Is Microsoft Corporation's New $3,000 Device Overpriced?

Microsoft (MSFT +0.01%) recently started taking orders for the developer edition of the HoloLens, but the augmented reality headset costs a whopping $3,000. That price tag wasn't surprising, since Microsoft already announced it last year, but it keeps it out of the reach of mainstream consumers.

Microsoft's HoloLens. Source: Microsoft.

That steep price could also convince developers and smaller studios to create more apps for "cheaper" VR devices like Facebook's (FB +0.01%) $600 Oculus Rift or HTC's $800 Vive, or richer Android VR experiences for mobile-based options like Samsung's $99 Gear VR or Alphabet's (GOOGL +0.02%) (GOOG +0.02%) $15 Cardboard.

IHS Technology analyst Piers Harding-Rolls recently told BBC that he didn't "expect Hololens to be a mass market product due to its pricing." Instead, he believes that the Hololens dev kit will only "appeal to technology enthusiasts with large amounts of disposable income." Will the HoloLens' price tag prevent it from gaining much traction among developers this year, or will its innovative AR features win them over?

Will the "year of VR" steal Microsoft's thunder?
In addition to its price, another big hurdle for HoloLens is that it's an AR headset being launched in a year when most tech companies are focused on the VR market. 

Facebook started taking pre-orders for the Oculus Rift on Jan. 6. HTC started accepting pre-orders for the Vive on Feb. 29, and reportedly sold 15,000 units in less than 10 minutes. Sony could finally reveal the price and launch date for its PlayStation VR headset, which will only be compatible with PS4 consoles, at an upcoming event on March 15. Google is reportedly developing a second-generation plastic version of Cardboard with additional sensors, as well as a stand-alone VR headset which won't be tethered to mobile devices, consoles, or PCs.

First VR, then AR
Things have been quieter on the AR front. Google's new version of Glass and its investment in AR start-up Magic Leap indicate that it's stil interested in developing next-gen AR experiences. Apple (AAPL +0.01%), which has been on an AR/VR acquisition spree, is also rumored to be developing an AR/VR headset similar to HoloLens. Those are all interesting moves, but they don't mean as much to developers as the arrival of the HoloLens dev kit.

Tech M&A advisory firm Digi-Capital believes that the AR market will grow from nearly nothing today to $90 billion by 2020, fueled by rising demand for AR hardware and software. The firm also estimates that the VR market will only be worth $30 billion by then, since the appeal of VR movies, games, and experiences could be limited to a smaller market of enthusiasts.

Therefore, Microsoft might be expecting the AR market to take off after VR headsets carve out their own niches. By then, production costs might decline and enable Microsoft to release cheaper versions of the HoloLens for mainstream consumers and developers.

Should Microsoft follow Google's lead?
In my opinion, a key problem with Microsoft's introduction of HoloLens is that it didn't do a mainstream push to raise awareness of AR applications.

Google successfully did this with VR apps by introducing Cardboard in 2014. Cardboard was crude, but it was cheap enough to convince mainstream users to test out VR apps. As a result, the Cardboard app has been installed up to 10 million times from Google Play, which persuaded app developers to create new VR experiences. Developers also ported their Oculus VR apps to Cardboard to reach more users.

Microsoft probably couldn't create a crude cardboard version of HoloLens to give users a taste of augmented reality, but it can launch new apps to introduce the concept to mainstream users. For example, Microsoft can launch new camera apps for smartphones which "augment" real world surroundings with useful information. Plenty of mobile apps -- like Layar, iOnRoad, and Wikitude -- already do this, but they're not fully tethered to a major ecosystem player like Microsoft or Google yet. If Microsoft stokes mobile developer interest with such apps, it could likely convince them to also create next-gen AR apps for HoloLens.

Microsoft needs to narrow the HoloLens' focus
So far, Microsoft has demonstrated that the HoloLens can be used to create holographic designs, play Minecraft, hold Skype meetings, and watch a 3D football game on a coffee table. Those demonstrations have been impressive, but it's still unclear what market the HoloLens is aiming for -- gamers, designers, enterprise users, or mainstream consumers.

Early HoloLens apps. Source: Microsoft.

The HoloLens could certainly be a useful gadget for all three markets, but Microsoft needs to focus on a single market first and lower the price tag to attract developer interest. Until that happens, I expect the HoloLens to remain on the back burner as the tech market focuses on the VR market instead.