms leading the way – Occulus faces competition from HTC and Valve’s tie-up (Vive) as well as Sony’s PlayStation VR (Project Morpheus) – the majority of the recent investment is (according to CB Insights) in enterprise applications.

Future Applications and M&A Activity

Indeed, a significant number of commentators see the largest potential markets for VR and AR being outside the media and entertainment sectors.  In a recent Wired article, Brian Shuster (internet pioneer, now CEO of Utherverse Digital and Ideaflood) reflected on the impact of the Internet on consumer business and expectation and the potential impact of VR and AR:

“The way the Internet and the ‘flat’ World Wide Web set off this period of economic nirvana was, in short, that it changed everything – everything, that is, for some segments of the economy.  All kinds of costs were taken out of entire industries, such as music, travel and shopping… But some industries were largely untouched by the World Wide Web.  Industries like real estate, conventions and classroom education… Virtual Reality holds the promise to be even more transformative than the flat Web was – reaching into every segment of every market and remaking it to be virtually accessible.”

Imagine being a student in a VR/AR-enabled society.  By slipping on a headset, you would be able to attend lectures in real-time, interact with real classmates and be taught by the world’s finest professors, making use of the best online interactive learning tools.

Similarly, medical applications of VR and AR are starting to emerge.  Companies like EchoPixel, a developer of software which converts flat images of patient anatomy into interactive 3D representations, are exploring virtual reality applications for doctors, medical students and patients.  In fact, any situation where a professional has to examine or control something at a distance could benefit from VR or AR technology.

Where investment leads, M&A follows and we’re already experiencing a marked rise in the number of EdTech and MedTech acquisitions, involving target companies which are developing their own VR and AR solutions.  For now, the games designers are the ones setting the VR and AR agenda, and whilst it is difficult to predict where exactly the market is headed, the proliferation of new patents means that high-valuation consolidation is typically on the horizon.

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