Earlier this year, chipmaker AMD (NASDAQ:AMD) called the augmented reality and virtual reality markets "key drivers" of future growth. AMD stated that its advanced processing units (APUs), which merge CPUs with GPUs (graphics processor units) on a single chip, are well-suited for AR and VR devices. AMD also introduced LiquidVR, a software suite which reduces the latency in VR apps, an issue that can cause motion sickness.

"Oculus Ready" PCs. Source: Oculus.

AMD recently partnered with Facebook's (NASDAQ:FB) Oculus and Dell to develop "Oculus Ready" PCs -- machines optimized to work with the Oculus Rift headset when it arrives next year. For its part, Dell will launch new Alienware gaming PCs powered by AMD's Radeon R9 GPUs, which will combine AMD's new GCN (Graphics Core Next) architecture and LiquidVR tech for VR experiences.

Intensifying competition
AMD and Dell aren't the only "Oculus Ready" partners; that list also includes Intel (NASDAQ:INTC), Nvidia (NASDAQ:NVDA), and Asus. Oculus isn't promoting one company's products over another -- it has merely asked for the PCs to cost less than $1,000 and meet the minimum hardware requirements. On the low-end, an "Oculus Ready" PC requires either Nvidia's GeForce 9800 GT or AMD's Radeon HD 4870. The recommended specs are much beefier, and require either Nvidia's GTX 970 or AMD's Radeon R9 290.

Nvidia has also launched its own proprietary software suite, Gameworks VR, which reduces latency like AMD's LiquidVR. Research firm JPR estimates that Nvidia controlled 82% of the add-in graphics boards market in the second quarter, compared to 18% for AMD, which could make it tough for LiquidVR to gain ground against Gameworks VR.

The VR market could grow from nearly nothing today to $30 billion by 2020, according to advisory firm Digi-Capital, fueled by the growth of VR games, films, and telepresence applications. Meanwhile, the AR market could grow to $120 billion in the same span, thanks to robust demand for reality-enhancing AR apps.

Unfortunately, VR won't save AMD
AMD has experienced some big setbacks recently. During the second quarter, its computing and graphics revenue plunged 54% annually as the unit's operating loss widened from $6 million to $147 million. Intense competition from Intel's x86 chips and Nvidia's add-in graphics boards caused AMD to cede market share on both fronts.

In September, Chief Architect of Microprocessor Cores Jim Keller, the designer of AMD's next-generation Zen chips, abruptly resigned. Many analysts consider the Zen, which is scheduled to be released late next year, to be AMD's last meaningful chance to strike back against Intel.

Counting on unproven niche markets like AR and VR to become "key drivers" of growth is an unsound long-term strategy. If VR applications on PCs gain mainstream acceptance, there's no meaningful way for AMD to defend against Nvidia if both companies' products are considered "VR ready." AMD has a slight edge in laptops and headsets with its APUs, but Intel and Nvidia could catch up in that market with comparable products.

The biggest challenge
As I mentioned in a previous article, the biggest hurdle for the VR market is mainstream adoption. Alphabet's Google (NASDAQ:GOOGL)  (NASDAQ:GOOG) addressed that issue with Cardboard, and Facebook recently introduced "VR like" 360-degree videos to its News Feed.

Branding PCs as "Oculus Ready" devices complements those strategies by reaching more mainstream buyers. This could give the Oculus Rift a brand recognition advantage over upcoming rival devices like HTC and Valve's Vive. By setting a price ceiling of $1,000 on the machines, Oculus also ensures that its VR experience remains fairly affordable. However, it will still be a less economical option than gaming consoles like the Xbox One or PS4, which will get its own VR headset next year.

The Oculus Rift and its controller. Source: Oculus.

The key takeaway
After shedding nearly 30% of its market value since the beginning of the year, AMD needs a catalyst. Unfortunately, its VR partnership with Dell and Oculus isn't one. Facebook will be the main beneficiary, since it can sell more Oculus Rift headsets at $200 to $300 apiece next year.

Meanwhile, companies like AMD, Nvidia, and Intel will fight the same battle they previously fought in PCs. The vote of confidence from Alienware might boost AMD's credibility among hardcore gamers -- who will likely be Oculus Rift's first adopters -- but it might not prevent AMD from losing more market share in GPUs to Nvidia.


This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.