Microsoft (MSFT 0.87%) just hired Ruben Caballero, a former engineering VP at Apple (AAPL 0.69%), as a new corporate VP for its engineering department. Caballero will lead the hardware design department of Microsoft's Mixed Reality & AI division, which previously developed the HoloLens and its Mixed Reality headsets.

Caballero worked at Apple from 2005 to 2019, and led the development of various wireless technologies for iPhones, iPads, and Macs. What does this new hire tell us about the future of the AR/VR market?

Three designers work on a car in augmented reality.

Image source: Getty Images.

Microsoft hasn't given up on Mixed Reality yet

Microsoft unveiled the HoloLens four years ago and launched its successor, the HoloLens 2, last November. However, the headset still costs $3,500 and targets developers rather than mainstream consumers.

Microsoft launched the HoloLens alongside its "Mixed Reality" platform for Windows 10, which encouraged developers to create holographic experiences. It also expanded the branding to VR headsets from hardware partners in late 2017, but most of those devices disappeared last year -- presumably due to poor sales.

Microsoft's Xbox chief Phil Spencer recently stated there weren't any plans to bring VR experiences to the upcoming Xbox Series X. That stance, which broke with Sony's embrace of VR experiences with the PSVR, was another indication that Microsoft was abandoning its Mixed Reality dreams.

However, Microsoft's decision to hire Caballero to lead the Mixed Reality & AI division indicates that it still has irons in the fire. Caballero will likely help Microsoft develop next-gen AR devices -- which could be significantly cheaper, lighter, and more powerful than current-gen devices -- to keep pace with tech rivals like Alphabet's (GOOG 0.60%) (GOOGL 0.53%) Google, Amazon (AMZN -0.21%), Apple, and Facebook (META -0.90%) in the nascent market.

Google is aiming its second-gen Google Glass, which costs $999, at enterprise customers. Amazon launched Echo Frames, a pair of Alexa-powered glasses, last year. Apple reportedly plans to launch a pair of AR glasses in 2022, and Facebook is developing two AR devices, Stella and Orion, which could arrive between 2023 and 2025. Several companies are also developing AR contact lenses.

In other words, the market for AR devices could explode over the next five years with smaller, cheaper, and more powerful chips. Last November, IDC forecast that global spending on VR/AR products and services could grow at a compound annual growth rate of 77% between 2019 to 2023.

illustration shows the Microsoft HoloLens 2 being used by a factory worker as she produces a part.

Microsoft's HoloLens 2. Image source: Microsoft.

How new Mixed Reality devices could strengthen Microsoft's business

Microsoft's HoloLens and Mixed Reality devices aren't generating enough revenue to move the needle yet. But as manufacturing costs decline and smaller devices gain steam with mainstream customers, Microsoft's Mixed Reality unit could launch a new lineup of next-gen headsets to complement its Surface devices.

That expansion would boost the weight of its devices unit, which generated less than 5% of Microsoft's revenue last year. It would also tether more developers and companies to Azure, the core growth engine of its commercial cloud business, and more users to its Windows 10 and Xbox platforms with holographic apps and VR/AR gaming experiences.

The expansion of that ecosystem would then widen Microsoft's moat and prevent it from falling behind another tech curve, as it did when Apple and Google split the mobile market over a decade ago.

But let's not jump to conclusions

Microsoft's roadmap for the AR/VR market probably won't take shape anytime soon. However, its decision to hire one of Apple's veteran engineers to lead its Mixed Reality and AI unit indicates the business is still actively cooking up new projects that could expand its presence beyond PCs, consoles, and mobile apps.