For those following the tech industry, there's always a huge emphasis on "the next big thing." Just in the last few years, wearables, the Internet of Things, and cloud computing have all been bestowed with this game-changing designation, and they have experienced differing levels of disruption and success. But more recently, there's been a nascent but growing new industry: virtual reality. If the newest report from Patently Apple (NASDAQ:AAPL) is correct, it appears that Cupertino is working ferociously on the technology.
As the website notes, this isn't Apple's first foray into the industry. In late 2013, Apple purchased tech firm PrimeSense for roughly $360 million. The Israeli company's key product was its 3D sensor technology, most notably used in Microsoft's Xbox Kinect peripheral unit.
At the time, it was widely speculated that this acquisition was meant to bolster Apple's in-living room solutions, as many rumors at the time claimed that Apple was working on a TV set. Now, it appears Apple is taking the technology in an entirely different direction.
Virtual Reality on Apple's own terms
Apple appears to be working on a virtual-reality headset. Unlike Facebook-owned Oculus VR, but similar to Sony's Morpheus VR, Apple's headset seems to be designed as a companion piece. For Sony, Morpheus is designed to mostly work with its PlayStation gaming system. Apple is looking to use its signature iPhone as the processing unit, adding virtual reality to its already sticky ecosystem. This is significant because Apple makes the bulk of its profit from the iPhone.
As Patently Apple notes, the initial headset patent was granted in February. That's around when news broke that Apple was hiring display engineers for virtual reality technologies. Apparently, those hires are bearing fruit, as the recently granted patents are follow-ups and improvements to the headset model, including additional sensors and speakers, presumably as ways to enhance the immersiveness of the experience.
How big could the VR market be?
Of course, investors should ask about market scale and potential monetization. And, as always in new markets, the answer is hard to project. For VR, the question is even more complicated because the term and industry are somewhat nebulous at this point.
That said, Business Insider estimates the VR hardware market will grow from a rather small base of $37 million this year to $2.8 billion in 2020 -- good for 99% annualized growth. And while $2.8 billion is peanuts for Apple -- and that's under the unrealistic assumption the company will totally dominate the market -- this estimate only reflects hardware revenue. It does not include high-margin software revenue.
Of course, the software will probably be reflected in games and apps for Apple, and they only take a cut of that revenue as they pay developers, but Apple could benefit in other ways that may not be directly attributed to virtual-reality sales. If Apple is able to innovate here by bringing a comprehensive virtual-reality experience to market that uses its iGadgets as processors, the company will probably make more money selling those iGadgets than headsets and games (not to mention the increased gaming and software revenue from rabid gamers).
Specifically, this sticky ecosystem could help to move more highly profitable iPhones, and may even allow Apple to raise iPhone prices as their value proposition would have increased. These are things that probably won't be directly attributed to the virtual-reality market, but should increase shareholder value. And while it's important to note that many patents fail to see the light of day, it appears Apple's hiring patterns and follow-up patent filings point to an eventual VR headset.
Jamal Carnette owns shares of Apple. The Motley Fool recommends Apple and Facebook. The Motley Fool owns shares of Apple and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.