Apple (NASDAQ:AAPL) has scrapped its plans for augmented reality (AR) and virtual reality (VR) headsets, according to Taiwanese news site DigiTimes. It reportedly disbanded its AR/VR headset unit in May, four months after Avi Bar-Zeev, a key team member who co-created Microsoft's (NASDAQ:MSFT) HoloLens, left Apple.

Apple's decision to end its AR/VR headset efforts isn't surprising since it's a nascent market that only reaches a group of niche users. But could this decision leave it behind the tech curve as Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB), and Alphabet's (NASDAQ:GOOG) (NASDAQ:GOOGL) Google move forward?

A man and woman manipulate a model city in augmented reality.

Image source: Getty Images.

What was Apple's original plan?

Apple never clearly outlined its AR/VR plans, but it acquired several AR/VR firms, assembled a team of AR/VR experts, filed patents for an AR/VR headset for the iPhone, and added depth-sensing cameras and computer vision chips to its newer iPhones for AR apps.

Apple also launched ARKit, an API (application programming interface) that lets iOS developers build more advanced AR apps. Google offers a similar API, ARCore, for its higher-end Android devices.

A CNET report last year claimed that Apple was developing a stand-alone wireless AR/VR headset codenamed T288, which sported an 8K display for each eye. That marked a multi-generational leap over any other AR/VR headset -- Microsoft's new HoloLens 2 and Facebook's new Oculus Quest both offer just 1440p displays for each eye.

CNET claimed that Apple could launch the headset in 2020. However, DigiTimes claims that the device wasn't light enough and couldn't function optimally without 5G support. The production cost was also likely too high. As a result, Apple scrapped the project and transferred its team members to other divisions.

Apple's moves reflect broader industry concerns

Facebook faced similar roadblocks in its secretive AR plans. Back in 2017, CEO Mark Zuckerberg stated that Facebook wanted to "eventually" develop glasses, but that it lacked "the science or technology today" to build an ideal product. Zuckerberg stated that it could take five to seven more years for that tech to arrive.

Facebook is more confident in the VR market, where it's been releasing commercial headsets since 2016. That business had a rough start, but research firm SuperData expects the company to ship over a million stand-alone Oculus Quest headsets this year. Apple seems more interested in AR and "mixed reality" headsets than VR, so it probably never planned to challenge Facebook in that niche market.

A doctor checks a patient's chart with AR glasses.

Image source: Getty Images.

In the AR market, Microsoft has a first mover's advantage with HoloLens, which it initially launched for developers three years ago. It introduced the HoloLens 2 earlier this year, but with its $3,500 price tag, the device is still aimed at developers. It's unclear when Microsoft will launch a cheaper version for mainstream consumers.

Microsoft also encouraged third-party device makers to produce Windows Mixed Reality headsets (which are basically VR headsets), but those headsets started vanishing from Microsoft's store earlier this year -- which suggests that its VR dreams are also dead.

Google tried to crack the AR market earlier than Microsoft with Google Glass in 2013, but the $1,500 device flopped due to its high price tag, awkward appearance, and privacy concerns. Google relaunched Glass for the enterprise market two years ago, but the device is still only supported by a handful of developers.

Google also expanded in the VR market with its third-party Daydream headsets, but those devices are largely overshadowed by Facebook's Oculus devices, Sony's PlayStation VR, and HTC's Vive headsets.

Apple's decision wasn't surprising

Simply put, the AR/VR market remains uncharted territory for big tech companies. AR headsets are useful for certain enterprise users, but they're still too bulky and expensive for mainstream consumers. VR headsets appeal to gamers and tech enthusiasts with deep pockets, but they'll likely remain niche gadgets for the foreseeable future.

Apple has three top priorities: reviving consumer interest in the iPhone, expanding its software services ecosystem to lock in users, and boosting shareholder value with bigger buybacks and dividends. That's why it's slashing spending on side bets like its automotive unit Project Titan, which was downsized earlier this year, and scrapping speculative projects like AR/VR headsets.

Apple will still stay invested in the AR market with ARKit, but it will likely avoid any other major hardware projects until the market matures and the tech curve becomes more visible.