Virtual reality is the next step in film and online gaming entertainment

China’s gamers and moviegoers each outnumber the U.S. population

China can make headsets cheap, but designing VR worlds could be tough

On the more polluted days in China’s bursting big cities, it’s not difficult to imagine virtual reality (VR) really taking off. Who wouldn’t want to don a pair of glasses and headphones to see blue skies and hear the birds, instead of being trapped in smog and deafening traffic?

Snarled in traffic jams on an ever-increasing number of ring-roads, no, you couldn’t blame Chinese citizens if, on occasion, they wanted , Matrix-style, to just take the blue pill and escape, donning VR glasses to enter a individualized, digital realm, access to which is getting cheaper with every new edition of the at-home gaming consoles wildly popular among China’s legion gamers, who outnumber the number of citizens in America.

In The Three Body Problem, one of the most anticipated Chinese films for 2016, based on the hugely popular novel of the same name by Liu Cixin, the narrative meanders through the brutalities of the Cultural Revolution and a vast virtual reality world.

The demand for VR in China is strong and a push to supply the nation with VR entertainment is gaining strength, too. Faced with a stuttering economy, Chinese premier Li Keqiang has called for a “new industrial revolution” and is banking on a so-called “Internet Plus” strategy to revive moribund industries with the new energy and momentum of emerging start-ups.

Ever on the look out for any technological trend—whether that be 3D printing or clean energy technology—authorities in Beijing are keen to identify any area where China might be able to leap-frog the rest of the world.

Just weeks ago, Nanchang, the capital city of southeast China’s Jiangxi province, announced itself as the nation’s “Virtual Reality Industrial Base,” promising subsidies drawn from a RMB 1 billion angel fund (that’s $154 milllion) and an industrial investment fund totaling RMB 10 billion, or $1.5 billion to support VR firms that locate at the base

Back in Beijing, in a southeast corner of the sprawling capital of more than 20 million people, sits the headquarters of Lightime Studios, one of the would- be leaders of VR in China, where, in addition to a huge gaming audience, the moviegoing set is the fastest growing in the world. Past a wall of backlit posters for its movie projects—including one for Painted Skin 2, the 2012 fantasy that was the first Chinese film to gross more than $100 million on the mainland—is a small room where a group of employees are tinkering away at what CEO Sean Shen Hongxiang hopes will be the future for the company.

Two employees decked out in Virtual Reality backpacks, glasses, and headphones—and carrying toy rifles—are relaying what they see on the screens into another group of employees, huddled around a computer. “Our hardware is the most advanced you can get from overseas,” Shen says, pointing out the brand names on each piece of equipment. “But it’s when you put all of these parts together that it becomes a new thing.”

Shen instructs the blindfolded employee to fire his toy gun, which kicks back and vibrates. He explains the power of the technology to totally transport the player into fantasy, noting that the target the shooter sees inside his VR glasses is different from his opponent there in the Lightime studio: “The man he’s shooting at becomes a pretty lady in the game—even though he’s a man—he becomes a woman in this virtual world.”

The game is only one part of what Shen’s team is working on. “Next step we are going to make it as a network drama, and then turn it into film. It’s pretty interesting. Even though we are very tired working everyday, we feel happy,” he says.

Gaming research firm Newzoo estimates China’s digital games market hit $22.2 billion in 2015, surpassing the market in the United States, where sales were $22 billion.

The overlap between gaming and filmed entertainment goes both ways—illustrated by two deals struck in February. First, Beijing-based video game maker Perfect World agreed to invest up to $450 million in a Universal film slate, then Hong Kong game publisher Fifth Journey won backing from Universal Pictures, Lionsgate, and MGM Studios to create movie-based mobile games for Asian markets including China. This follows a $65 million investment in the VR powerhouse Jaunt in September from China Media Capital, Disney and CAA.

Shen is one of the pioneers of the Chinese 3D film industry, with credits including The Hunger Games: Mockingjay, and Gone with the Bullets, the 2014 film touted as the most expensive 3D production in Chinese film history.

