Qualcomm (NASDAQ:QCOM) recently unveiled a new reference design for virtual reality (VR) headsets, powered by its upcoming Snapdragon 845 chipset. The announcement seems early, since VR headsets based on Qualcomm's prior Snapdragon 835 design are just hitting the market.

Like the 835 headset, the 845 headset features eye-tracking technology and 2K-per-eye resolution displays, while its tracking cameras let users "see" their own hands in virtual space. However, it also adds room-scale positional tracking with onboard cameras, and reportedly offers 30% better graphics performance and 30% more power efficiency than the 835.

A student uses a VR headset.

Image source: Getty Images.

The addition of room-scale tracking and higher-fidelity graphics could bring Snapdragon-powered stand-alone VR headsets within striking distance of higher-end PC-based devices, like the HTC Vive; or console-based ones, like Sony's PlayStation VR.

Let's dig deeper into Qualcomm's VR efforts to understand what they mean for the company and the fledgling industry.

Qualcomm already has a foothold in the market

Qualcomm's mobile chips already power the vast majority of Android phones. Therefore, anyone who has put a smartphone into a Cardboard or Gear VR-like viewer has likely seen a Qualcomm chipset power a VR app.

Over the past year, device makers realized that three problems throttled sales of higher-end VR headsets like Facebook's (NASDAQ:FB) Oculus Rift: their high prices, their need to be tethered to high-end PCs, and the cumbersome setup of wires and tracking cameras.

Mobile-based headsets eliminated many of those problems, but they lagged behind in graphical horsepower. Repeatedly placing the phone in the headset -- and switching between mobile and VR modes -- was also clumsy and inefficient.

Facebook's Oculus Go.

Facebook's Oculus Go. Image source: Oculus VR.

That's why VR headset makers started developing stand-alone headsets based on mobile technology. Facebook's Oculus Go, a $199 stand-alone headset it introduced last October, is powered by Qualcomm's Snapdragon 821 chipset, which was launched in 2016.

Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) new stand-alone Google Daydream headsets with positional tracking, which are made by companies like Lenovo and HTC, use the newer 835 reference design.

Qualcomm is faring much better than other chipmakers in this market. Intel (NASDAQ:INTC), for example, killed off its Project Alloy VR headset project last year due to a lack of interest from hardware partners. That was a significant setback for Intel, which was using the platform to showcase its Movidius visual processing units and RealSense depth-sensing cameras.

What does the VR market mean to Qualcomm?

IDC estimates that 13.7 million VR headsets were shipped last year. That number pales in comparison to the 1.47 billion smartphones that IDC estimates were shipped in 2017.

However, IDC also believes that VR headset shipments will rise at a compound annual growth rate of 56.1% between 2017 and 2021, reaching 81.2 million units by the end of the period.

So over the next few years, new reference designs for VR headsets could diversify Qualcomm's mobile chipmaking business away from the saturated smartphone market -- where it faces tough competition from cheaper chipmakers like MediaTek and first-party chips from original equipment manufacturers like Huawei.

Qualcomm also sells other reference designs and development kits for drones, auto infotainment and navigation systems, wearable devices, and Internet of Things devices. Together, these chips might help Qualcomm dominate new markets in the same way that it conquered the smartphone market.

The key takeaway

I'm still skeptical about virtual reality devices, since many pundits and companies previously overestimated the growth potential of the market. However, I believe that improvements in the technology -- like those seen with Qualcomm's stand-alone reference designs -- could eventually pave the way toward mainstream growth.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), and Facebook. The Motley Fool owns shares of Qualcomm and has the following options: short March 2018 $200 calls on Facebook and long March 2018 $170 puts on Facebook. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.