Over the 4th of July long weekend I tried to physically and mentally unplug as much as possible from the technology rat race. However, as I sat watching the fireworks on the north shore of Lake Tahoe, I couldn’t help but wonder what this experience would be like in virtual reality, and how many, if any, of those in the enormous crowd would instead opt to stay home and watch the virtual version if they had the opportunity. [1]

To put it another way, what is the reality premium? How much more valuable is an experience because it is real instead of virtual? [2] This is an important question, especially considering the massive investment in VR/AR recently. [3] You could no doubt write an entire book examining this, but I just want to think through some of the key facets that are top of mind.

Obviously the reality premium will vary greatly depending on the individual and experience, and surely be negative for certain dangerous activities like war games (skydiving presumably depends on the person). Let’s stick with fireworks for now. With existing technology we can already create convincing versions of the bright, shimmering explosions of color and the deep, slightly delayed booms. And, not bound by the laws of physics or costs, these could be even more spectacular in your VR headset. We’ll need some Ready Play One haptic technology in order to faithfully replicate the non-visual or auditory aspects of the experience—the warm sand under your bare feet, the cool breeze coming off the lake, the taste and smell of beer and hot dogs (ok you can create those last two on your own easily enough)—but the core parts of watching fireworks are arguably on par or better in virtual reality. Yet, I doubt anyone would bet on fireworks declining in popularity any time soon. Clearly part of the answer is that fireworks are free (ignoring indirect costs), and high quality VR is still very expensive and not widely owned. Let’s examine these individually, then bring everything together.

Instead of free events, what about those that can be quite expensive, like concerts, sports, and travel? [4] For the last several decades the quality differential between the real and alternative experiences of these events—watching them on screens, maybe via 360 videos or 3D TVs more recently—has been large. However, the visual and auditory components in the current VR versions, at least in some of the demos I’ve seen, are incredible. But how does this compare to being able to tell your grandkids you scuba dived in the Great Barrier Reef, saw Led Zeppelin live in 1969, or were at Candlestick Park to witness “The Catch”—in real life (or whatever the modern day equivalents turn out to be)? I believe that for the foreseeable future many people will continue to spend a big chunk of their disposable income on these activities despite viable virtual alternatives.

Speaking of disposable income, let’s briefly look at cost. Assuming it follows the trend of past technologies in their relatively early stages, the cost of VR will decrease while the quality goes up. This will cause it to be more widely distributed, probably via phones, and the reality premium to decline (of course, we’ll need to get over things like the uncanny valley and how off-putting someone wearing a VR headset can be). Taking this thought to what some would argue is its logical conclusion, eventually we’ll presumably be able to stimulate the brain in the exact same way the external world does, and we will all live “virtual” lives indistinct from reality like in The Matrix.[5] Many experiences will actually be vastly superior or only possible in VR, but for an identical activity, is there still a reality premium? I think there is—you could argue that watching the Super Bowl on TV is already a superior experience to going to the game because you avoid dealing with lines, weather, unruly fans, having a poor view of the action, etc. but yet thousands of people pay thousands of dollars each year to attend.

So, what could a model for the reality premium look like? Combining the (in no way comprehensive) factors examined above and making all kinds of assumptions, for each desirable experience and individual we would get something like this:

Observations:

There is a y-intercept, or a maximum reality premium per activity; no matter how much better Taylor Swift is in concert, there is a limit to how much you will pay to go vs. watching her on YouTube (or even just listening on Spotify).

No matter how good and cheap VR gets, there will be some minimum reality premium; there is something inherently valuable about an experience being real vs. virtual.

This will have all kinds of implications for the demand and pricing of events with virtual equivalents. Will this effectively shift out the supply curve and/or shift in the demand curve, reducing prices?

No discussion of VR would be complete without explicitly mentioning the xxx factor, the so-called killer app: porn. I think it follows the same curve as above, probably shifted up farther than most activities.

Even things that aren’t necessarily desirable but must be done, like visiting the doctor or many work meetings, would follow a similar curve but may intercept the x-axis at some point; once you can get an accurate diagnosis from your couch you may never visit the doctor again. [6]

To sum things up: VR will open up amazing experiences to many people who would otherwise have to settle for far-inferior versions, create entirely new experiences altogether, and have a potentially radical impact on lots of activities. However, there is in fact a reality premium, and while it will vary, it’s probably significant, at least for the foreseeable future.

Notes

[1] These don’t necessarily have to be mutually exclusive, but that’s what I want to focus on.

[2] Let’s ignore for now the question of if we’re already living in a simulation of a more advanced civilization.

[3] AR is a different ballgame because you can combine the upside of actually being somewhere doing something with additional layers of value, as long as we don’t end up with this nightmare scenario.

[4] For many the best part of an experience is sharing it with other people, so perhaps the reality premium will be lower for solo activities, though some argue that virtual reality will be the most social technology of all.

[5] See the brain in a vat thought experiment for more on this idea.

[6] I think it will be some time before VR gets traction outside of gaming and other entertainment-related domains. For example video calling has been available for a decade but makes up a minority of conference calls, and VR is higher friction. VR will probably be niche until we’ve moved far down the x-axis, and even then, like with self-driving cars and most significant new technologies, there are others barriers to adoption.