Market researcher IDC recently released its estimates on the virtual reality (VR) and augmented reality (AR) market, and stand-alone headset sales are booming while screenless viewers are getting crushed. Meanwhile, the AR headset market is still mostly nonexistent, as most consumers currently use AR technology through their smartphones instead of dedicated headsets. AR's potential is massive, but consumers aren't quite there yet.

In this segment from Industry Focus: Tech, host Dylan Lewis and Fool.com contributor Evan Niu discuss the latest news in the AR and VR market.

A full transcript follows the video.

This video was recorded on Dec. 7, 2018.

Dylan Lewis: I think upfront investment might be the perfect way to segue into the VR and AR discussion. This is a market where I think a lot of people have been very excited for a very long time. It's a sexy idea, the idea of virtual reality. The reality of virtual reality is, a lot of the rigs are expensive, and a lot of the computing needs to power this stuff are also fairly expensive. What does adoption look like there? What did you glean from the report?

Evan Niu: People like thinking about VR because it's so sci-fi. [laughs] The VR market has been declining for about four consecutive quarters. It finally returned to growth in the third quarter, according to IDC's numbers, with 8% growth. There were 1.9 million units sold worldwide. Kind of like we're seeing in the wearables market, the falling prices and the discounts are really helping to spur unit volumes in both consumer and enterprise markets because it makes it cheaper for people to give it a try.

Lewis: In the wearables market, we have the very limited functionality bands, and then we have the smartwatches. In VR, we have screenless viewers, tethered headsets, stand-alone headsets. What's going on within those spaces?

Niu: Screenless viewers, which are those accessories where you strap a phone to your face, which is kind of not a great experience, those volumes are getting crushed. Those volumes are down 60%, almost. I don't think that's too surprising because those products have never been that compelling to begin with. It's just a really cheap way for users to explore a really rudimentary VR experience. There's also not a lot of potential for innovation because it's just accessory, whereas the phone itself is the primary device to delivering the VR. Companies aren't working too hard on this category, so it's not too surprising to see the volumes dropping here.

Lewis: I've always thought of it as the gateway to VR. Maybe it's the first way that some people experience any VR interaction. You have the Google Cardboard-type product, where you pop it in, it costs like $10 or something like that. I remember being at trade shows, and people literally gave them away as a way to build brand buzz and things like that. But you're like, "Oh, this is neat," and then it collects dust on your desk for a year. So, I can see why that category might be getting crushed.

What about some of the more involved stuff?

Niu: The tethered headsets, which are the ones where you have the headset, but you still have to plug into a high-powered PC, that market is still pretty solid. Sold over a million units for the second time ever. Sony is the clear leader with the PSVR. They sold almost 500,000 units. They have a pretty big advantage here because they've sold over 80 million PS4 gaming consoles to date. That's a pretty large installed base of people that already have the big hardware that you need. Then, the PSVR is a small accessory that you buy on top of that Whereas, compared to PC-based virtual reality, like Facebook's Oculus Rift, the Rift itself is kind of expensive, but also, you need to buy a gaming PC that's $800 or more. That's a pretty expensive setup. There's clearly a market for it of enthusiasts that are really big into it. Most of the applications are still gaming. That market is still doing pretty solid.

Lewis: That's kind of funny, because Oculus is the Kleenex of VR. I think if you were to ask someone to name a VR rig, that would be the one that they'd throw out there.

Niu: They're #2. They sold about 300,000 units in the quarter. They're second behind Sony. #3 is HTC. Three main players here.

Lewis: Something that I was surprised by looking at this report is how AR hasn't taken the way that I was hoping it might. I look at VR and I say, it's immersive, it's wholly immersive. AR is a hybrid there. And yet, it is still a very small portion of the market of this combined AR-VR space.

Niu: Right. AR is still only about 3% of the market. Kind of like the early VR stuff we were talking about with the accessories, AR primarily is being delivered through phones these days. You have Apple and Google really pushing AR technology on their own platforms to allow developers to create these experiences that are all through your phone. You use your phone as a viewfinder. As far as pure AR headsets go, there aren't a lot of players. It's really Lenovo and Microsoft. Lenovo sells this one headset that's very limited, there's just one Star Wars game. Microsoft has its HoloLens, which there's been a lot of buzz around, but it's still only available to developers, and it costs $3,000. [laughs]

Longer-term, Facebook and Apple are reportedly working on these dedicated AR headsets. As we've talked about before, Tim Cook has talked about the potential for augmented reality extensively. He really thinks it's a game-changing technology. We know that Apple's investing heavily in it, we just don't know when they're going to do something.

Lewis: Your point about AR, and that headset costing $3,000, that's been the struggle with this category in general. It's expensive, and people don't necessarily want to lay out that kind of money for something that the content isn't there yet for. The entertainment experience isn't quite there yet. Think about how many things you drop several thousand dollars on to just purely enjoy. Maybe a TV every couple years. I've long held the idea that the real, most visible adoption of AR is going to happen with phones. And it hasn't really happened in a way that's all that functional or all that helpful yet. Most of the AR experiences that people have on phones are emojis or filters on Snap. They aren't these really helpful at-a-glances, or layers onto whatever you're looking at that can help you make sense of something.

Niu: Right. Of course, you have to mention Google Glass from years ago, which was just so ahead of its time. Yeah, I definitely agree that the really killer use cases aren't there yet. But that being said, I think it's really exciting if you look at some of the stuff that these developers are making. I saw one the other day, there was a photo-realistic shoe -- some product demo-type thing. But it looked photorealistic. It was kind of crazy how good it looked. There's a lot of these glimpses that we're seeing of what developers are working on that do have a lot of promise and potential for the future. But, I definitely agree that it's not quite there yet, to the point where it would warrant someone buying a dedicated AR headset for everyday use. It's just not there yet.

Lewis: To recap all of this, it sounds like Sony is continuing to do what it needs to do to further VR in the gaming space. For some of the other big tech names, expect AR and maybe some idea of VR to play into hardware that people maybe already have, or to future product lines. But a company like Apple, this isn't playing into the strategy in a very visible way right now.

Niu: Right. But they're laying the groundwork for it eventually. They're doing the right thing with getting the content and getting people used to the idea first, which paves the way for eventual adoption of a dedicated headset later on.

Lewis: Do you think that we will see something AR or VR-related from Apple before we see Uber and Lyft go public, Evan?

Niu: [laughs] No. I think it'll probably be three to five years or so. Definitely not 2019, would not expect that.

Lewis: I guess we'll just have to keep waiting. That's just the way things go.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Dylan Lewis owns shares of GOOGL, AAPL, and FB. Evan Niu, CFA owns shares of AAPL and FB. The Motley Fool owns shares of and recommends GOOGL, GOOG, AAPL, and FB. The Motley Fool owns shares of MSFT and has the following options: long January 2020 $150 calls on AAPL and short January 2020 $155 calls on AAPL. The Motley Fool has a disclosure policy.