• Alphabet is developing a new Virtual Reality (VR) headsets for smartphones as a successor to its low-cost Cardboard headset, which has seen more than 5 million shipments.
• VR is expected to become a "platform" for computing, much like a smartphone or a PC.
• Compelling life-like virtual ads delivered through next-generation interface devices could represent the future of advertising.

Alphabet Inc.-C (Nasdaq:GOOG) is developing a new Virtual Reality (VR) headset for smartphones, and adding extra support for the technology to its Android operating system, Financial Times reports.

The new headset, which is expected to be released this year with new Android VR technology, will be a successor to Cardboard - a simple, low cost, and surprisingly successful head mounted VR viewer, powered by any smartphone, with a stereoscopic display and on-board accelerometer. The renaissance of the VR market, triggered by high-end devices like Facebook's (FB) Oculus Rift and Samsung Gear VR creates a niche for low-cost viewers based on Cardboard technology as well.

The first Alphabet VR headset is called Cardboard because the first units shipped were actually made of cardboard instead of futuristic shining plastic. The device, a smartphone head-mount with lenses and magnets, can be fastened around the head and used as a headset. Any smartphone with a stereoscopic display and on-board accelerometer for motion sensing - standard features in today's smartphones - can be inserted in the device to generate 3D scenes with associated audio, that the user can enjoy in interactive, immersive VR mode.

More than 5 million Cardboard units have shipped so far, and consumers are warming up: Alphabet says that 25 million Cardboard apps have been downloaded from its Play Store, meaning users have tried an average of five different VR experiences on the device. But Cardboard is "just the first step" in Alphabet's VR efforts, said Google CEO Sundar Pichai on Alphabet's earnings call. “Beyond these early efforts, you’ll see a lot more from us and our partners in 2016."

Alphabet's ambition in the VR sector extends to high-end devices as well. According to people familiar with the matter, the Internet giant is already working on future stand-alone VR headsets that don’t rely on a smartphone, computer or game console. The new developments show Alphabet’s growing interest in VR and indicate that the search giant intends to compete head to head with Facebook, whose VR unit plans to start shipping the $599 Oculus Rift headset next month.

"Since the beginning we’ve been about making VR available for everyone," said new Alphabet VR chief Clay Bavor. "We’ll have some more to share later in the year." The recent moves suggest that Alphabet is preparing to bet big on VR hardware and software. Companies across Silicon Valley and Hollywood are betting billions of dollars on VR's potential in industries such as gaming, entertainment and education. VR is expected to become a "platform" for computing, much like a smartphone or a PC.

One of the Wall Street Journal's unnamed sources said the next-generation Alphabet headset will include a screen, high-powered processors and outward-facing cameras. Alphabet would use chips from startup Movidius, a company specialized in low-power machine vision for connected devices, which is now working with Alphabet to accelerate the adoption of Artificial Intelligence (AI) within mobile devices. Other high-end headsets, like the Oculus Rift, rely on external PCs or smartphones for computing powers and cameras to track users’ motion, but Alphabet's new device would be self-contained.

Microsoft (Nasdaq:MSFT) is also betting on a self-contained headset that resembles a pair of ski goggles and hints at sci-fi-like computing. The company's HoloLens, a stand-alone computer embedded in a headset, brings high-definition holograms to life, seamlessly integrating with the physical world in "mixed reality." In fact, Microsoft's HoloLens is mainly aimed at Augmented Reality (AR) applications, where virtual annotations ranging from simple street directions to life-like holograms are superposed to the user's perception of the real world through the device.

Alphabet is also targeting AR, and it seems plausible that the new Alphabet device would be capable of "mixed reality" AR applications, which fit perfectly in Alphabet's existing business strategy since 89 percent of the company's revenue comes from advertising. Compelling, life-like virtual ads delivered through next-generation interface devices could represent the future of advertising in a world where 'always-on' connected users spend more and more time wearing headsets.

It seems plausible that Alphabet's advanced projects and investments in Magic Leap, a secretive Florida AR startup that raised $542 million in 2014 and $827 million in 2015 to develop new VR and AR technologies, could play an important role in Alphabet's strategy. The expected boom in the VR and AR market could boost the Alphabet stock in the medium term.