Amazon (NASDAQ:AMZN) could be developing augmented reality (or AR) features for its own chain of homewares stores, according to The New York Times. The report, which cites a source "briefed in the discussions," indicates that shoppers at Amazon's brick-and-mortar homewares stores could use devices or apps to "project" home furnishings into digital images of their actual living rooms.

This idea isn't really new. Back in 2013, IKEA launched an AR app which let customers project furniture into their living rooms via a smartphone camera. Last year, home improvement retailer Lowe's (NYSE:LOW) installed Microsoft's (NASDAQ:MSFT) HoloLens mixed reality headset at select stores to let shoppers design virtual rooms.

An augmented reality display being projected onto a woman's eye.

Image source: Getty Images.

However, Amazon's AR plans coincide with its recent moves into the brick-and-mortar space with test bookstores, grocery stores, and now rumored homewares stores. Let's see what that push means for Amazon, and how it could boost demand for Microsoft's HoloLens and holographic apps.

What is Amazon up to?

Amazon's brick-and-mortar expansion might seem counterproductive, since its online marketplace is forcing many brick-and-mortar retailers to shutter stores and invest more heavily in e-commerce. However, Wal-Mart (NYSE:WMT) has proven that some customers still prefer placing orders online and picking them up immediately to avoid wait times and shipping fees.

To cut overhead costs, Amazon's grocery store model uses a "just walk out" system called Amazon Go. The store tracks the items taken by the customer and charges their Amazon accounts once they walk out -- eliminating the need for checkout lines and cashiers. Its bookstores offer special discounts to Prime members, and offers self-checkout via the Amazon app.

For the rumored homewares push, the idea will likely be the same -- to offer self-checkout for smaller items, delivery for larger items, and discounts for Prime members. Assuming that you have pictures of your living room, you can potentially project the home furnishings into your home like the IKEA app.

Since these brick-and-mortar stores all give preferential treatment to Prime members, that expansion can boost the growth of the Prime ecosystem. Last June, research firm CIRP estimated that Amazon had 63 million Prime members in the U.S., a 19 million increase from a year earlier. It also estimated that the average Prime member spent $1,200 annually at Amazon, while non-members spent just $500.

Making sense of Amazon's AR investments

This isn't Amazon's first move into the AR market. However, its previous moves have been all over the map. In late 2015, it patented an AR projection system, similar to Microsoft's IllumiRoom, which "transformed" living rooms into completely different, interactive environments. For example, a user could theoretically tap the wall and turn it into a TV screen, or tap the desk to open an e-book.

Last year, Amazon offered jobs for a virtual reality team. It didn't say much about the team's goals, except that it would focus on a platform for "immersive storytelling". Analysts and investors speculated that Amazon could apply VR to games on the Fire TV, or add VR viewing options to Amazon Video. However, the recent report about AR homewares indicates that the team might actually be developing new AR features for the Amazon app to enhance the shopping experience at its brick-and-mortar stores.

What does this mean for Microsoft and the AR market?

Amazon's rumored AR app or homewares stores might never see the light of day, since the company hasn't publicly said anything about them yet. But Amazon's interest might get other retailers interested in using AR tools in brick-and-mortar stores.

A HoloLens demo at Lowe's.

A HoloLens demo at Lowe's. Image source: Lowe's.

That would be great news for Microsoft, since the HoloLens is the most mature "mixed reality" headset today. The upcoming Windows 10 Creators Update, which will add easy-to-use holographic tools for developers, could also make it much easier for retailers to build custom apps for the HoloLens without Microsoft's help. This wouldn't only apply to big box retailers like Lowe's -- Volvo is also using the HoloLens in dealerships to let customers virtually view cars which aren't in stock.

Is augmented reality the next big thing?

It's hard to tell if Amazon and Microsoft's early AR moves into the retail space will ignite a major shift in how stores showcase their products. However, tech M&A advisory firm Digi-Capital estimates that the AR market will grow from nearly nothing today to $90 billion by 2020, with much of that growth generated by sales of AR hardware, e-commerce uses, and enterprise applications.

If companies like Amazon and Microsoft lead this charge, we could see mainstream interest in AR evolve beyond early efforts like Google Glass and Pokemon Go toward shopping apps. That shift could blur the lines between "showrooming" and online purchases, which could help tech giants like Amazon straddle both markets.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.