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This summer, it introduced ARKit, a software development kit that lets developers create AR apps for iPhones and iPads.

The 3:59 gives you bite-size news and analysis about the top stories of the day, brought to you by the CNET News team in NY and producer Bryan VanGelder. The OS would borrow from iOS. However, Apple declined to issue a comment on its plans.

Apple has seemed largely uninterested in the virtual reality fad, and that may be because it has plans for a different kind of experience. "AR is going to change everything".

It is well known that Cook and Apple feel that AR has much more potential than virtual reality (VR), given how the technology allows for interaction with the physical world rather than immersing people in virtual ones.

Apple sees the AR headset as a successor to the iPhone, the report said. Apple will use the interim time to get consumers familiar with augmented reality using ARKit on the iPhone.

It's no big secret that Apple has little interest in pursuing VR devices to challenge the likes of the HTC Vive or Samsung Gear VR, and there's also no sign of an impending iContender for Windows Mixed Reality headsets.

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According to Bloomberg, the team building Apple's headset is also designing a processor that would power the device, as well as a new operating system it's now calling rOS, or "reality operating system".

Apple's product would have its own display, processor and operating system via a "system-on-a-package" component similar to the one in the Apple Watch.

There is no comfirmation how Apple's AR device will be controlled, but the Bloomberg report suggested that the firm is investigating touch panels, voice-activation (via Siri) and head gestures.

To be competitive in the space, Apple will likely focus on marketing, Nguyen said, and positioning their product in a way that users both understand it and want to use it. For launch apps, engineers are said to be already prototyping a range of applications that involves mapping, texting, holding virtual meetings and watching 360-degree videos. The headset will be capable of running its own apps, and have access to a dedicated version of Apple's app store. "The technology had matured to a point where they felt they could demonstrate something interesting and useful and present it in a way that is easy for users to do", Nguyen said.