Anyone following the VR space knows by now that Qualcomm Inc. (Nasdaq:QCOM) has entered the space with the announcement of its standalone VR820 headset. While it’s a positive step in a new direction, with the potential of opening a new revenue stream for the company, many media outlets have termed this development as “risky”. It breaks the industry norm and is different from how Galaxy VR and PC-driven headsets operate, and the general perception is that it might not succeed. But what exactly is “risky” about this release? Let’s take a closer look to have a better understanding of it all.

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Is the new platform risky?

Let me start by saying that there aren’t many options in the VR headset space as of now. We have Galaxy VR retailing in the market, which basically requires a smartphone to power it. And there’s a second category of headsets which essentially requires us to stay connected to a PC to experience VR. Oculus Rift falls into this category. But the star of our article, Qualcomm’s VR820, has its own set of dedicated hardware such as OLED display and computing components to power the headset. Hence, the design philosophy is new.

The thing that’s concerning media outlets and industry experts, at least to the best of my knowledge, is that VR820 will be an entirely new platform. So there won’t be any content available for the headset right from the start. Qualcomm would actually have to build and nurture its community of future developers over time, for the headset to have any sort of appeal for mass consumers. Otherwise, it could die just like BlackBerry's BB10 OS or Windows Phone OS due to the lack of apps across various genres.

But what exactly is risky about it? What does Qualcomm stand to lose if VR820 doesn’t become a blockbuster hit? The chipmaker is using an SDK and Snapdragon 820 chip, that already existed. The chipmaker merely put together a high-resolution display, its Snapdragon 820 chip and other components required for the running of any generic mobile device. It didn’t really have to go out of the way, spend large chunks of cash on R&D, for the development of this headset.

So from the way I see it, if VR820 fails to become a huge hit, Qualcomm doesn’t really lose much, since it didn’t heavily invest in the development of this headset in the first place. But if the headset succeeds, it would open up a new revenue stream for Qualcomm. It’s basically a low-risk, high-reward venture. The chipmaker is merely trying to monetize the IP that it already has, and I don't think that there's anything risky about it.

Highly profitable

It’s also worth noting that the VR headset industry is projected to explode over the next few years. The chart attached below sheds light on this very fact. So Qualcomm is technically going to operate in a rapidly growing market. Even if it manages to capture only a small piece of the market, its returns could be huge. This increases its chances of succeeding and beating the odds, a move that is termed as “risky”.

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(Source: Digi-Capital)

More to the point, the VR820 is going to be Qualcomm’s own device. Up until now, it has been making chips for other smartphone makers to tap the growth of the smartphone market. But with the release of its own VR headset device this time around, the chipmaker gets direct exposure to the exploding VR market. If the VR820 succeeds, Qualcomm’s returns from this market would be much larger than its conventional royalty rate of 2-5% of the ASP that it charges smartphone OEMs, on each smartphone sale.

And lastly, industry experts believe that the upcoming VR headset would carry a price tag similar to high-end tablets. The chipmaker will be competing on quality and margins, rather than on a low-margin high-volume model. So this could potentially allow Qualcomm to breakeven in the VR headset segment even on low volumes. I suspect that this is going to be a highly profitable venture for the chipmaker.

Putting it all together

We have to understand that the VR/AR industry is fairly new. Our current technologies are still in nascent stages and there’s still lots of room for improvement and product development. So we can’t really say what will work, and what won’t, at least not at the moment.

I believe that QCOM is making an effort in the right direction. The chipmaker has ample resources and expertise to build and nurture a developer community entirely from scratch.

If the headset succeeds, Qualcomm scores a home run in the rapidly growing VR segment. If it fails, it doesn’t stand to lose much, as it is basically deploying its smartphone tech in VR headsets, without really spending much on R&D. So I believe that this is a great move by Qualcomm, and not at all “risky” for Qualcomm stock.