The next version will be an upgrade in every way, including form factor (it will be a headset instead of a handheld viewer) and additional support for Android. It will feature a plastic chassis instead of cardboard, along with integrated sensors and lenses, but it won't be a standalone headset—it will be more like Samsung's Gear VR, but presumably compatible with a wider range of Android smartphones.
Say goodbye to Cardboard—Google's next VR viewer will be a plastic headset like Gear VR
That's on the hardware side. On the software side of things, Google's engineers are cooking up new Android VR technology. It's not yet known exactly what new things Google has in store for Android, but the overall goal is to bake in a higher quality mobile VR experience by embedding certain elements directly into the OS rather than leaning on third-party apps.
This could end up being a huge play for Google. Just last month, Google announced that it had shipped 5 million Cardboard viewers to date—an impressive figure considering it's been on the market for less than two years and is actually built out of cardboard. The mobile market is incredibly big, and if Google launches a higher end headset with better Android support, you can bet it will draw the attention of both consumers and developers.
All signs point to that happening. In addition to a new headset in the works, Google recently created a new VR division to be led by Clay Bavor, previously the VP of Product Management for cloud apps like Google Docs. More importantly, Bavor helped created Cardboard, and now you'll oversee Google's next moves in VR.