If virtual reality is going to change everything about the world, its impact will be felt first in the video game industry. It seemed in recent months that the battle lines were becoming clear as competing headsets were being built by Facebook-owned Oculus, HTC and Valve, Sony, and Microsoft, with the first commercial release dates set for 2016. Now Microsoft has suddenly thrown in its lot with Oculus.

Oculus held a press conference on Thursday to fill in a few key details about the headsets. The company said it would begin selling the devices by the end of March 2016, announced a $10 million fund to help independent developers make Oculus games, and demonstrated prototype controllers that players will hold in each hand to navigate virtual environments. Brendan Iribe, the company's chief executive officer, said that the headsets will ship with Xbox controllers, and he described how Oculus will have a "tight integration with Windows". He said players will be able to stream Xbox One games onto the Oculus headsets.

It's not yet clear how developments in the virtual reality industry will play out. Customers and developers have yet to cast their votes as to which headset should win. Tim Merel, managing director of Digi-Capital, a firm that advises companies on augmented and virtual reality, says the current landscape "feels a bit like the smartphone market before the iPhone." A collaboration with Microsoft could tip the scales further in Oculus's favor. Developers tend to want to build applications for the widest possible audiences, and Microsoft's audience will be a big draw.

For Microsoft, Oculus allows a way into virtual reality without having to do a lot of heavy lifting. If Oculus takes off, Microsoft shares in the success. If it doesn't, Microsoft won't have much on the line. A significant prize would be a boost in the gaming console market. The Xbox One has been trailing Sony's Playstation since they were introduced in late 2013. But while the companies say gamers will be able to stream Xbox one games on the Oculus headset, this isn't quite the same thing as turning Oculus into Xbox's version of Sony's Morpheus, a virtual reality device designed to work directly with the console.

In essence, the partnership with Oculus is a way for Microsoft to hedge its bet. Earlier this year the company unveiled HoloLens, based on the related but distinct technology known as augmented reality. While virtual reality blocks your senses to place you in a new world, augmented reality allows you to stay in the real world while seeing digital imagery integrated into reality. Virtual reality is something that the entire hardcore gaming industry has jumped at, but Microsoft is currently the only big player working on augmented reality.

Ed Fries, the former Microsoft executive who led the creation of the Xbox, thinks the HoloLens could offers Microsoft a way to gain ground on Playstation. "Maybe AR will really win in a big way over VR because people want to see while they wear this thing on their heads," he says. "That's a potential wild card." Sony is planning to use next week's E3 conference in Los Angeles to discuss its own plans for virtual reality; Xbox hasn't confirmed whether it will show off the HoloLens at the show.

Merel of Digi-Capital thinks augmented reality could end up being a more important technology than virtual reality because it is inherently more portable than a headset that completely blocks your natural vision. His company forecasts that augmented reality could be a $120 billion industry by 2020, with VR topping out at $30 billion and being more tightly focused on gaming and 3D entertainment.

Virtual reality does have the advantage of being first. Elijah Freeman, the executive producer of German gaming developer Crytek is currently working on virtual reality games, but hasn't started in on augmented reality. The appeal of virtual reality is that "so many systems are about to launch," says Freeman, so his team has already developed some competency with the medium. "None of that necessarily diminishes our interest in AR, it's just that we'll have to wait a little longer until we can explore the possibilities on that front," he says. Oculus allows Microsoft to hold developers' attention while HoloLens plays catch up.

Microsoft's partnership with Oculus also gives it more flexibility to experiment with HoloLens as something more than a gaming device. While the Xbox seems a natural fit for a gaming headset, HoloLens didn't come out of the company's gaming division, and it didn't show off any Xbox tie-ins when it first demonstrated the headset in January. (It did show how augmented reality could be used to turn your living room into a setting for the game Minecraft.) Microsoft has been careful to keep its non-gaming ambitions from leaking into its plans for Xbox because it encountered significant backlash when it tried to position the Xbox One as a general entertainment tool. By making Oculus the de facto virtual reality headset for its hardcore gaming customers, Microsoft can build the HoloLens as a tool for office workers and electricians without making anyone too mad.

-Bloomberg News