Throughout most of 2016, Microsoft (NASDAQ:MSFT) seemed to be a laggard in the virtual-reality market. Facebook's (NASDAQ:FB) Oculus Rift and HTC's Vive courted high-end PC gamers, Samsung's Gear VR and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google Cardboard introduced VR to mobile users, and Sony's (NYSE:SNE) PlayStation VR made PS4 games more immersive. Microsoft, however, merely hinted at Oculus Rift compatibility with its Xbox Scorpio upgrade.
But that all changed in late October at Microsoft's Windows 10 event, which finally revealed the tech giant's VR ambitions. Let's discuss five key things investors should know about the company's upcoming VR headsets.
1. Tethered, with "inside out" sensors
Like the Rift and Vive, Microsoft's VR headsets will be tethered to PCs. That means users can't freely move around as they could with a mobile-based device such as the Gear VR, or a standalone one such as Intel's (NASDAQ:INTC) Project Alloy.
However, Microsoft claims that these new headsets can track a user's head rotation and position without setting up additional sensors around the room. The Rift and Vive, by comparison, both use external sensors to track the headset's position in space. Microsoft claims that its headsets use "inside out" sensors that can track a user's position with internal hardware -- making it much easier for multiple people to use headsets in the same area.
2. A much more affordable VR experience
Microsoft won't make these headsets by itself. Instead, it's relying on its longtime hardware partners HP, Lenovo, Dell, Asus, and Acer to deliver the goods. The headsets will start at just $300, which is much cheaper than the $600 Rift and $800 Vive.
Microsoft has also stated that its headsets won't require pricey high-end PCs as the Rift and Vive do. Hololens and VR head Alex Kipman recently told Polygon: "We've lowered the specs you need for PC from a $1,500 system to a $500 one."
3. Possible training wheels for the HoloLens
During the demo, Microsoft's VR headset was entirely controlled by voice commands and hand gestures. That was quite different from the Rift, Vive, or PSVR -- which all use external controllers. But those controls closely resembled the ones for the HoloLens.
Since the HoloLens' development kit costs $3,000, it remains out of the reach of mainstream consumers. But if Microsoft floods the market with $300 VR devices that use the same controls, they could serve as "training wheels" for the HoloLens before it's officially launched.
4. Locking in developers with a big Windows 10 update
To establish a new computing platform, Microsoft needs to win over developers. It intends to do so with the upcoming Windows 10 Creator Update, which will add 3D image capture and editing tools. These tools will enable artists and developers to create 3D objects which can be viewed in Microsoft's VR headsets or HoloLens.
To reach the largest number of developers, Microsoft is simplifying the tools so that 12-year-olds can use them. If the platform attracts enough new developers, Microsoft's vision of turning Windows 10 into a "holographic" OS -- as it has repeatedly demonstrated in HoloLens demos -- could become a reality.
5. Is this Microsoft's answer to the PSVR?
Microsoft has spent a lot of time strengthening the bonds between Windows 10 and the Xbox One, with a shared app store and game streaming. Therefore, it's logical for Microsoft to tether its new headsets to the Xbox One as well. Doing so would help Microsoft counter the PSVR and offer Xbox One owners a way to play new games with VR features.
That also means Facebook's Oculus VR and Microsoft won't really be allies in the VR market. The Oculus Rift runs on Windows PCs, but the company is aggressively growing its own VR ecosystem, Oculus Home, which would ultimately clash with Microsoft's vision for an AR/VR-powered Windows 10. Oculus has also been developing its own standalone device, the Santa Cruz headset, which would naturally become a rival to Microsoft's VR devices.
The key takeaway
Microsoft's VR ambitions seem well planned and could serve as a natural stepping stone between PCs and HoloLens. They could also finally help Microsoft evolve into a market-leading innovator to counter rivals such as Sony, Facebook, and Google across multiple markets.