How Alphabet Inc. Could Win the Virtual Reality War

The buzz surrounding the budding virtual reality craze really picked up steam early this year following the news that the long-awaited Oculus Rift headset was ready for pre-orders. By most accounts, the Facebook-owned Oculus has drawn scads of pre-orders, stirring the pot even further.

Facebook wasn't the first VR big-hitter to bring its solution to market. Oculus worked with mobile phone king Samsung , helping design its Gear VR device, which works with the latest Galaxy smartphones.

Not to be outdone, Alphabet's Google tossed its own hat in the VR ring. The low-end Cardboard headset is viewed by many as an also-ran compared to the Rift's and Gear's of the world, even after recent upgrades. But the writing was on the wall that Google wasn't going to let Facebook and Samsung have all the fun. And if the rumor mill proves correct, it's latest foray into VR could be a game changer.

Image courtesy of Google

Laying the foundation Shortly after Facebook announced the Rift was ready for the masses, Alphabet shared its own news: It was spinning off its virtual reality team into a separate entity. The new division is led by Clay Bavor, who also oversaw Google's Cardboard VR development and introduction.

Just a couple of weeks after forming its new unit, Google took another step to further its VR ambitions with the hiring of Scott Broock, a noted expert in the field. Broock's role is to find new, better, and more profitable ways to bring VR to Alphabet's wildly popular YouTube property. Like Facebook, Alphabet recognizes that virtual reality offers almost unlimited advertising possibilities.

Should have seen it comingThe upgrade of Cardboard, forming a new division, and the recent executive postings are clear indications Google has some grand plans -- and those give the recent rumors regarding what would be a VR-industry first more credibility.

Word has it Google is working on a stand-alone VR headset. The Oculus Rift has to be connected to a high-powered computer, while Samsung's Gear needs a Galaxy smartphone to work. However, the VR device Google's rumored to be crafting will operate all on its own. Per the usual "unnamed sources," the new "device-free" VR headset is will fall somewhere in-between a high-end Rift and other makers' entry-level models. No word on price, nor even the name of the unit as yet.

The same unnamed sources said Google's device will come with a screen, plus "high-powered processors and outward-facing cameras." The portability of this rumored VR solution makes it that much more intriguing. Thanks to the proliferation of powerful smartphones and tablets, the world as we know it has never been more mobile, and consumer seeking a device that fits that mold would give Google's VR device an immediate leg up in the virtual world. Sure, the Gear is mobile -- assuming a user has the right equipment -- but Google's offering would offer a more immersive, all-in-one experience for folks on the go.

Does it matter?Investors and industry pundits alike were duly impressed with Alphabet's fourth-quarter and 2015 earnings results, and for good reasons. Advertising revenue climbed 17% to over $19 billion in Q4, and free cash flow (FCF) jumped over 50%, to $4.3 billion. Somewhat lost amid all of Alphabet's other good tidings was the 24% increase in "other revenues" in Q4 to $2.1 billion. Other revenues primarily consists of Google Play, Nest smarthome device sales, and most other non-advertising revenue.

It's rarely a bad thing for a company to diversify its revenue sources, and a cutting-edge entry into what nearly everyone expects to become a significant market could eventually move the needle even for a tech behemoth like Alphabet. One estimate suggests that VR will become a $30 billion opportunity in just four years, led by video games and 3D films. That's great news for Google, particularly if the rumored stand-alone VR headset become a reality. But it gets even better.

For Alphabet and Facebook, the impact VR ad spots could have in driving ancillary advertising revenue could be as significant as device sales alone are expected to become. If Google Cardboard was underwhelming for some -- and it was -- the rumored stand-alone VR could be the polar opposite: a legitimate game changer.

The article How Alphabet Inc. Could Win the Virtual Reality War originally appeared on Fool.com.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Tim Brugger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), 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.