AMD (NASDAQ:AMD) has been fighting a losing war against Nvidia (NASDAQ:NVDA) in high-end GPUs over the past decade. AMD controlled nearly half the dedicated GPU market back in 2006. But by the first quarter of 2016, AMD controlled just 23% of the market, according to research firm JPR, while Nvidia controlled the remaining 77%.

The bears believe that AMD will fall behind Nvidia in GPUs and Intel in CPUs, and end up pigeonholed in niche markets like embedded processors. But there's also a more bullish narrative anchored in virtual reality.

Image source: Getty Images.

In that thesis, console and headset makers will use AMD's APUs (which combine CPUs and GPUs), because they're generally more cost effective than stand-alone CPUs and GPUs. AMD's new "VR-ready" add-in graphics boards could also enable consumers to build cheaper PCs which can run apps for high-end headsets like Facebook's (NASDAQ:FB) Oculus Rift or HTC and Valve's Vive. Let's discuss that second theory, and see if AMD can challenge Nvidia in the low-end VR-ready GPU market.

Meet AMD and Nvidia's low-end VR GPUs

AMD's cheapest VR-ready GPU is the RX 480, which has a base clock speed of 1.3 Ghz, 4GB of VRAM, and costs $200. Nvidia's competing device is the GTX 1060, which has a base clock speed of 1.5 Ghz, 6GB of memory, and costs $250.

Early benchmarks on the two devices at PCEVA indicate that the 1060 offers 6%-7% better graphics performance on the latest version of 3DMark's Time Spy DirectX 12 benchmark. Those results are encouraging for AMD, since some customers might question the value of paying 25% more for a 7% performance boost.

They're also better than the "leaked" 3DMark Firestrike benchmarks from XFastest in early July, which indicated that the 1060 could outperform the RX 480 by 15%. However, future benchmarks which fully utilize the GTX 1060's higher VRAM could reveal a bigger performance gap between the two cards.

The RX 480 (L) and the GTX 1060 (R). Image source: AMD/Nvidia.

AMD investors should also be wary of two headwinds. First, Nvidia's growth over the past decade has been fueled by robust brand loyalty for its GeForce cards. This arguably enables it to charge a premium on its devices without losing market share to AMD.

Second, Nvidia has a strong track record of launching more advanced and power efficient chip architectures before AMD. AMD has generally tried to keep pace by boosting clock speeds instead of developing new architectures, which occasionally leads to overheating problems. AMD addressed this perception with a more power efficient 14nm FinNET architecture in its latest GPUs, but the initial launch of the RX 480 was marred by power draw issues -- which were subsequently resolved with a new driver.

Why cheap VR GPUs matter

Facebook, HTC, Valve, and other PC-based VR headset makers need the price of GPUs to decline to make VR-ready PCs more affordable. Prior to the launch of the RX 480 and GTX 1060, the average price of a VR-ready PC was roughly $1,000. Adding the $600 Oculus Rift or the $800 Vive to that rig made the entire setup a toy for rich gadget enthusiasts instead of mainstream consumers.

New gaming PC builds using the RX 480 or GTX 1060, however, have already reduced the average price to around $700. While that still keeps the price tag of the VR experience well above $1,000, it might attract more mainstream consumers who were looking to upgrade their aging PCs. The prices of Nvidia and AMD's VR-ready cards will likely decline over the next two years, which will make VR-compatible a standard feature on most PCs.

If that happens, the VR market could grow from nearly nothing today to $30 billion by 2020, as tech M&A advisory firm Digi-Capital predicts. Headset sales could soar to half a billion units by 2025, according to Piper Jaffray's estimates.

But does AMD or Nvidia have the upper hand?

Nvidia has two distinct advantages over AMD. First, it's allocating most of its R&D and sales/marketing expenses on its GPU business. AMD, however, must allocate those expenses to three fronts -- its GPU battle with Nvidia, its CPU battle with Intel, and its expansion in enterprise, embedded, and semi-custom (EESC) processors. Nvidia's GAAP operating expenses were nearly 50% higher than AMD's last quarter -- indicating that it has much more cash for big marketing blitzes.

Second, Nvidia had a GAAP gross margin of 57.5% last quarter, compared to AMD's gross margin of 32%. This means that if AMD gains market share against Nvidia, Nvidia can dramatically lower its prices to regain lost ground. This would be bad for both chipmakers' margins, but gamers and VR headsets would benefit from the arrival of cheaper VR-ready GPUs.

So who will win the VR battle?

Nvidia has clear advantages in the VR-ready GPU battle, but AMD will likely hold its ground with considerably cheaper GPUs with just slightly lower specs. Therefore, it's unlikely that Nvidia will flush AMD out of the market, but it's equally unlikely that AMD will steal much market share away from Nvidia without triggering a major price war.

Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Nvidia. The Motley Fool recommends Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.