Image courtesy of Microsoft

The hype surrounding virtual reality -- and, by extension, augmented reality (AR) -- hit fever pitch when Facebook-owned (META -0.28%) Oculus announced in January that it would begin taking pre-orders for its much anticipated Rift VR headset. For $599 (plus the price of a high-end computer capable of powering it), consumers will soon be able to enter a virtual gaming world which, coincidentally enough, comes with a VR version of Microsoft's (MSFT -0.18%) wildly popular game, Minecraft.

The Rift, which will be compatible with XBox One games, will be sold with a  controller for the Microsoft console included. With nearly 50 million Xbox One active users as of last quarter, integrating with Rift was a natural move.

But Microsoft is doing more than dipping its toe in the VR market via games and controllers: It's developing its own reality-altering device that will likely compete with Rift -- the HoloLens. And if pundits are anywhere close to right in their market estimates, Microsoft's device could end up blowing Oculus out of the water.

The envelope please
Microsoft introduced its HoloLens device a year ago, and it instantly caught the attention of the tech world. Unlike Rift and similar VR devices, the augmented reality device adds virtual "things" to a user's view, partially immersing them in the created world of their choice, but still able to see their real physical surroundings. Virtual reality, by contrast, is fully immersive: It closes a user off from the world around them.

Microsoft recently announced that HoloLens will begin shipping the end of March to developers willing to plunk down $3,000. The availability of HoloLens dev kits in the U.S. and Canada is a milestone: It means that Microsoft has laid its foundation, and is ready to for those app developers to expand the device's capabilities in preparation for its introduction to the masses.

The price tag may appear hefty, but both AR and VR have garnered enough interest among the general population, let alone the tech community, that Microsoft isn't likely to have a shortage of takers. Rift fans may recall its dev kits -- there were a couple of iterations -- cost in the range of $1,000 to $1,200 just a year ago, and those sold out rapidly.

Why it matters
Most pundits agree the AR and VR markets each have almost limitless potential, and not just among gamers. One estimate suggests that the combined AR and VR market will grow to a whopping $150 billion annually in 2020.

Interestingly for Microsoft, that $150 billion isn't expected to be split evenly among the two altered reality alternatives. Augmented reality is forecast to account for as much as $120 billion of that in revenue compared to VR's "mere" $30 billion in the next four years. The difference is AR's flexibility in terms of where it's used, and the many commercial applications it offers. Already, a Microsoft HoloLens dev kit is the hands of NASA's Jet Propulsion Laboratory, where they're creating augmented reality software of Mars, among other things.

The fact that AR doesn't offer the fully immersive experience of VR could push some gamers toward Rift, but AR's potential market is significantly larger and more diverse: A HoloLens could be used most anywhere. And don't discount HoloLens entirely from the gaming market. Microsoft's Xbox One is already morphing into a great deal more than a game console, and a seamless integration with HoloLens would make a compelling argument for AR among the world's 48 million Xbox One gamers.

Getting HoloLens into developers' hands doesn't imply any particular timetable for when the device will hit store shelves, but it does suggest that consumers may have a choice to make between AR and VR before long.