Inside Daydream, Google’s New VR Ecosystem

The search giant gets serious about virtual reality.
May 18, 2016, 6:13 PM UTC
Photo: Peter Earl McCollough—The New York Times/Redux

Inside Daydream, Google’s New VR Ecosystem

The search giant gets serious about virtual reality.

When Google (GOOGL) decided to get serious about virtual reality in 2014, it started by convincing its own employees. At the time, the company had dabbled in the technology with the launch of Google Cardboard, a plastic and heavy-duty paper object that turned a smartphone running Google’s Android mobile operating system into a makeshift VR headset. Emboldened by the early public response—Google went on to ship 5 million Cardboard viewers—the ­company’s ambitions quickly grew. Soon Google needed its employees to believe that VR was not just an experiment but a big bet worth making.

To make his case, the company’s newly appointed VR czar, Clay Bavor, converted a simple conference room at Google’s Mountain View, Calif., headquarters into a dedicated virtual reality room complete with speakers, soundproofing, and headsets. With gear from Valve, the gaming company behind the Half-Life series, the room became a place where employees could use a viewer to explore the Pacific Ocean or place themselves in the middle of a music concert.

“People would go in ­wondering and come out believing,” Bavor says. “It was a powerful turning point for Google.”

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But what about the rest of the world? Today the market for virtual reality is budding at best—just a $6.7 billion business this year, predicts market researcher TrendForce, driven mostly by hardware sales. In the two years since Google launched Cardboard, a rash of rival headsets has appeared. Facebook-owned (FB) Oculus VR released its long-awaited Rift, compatible with Microsoft’s (MSFT) Windows and Xbox. Samsung began shipping its Gear VR, which is powered by an Android-based Galaxy device, in partnership with Oculus. HTC released its Vive, which runs on software made by Valve. Sony (SNE) announced a VR system for its popular ­PlayStation gaming console.

Google’s reference design for a viewer and controller that support Daydream, its new virtual reality platform. Google’s reference design for a viewer and controller that support Daydream, its new virtual reality platform.Courtesy of Google

TrendForce believes the VR market will eventually turn a corner and reach $70 billion in sales in 2020—but driven mostly by software, not hardware. And that’s where Google hopes to make the biggest impact.

Sitting in a glass-walled conference room in the VR wing of Google headquarters, Bavor explains that he now needs to make his case to those beyond the Googleplex—to the software developers and smartphone manufacturers that will together spark adoption of VR technology beyond the early adopters who are driving today’s sales. The goal, he says, is to make sure that top developers see Android as the best return on their time rather than competing operating systems from Oculus, Valve, and Sony.

In May, at Google’s I/O conference for software developers, Bavor revealed Daydream, a virtual reality platform that sits atop a new version of Android, as well as a new viewer and a mission to work with partners to make Daydream-ready devices.

Unlike with Cardboard, the goal with Daydream is to design an ecosystem. Says Bavor: “The whole point is to think about the hardware, software, viewers, controllers, and experiences in concert.” And not separately, he implies, like some of Google’s rivals thus far.

The effort starts with Android. Google’s mobile operating system has been rebuilt to accommodate the additional sensors, graphics, and component prioritization that modern VR technology requires. It also better integrates the rest of the phone’s operations with the VR experience. (For ­example, you can now receive a text message in VR while wearing a viewer.)

The effort extends to Google’s revamped VR hardware. David Burke, vice president of engineering for Android, recalls walking into Bavor’s pop-up lab in Mountain View as his team tinkered with microchips, fabrics, plastics, and sensors to build scores of ­prototypes—100 in all—for a new viewer and controller. “There were wires and computers hanging everywhere,” Burke says.

The result—which took a year and a half to develop, vs. the mere weeks for Cardboard—is a sleek fabric viewer that fits snugly around a user’s head and relies on a person’s Android smartphone for VR content. It’s more garment than “gizmo,” Bavor contends, taking a subtle dig at the ski-mask-like Oculus Rift. The new controller mimics a small wand; Bavor first tested it by casting a line in a VR fishing game.

When it comes to hardware, Google is late to the VR party. Still, Bavor insists that its impact could be the most significant. By creating both the software and the hardware for VR (but allowing partners to make their own versions), Google is copying its own playbook for Android, the world’s top mobile operating system. Samsung and HTC, two major Android phone manufacturers, will develop Daydream-ready phones. Gaming giants Ubisoft and Electronic Arts (EA) will create Daydream-ready VR games.

“With Android we ­created a market for developers,” Burke says. “I think VR needs the same thing.”

DaydreamHome Courtesy of Google

The strategy insulates the search giant from continued criticism that it can’t create hardware that appeals to a large consumer base as ­rivals Apple (AAPL) and Amazon (AMZN) can. Google Glass, the company’s early attempt at a wearable, was a flop. Nest, the smart-home device maker it acquired in 2014, has missed sales targets.

“Google hasn’t had a breakthrough success on hardware, despite owning the operating system ­Android,” says James ­Cakmak, an analyst at ­equity research firm Monness Crespi Hardt & Co.

Bavor says Google has learned from its Glass debacle and applied those lessons to its VR efforts. For starters, a Daydream-ready system will not cost $1,500 (as Glass did) or $600 (as Oculus Rift does). He won’t reveal the price for Google’s new viewer and controller, saying only that it won’t cost a lot of money. The software will be free for developers.

“We’re building on what people are comfortable with and what people already have and are familiar with,” Bavor says. “People are going to continue to buy smartphones.”

And, he adds, those devices will be made by different manufacturers, not just Google. “So you can buy this extra thing, and it turns your phone into a movie theater that you can carry around with you in your bag.”

TEC.06.01.16.virtual reality pullquote Courtesy of Google

Could virtual reality become a Google experiment that doesn’t end up becoming a money pit? Bavor says the company hopes to emulate the Android business model by selling content through its Play store. In-app purchases could be an additional revenue stream, he adds. What he didn’t mention is advertising, where Google has earned billions of dollars.

Brian Blau, an analyst at market researcher Gartner, is confident in the company’s chances. “Google is the master at creating ecosystems and is much more effective than its competitors,” he says. “Creating a platform for VR is their opportunity to lose.”

Cakmak, the analyst, agrees. There is potential for Google to display ads within virtual reality ­content—about as captive as an audience gets. “Google is still an advertising company at its core,” he says. “VR could enable Google to gather more data and targeting capabilities for ad opportunities.”

For now, Bavor is focusing on the big picture. “I don’t pretend that VR will be the same as being in the crowd at a concert,” he says. “But it’s a whole lot closer to actually being there than watching it on a TV. You could be able to sell the same seat in a Broadway show 10 million times. Everyone wants to see Hamilton on Broadway, but few can see Hamilton. Virtual reality could solve that problem.”

A version of this article appears in the June 1, 2016 issue of Fortune with the headline “Inside Google’s Next Ecosystem: Virtual Reality.”