But as that market has shrunk and faded, rivals have come to attack every part of the company's business - and Microsoft's response has been as varied and sclerotic as its leadership.
The VR business is no different, and the company is trying as many different things as it can to keep itself with a toehold in relevance. We explore what Windows 10 means for virtual and augmented reality.
Microsoft has its own augmented reality program, dubbed Hololens. Powered by a miniature Windows 10 computer inside the headset, it's a wire-free system for seemingly projecting objects into the real world, like an holographic system, but taking account of the world's 3D structure and working with it.
The killer demo that several technology journalists witnessed was of Minecraft, Microsoft's newest purchase, running in miniature on a tabletop in a lounge while a full version of the game ran on a screen nearby. The press could step around it and look closely because of the high depth of detail at the focal point.
While this sounded and looked wonderful when we first saw it, the overall opinion of the tech was like Hololens itself - narrow, and focused only on the best parts. Outside of the focal point, the application cut off quickly, unlike traditional VR that seeks to provide a wide angle vision to create immersion. And the field of view has been estimated to be as little as 30 by 17.5 degrees. Compared to VR headsets, this seems like a huge limitation, especially as Hololens shares the need for a fully-specced top-end PC as well.
Hololens needs an operating system to run on, right? Well, that's where Windows Holographic comes in. Built around the API of Windows 10, Windows Holographic is designed around the integration of physical objects with virtual elements (what Microsoft calls 'holograms', much to the consternation of anyone who knows what real holograms are.)
It's designed to allow any Universal Windows App to run in an augmented-reality environment, and provide APIs that will be supported as standard in Windows 10 (which these days includes mobile devices and Xbox One).
The advantage of this for Windows 10 is that Microsoft isn't just focusing on Hololens - it's building it to work with any VR, AR or Mixed Reality device natively. So any VR device should theoretically be plug and play under Windows 10 from launch - it shouldn't simply display as auxiliary monitors and aims to unify tracking information.
And, given the market limitations of Hololens, it's entirely plausible that Windows Holographic could end up focusing on these other VR devices - to try to make Windows 10 the standard OS for all desktop VR devices.
Given that, it's worth noting that Windows Holographic is attempting to standardize gestures too. So a bloom gesture gives access to the OS main menu and an 'air tap' selects, while other gestures control dragging, resizing, carrying, pinning and so on. There's also the option, reminiscent of Minority Report, of having windows track your gaze in the environment. Whether Hololens takes off or not, these could be the default inputs we'll come to associate with VR.
On top of that, Windows 10 is important because of its built-in graphics support, as Richard Fabian of Ndreams explained to us. "Windows 10 provides support for DX12 and Vulkan, the long-awaited spiritual successor for OpenGL. Both of these things can only be good for VR, where raw performance and latency matters more than any other segment of the video games industry."
We'll get to see more about Hololens in the coming months, as developers are getting their hands on it at the end of March, 2016 - well, those willing to pay a stonking £3,000 (around $4,289 or AUS$5,591) a unit.
However, Microsoft CEO Satya Nadella recently told BBC Click that it wouldn't be with consumers any time soon as it was on a "five year journey". Even when it does come out, an anonymous Microsoft executive said that it would cost "significantly more than a games console" - which sounds like it could be in line with the HTC Vive or even more than a grand.
Microsoft seems to recognize this, and is seeking to integrate all of its tech as closely as possible with as many third-party virtual reality technologies as possible. It's partnering with both Valve-HTC to support their superior Vive headset and Facebook-Oculus to support their Rift headset. There's no word on other headsets - and the silence regarding support for Sony's Playstation VR is deafening.
First, more importantly than any hardware tie-up is software support - specifically Minecraft, which is one of the last IPs that anyone cares about. Minecraft was originally scheduled to be developed for the Rift by Minecraft creator Markus 'Notch' Persson, but he cancelled it in disgust at Facebook buy-out.
New owners Microsoft, however, have announced that they will be porting the Windows 10 version of Minecraft across to Rift - that is, the version rebuilt from scratch to avoid Java and which shares a code base with the Xbox 360, Xbox One, PS4 and mobile versions. It's due out in spring 2016 - which is now...
However, Microsoft has also made an exclusive deal with Oculus to bundle an Xbox One Controller and Xbox wireless adapter with every Oculus Rift, and stream Xbox One games to the VR headset. The controller will only work, however, with Windows 10, as the wireless adapter is only getting software support on that platform. Thankfully, as Microsoft has been kind enough to relentlessly remind us, upgrading to Windows 10 is free.
It's not clear yet which Xbox One games will have support for Oculus, what form that will take, or indeed, how the Xbox One's lacklustre hardware will cope with streaming two 1080P renders; however, getting their controller in people's hands as the default gamepad for VR is a big win for Microsoft. Most of the public are likely to want to use the Oculus Touch controllers, which is where Oculus' attention is focused, so it's no surprise that they didn't want to mess around creating a gamepad as well.
To avoid putting all their virtual eggs in one basket, Microsoft also announced at E3 2015 that it was partnering up with Valve and HTC to work on VR. The exact language used was that Microsoft "would be working with Valve to make Windows 10 the best platform for VR gaming" - whatever that means. The only signs we've seen of it so far have been a handful of US Microsoft Stores setting up demo areas for the Vive.
Indeed, Microsoft seems to be going the other way from Valve in certain senses, like the unification of the Xbox and Windows 10 stores for games, or by buying exclusives for Windows 10 and hence excluding them from Valve's Steam platform. We'd say that this 'partnership' probably hasn't gone very far.
The VR trap
Microsoft knows it missed the boat with Windows 8. But the team also think they have a fair idea of what they did wrong, and they think this forwarding looking smorgasbord of integration, accessibility and standardization is their solution. They're providing an OS designed for VR and AR; support for any major VR or AR device; and their own high-end, high-detail AR device.
With that OS being supported across PCs, mobile phones and the Xbox One, and featuring a tied-down app store in a way that PC users are unused to, Microsoft has set a very alluring trap to snare the VR market.