Well, That Was Fast: Intel Scraps Project Alloy

The virtual reality (VR) market is just starting to take off, but Intel (NASDAQ: INTC) is already winding down its plans to develop an all-in-one VR headset, called Project Alloy, just a year after it was announced.

The headset offered a combination of VR and augmented reality (AR) capabilities, but its defining characteristic was that it was essentially a Windows computer you could strap to your head. Thus, it could provide all the graphics processing of a high-end VR headset, but without the cumbersome wires tethering it to a PC.

Project Alloy was supposed to launch in the fourth quarter as an open reference design -- a starting point upon which partner companies could build their own devices. But now that Alloy is dead, does that mean Intel is giving up on VR? Not a chance.

Intel's continued VR focus

The company told Road to VR that it decided to kill Project Alloy over the summer, mainly due to a lack of partnership interest. But VR remains an important market for Intel to continuing pursuing; it's expected to reach $33.9 billion annually by 2022.

Here are a couple of technologies that the company mentioned it's still working on:

But even more important than these technologies are the company's prospects for selling processors designed for VR, including its Core i7 chip. Intel says on its website that the Core i7 provides a "great VR experience" and is geared for 360-degree 3D visuals and immersive 3D sound.

The company mentioned at its investor meeting earlier this year that sales of VR headsets that connect to a computer are growing at a healthy clip, and that the company could benefit down the road as more advanced chips are used for this tech. According to IDC's forecasts, worldwide AR and VR headset sales will reach 99.4 million by 2021.

Sales from Intel's client computing group revenue (which includes sales of PC chips) increased 12% year over year in its second quarter. That was good news for Intel investors, and there may be more good news around the corner.

Microsoft announced new VR headset partnerships just last month, and an update to its Windows software to make it even more compatible with virtual reality. Only a small percentage of computers sold now are VR-ready, but the push from Microsoft could eventually help VR go more mainstream. When and if virtual reality takes off, Intel should directly benefit by selling its high-end processors to power VR-ready PCs.

Looking ahead

Intel still has its work cut out for it in the VR market, mainly due to the fact that nearly all devices capable of delivering a high-end virtual reality experience (like the Oculus Rift) still need to be connected to a computer that has both a central processing unit (CPU) and a graphics processing unit (GPU). Intel only makes the former, while rivals NVIDIA and AMD have cornered the market for the latter.

Intel says it's working to make the integrated graphics processors it builds into CPUs just as capable as the separate GPUs made by its competitors, but it's likely years away from reaching that goal. In the meantime, Intel can benefit from VR's growth by focusing on high-end PCs. The high-end PC market is one of the fastest-growing segments in the personal computer space and accounted 43% of PC sales last year. Virtual reality should help keep those high-end PC sales growing; Intel would be wise to ride that trend as long as it can.

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Teresa Kersten is an employee of LinkedIn and is a member of The Motley Fool's board of directors. LinkedIn is owned by Microsoft. Chris Neiger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Nvidia. The Motley Fool recommends Intel. The Motley Fool has a disclosure policy.