Before becoming CEO of Lightime in 2015, Shen, now 40 years old, was COO at Beijing-based Soul Power 3-D, which specialized in converting Hollywood films into 3D. Since his move to Lightime, Shen has focused on getting out in front of the latest trend to captivate the film industry.

“The first thing to say about Virtual Reality is it’s hot!” says Shen. “It seems like everyone around the world is treating 2016 as the year for VR.”

He’s not wrong. In China, research firm Analysys International Enfodesk expects hardware, software, content, and other services associated with virtual reality to produce a more than three-fold increase in revenues to reach RMB 850 million ($136.46 million). And investment bank Goldman Sachs is predicting VR will grow to $110 billion by 2020.

If this wasn’t signal of growth enough, consider Facebook’s $2 billion purchase of Oculus VR, the creator of the much-anticipated virtual reality headset the Oculus Rift. Not to be outdone, Google, Samsung, Sony, HTC of Taiwan, Microsoft, and many lesser-known companies are also trying to play in the space.

But while much of the VR industry’s innovation is happening in the West, China’s manufacturing capabilities in cities such as Shenzhen could give local companies an advantage when it comes to cost. The company Baofeng Mojing, for instance, makes affordable virtual reality headsets, which, like the Samsung Gear VR, wrap around a normal smartphone whose screen acts as their display. But unlike the Samsung device which retails at $99, Baofeng’s VR glasses go for between RMB 69-179 ($10-$27).

Whereas the hardware might come easily to China, the content—designing the virtual worlds to project onto a VR headset’s screen—may prove more difficult.

“We’ve got to be aware that VR has its problems as well,” says Lightime’s Shen. “That’s something we’ve got to keep our eyes open about.”

“Whenever these new inventions pop up, there’s no content at all. It’s very much a chicken or the egg problem—does the hardware come first, or does the content? At the moment we have the better hardware, but the content isn’t up to scratch.”

Seeing this need for VR content, Huayi Brothers, China’s largest private-sector film company, joined state-owned CITIC Capital Holdings and others to raise RMB 230 million ($35 million) for Baofeng, bringing the company’s valuation to RMB1.4 billion ($213 million).

And Baofeng teamed up with leading Chinese film school the Beijing Film Academy in November to create a joint VR research center.

China’s gaming sector is in on the race as well. Shanda Entertainment is bringing Utah-based The Void to China. The Void is a fully immersive virtual reality theme park, which seamlessly blends virtual reality experiences with physical environments. Sensors and pulses in the Void’s proprietary gear called “Rapture” enable gamers to experience the sensation of flying planes, fighting dragons, and exploring dark dungeons.

But whether the content is ready or not, the race to be first in the Chinese market is heating up. FiresVR, a Beijing-based company set up by a former executive at Internet giant Tencent and two former Baofeng employees, aims to create the country’s first VR cinema.

But FiresVR CEO Lou Chi warns that the mad scramble is so intense it’s creating an environment ripe for amateurs and charlatans ready to make a quick buck and run.

“VR is still in its infancy,” Lou told state-run newspaper The Global Times, “but because the concept is hot right now, you’ve got listed companies and start-ups that are forced into competition on it, even if they lack the technology and don’t even understand VR”.

A quick name change to something more buzzy is sometimes enough to give a boost to the shares of Chinese companies listed on the nation’s rollercoaster-like stock exchanges. Last year it was “peer-to-peer,” this year it might be “virtual reality.”

By Lou’s own estimate, there were over 200 VR hardware companies in China in 2014, 80 percent of which hit the wall in 2015. As Lou told The Global Times, it wouldn’t be surprising if there was a major reckoning at the end of the year with only around five VR companies left standing. “The industry hasn’t grown faster,” Lou said. “The industry has just become a lot messier.”

Additional reporting by Zoe Law, Congzhe Zhang, and Chloe Chow.