Microsoft (MSFT -0.04%) recently unveiled HoloLens, a headset which projects holographic images into real space. During a press demo, Microsoft showed that the HoloLens can be used to simulate a walk on Mars, play Minecraft on a coffee table, enhance Skype calls with virtual whiteboards, design products in 3D, or summon virtual tech support to fix a real light switch.

Microsoft's HoloLens. Source: Microsoft

HoloLens can be considered both a virtual reality (VR) device, like the Oculus Rift from Facebook (META -1.48%), as well as an augmented reality (AR) device, like Google (GOOG 0.13%) (GOOGL 0.23%) Glass. Yet it differentiates itself from Oculus Rift with a transparent lens and is more advanced than Glass, which cannot project virtual objects onto real surfaces.

Microsoft has yet to announce a launch date or price for HoloLens, but this fascinating product may succeed where Glass recently failed.

Why HoloLens matters
Google, which recently halted new sales of Glass through its Explorer program, designed its smartglasses as a hands-free version of the smartphone. Like a smartphone, Glass can take photos, conduct web searches, look up directions, or run apps.

As a result, some people considered Glass to be a pricey and redundant smartphone peripheral. Others disliked the intrusive camera, which led to many public bans on the device. Some professions, like doctors and warehouse workers, found niche applications for Glass, but they failed to generate mass interest among enterprise customers.

Meanwhile, VR headsets like Oculus Rift and the Sony Morpheus focused on immersing gamers in virtual worlds. The drawback was that these headsets completely obscured the user's vision, making them impractical for mobile use. HoloLens bridges the gap between the AR and VR worlds by offering features that a smartphone alone cannot match, while giving users a clear view of the outside world.

Source: Microsoft

Market potential
Research firm KZero estimates that the VR market, worth nearly nothing today, will generate $2.3 billion in hardware and $2.8 billion in software revenue annually by 2018. Eon Reality forecasts that the AR market, which consists of AR apps on phones, tablets, and wearable devices, will be worth $660 million by 2018.

Admittedly, those numbers are too small to move the needle for Microsoft, which is expected to report $98 billion in revenues this fiscal year. But if the company uses its dominant share of PC operating systems as a foundation for the HoloLens, it could possibly encourage companies to explore greater applications for the device.

Microsoft could bundle HoloLens with the Surface Pro, which has been well received by large businesses replacing their aging PCs. It could roll out new AR and VR features for Windows and its cloud-based productivity and communications apps. Stacking those new features on top of existing Windows applications would also be easier to use than Google's Glass at Work solutions, which mostly require specialized apps to sync with PC software.

Once HoloLens is ready for a commercial launch, Microsoft will inevitably integrate it into its Xbox One and Windows PC gaming businesses. This is a market where Facebook and Google have a limited presence, and Microsoft may soon be able to match Sony's VR efforts.

Potential pitfalls
But before we call HoloLens a Glass and Rift killer, we should remember that Microsoft sometimes unveils prototypes of devices which never make it to the market. At CES 2008, for example, the company revealed the "Surface" tabletop projection-based touch screen, claiming that people could buy their own within three to five years. Of course, that product never arrived, and the Surface name was reused for its 2-in-1 tablets.

It's too early to tell if the HoloLens will ever be launched commercially, considering that neither Glass nor Rift has seen a wide rollout. Google released the "Explorer" version of Glass to developers last year, and Oculus started selling the devkit version of Rift in Sep. 2012. This means that a commercial launch for the HoloLens could still be years away.

Users also cannot actually "touch" the projected devices yet -- they must learn gestures to manipulate them from afar. However, Intel may be able to address this issue with its new depth-sensing cameras, which were used to help Oculus Rift users "touch" virtual objects during CES 2015

Source: Microsoft

A holographic future
Holographic projections could be used to design 3D printing templates, industrial designs, and computer graphics in the near future. If that happens on a widespread scale, devices like the Microsoft HoloLens -- which blur the lines between reality, augmented reality, and virtual reality -- could be as widely used as keyboards or mice. That big shift could help Microsoft score a rare victory against Google, which is still figuring out how to properly market Glass to consumers and businesses.