Magic Leap seeks turnaround as Big Tech invests in augmented reality

Magic Leap, the once-hyped augmented reality company, is seeking to mount a turnaround on the back of its high-tech optics at a time larger rivals such as Meta and Apple are entering the market.

The Florida-based start-up was valued at $6.4bn in 2018, having secured funding from investors including Alibaba, Google and Qualcomm. But poor sales of its consumer-oriented headsets led to lay-offs, a restructuring and a pivot to business customers.

Its valuation fell to $2bn by late 2021, when Saudi Arabia’s Public Investment Fund bought a controlling stake in the company, infusing it with more cash and taking total funding to $4bn.

Since then, the company appears to have stumbled into a new revenue line: manufacturing and licensing the intellectual property for components crucial in AR devices that overlay images upon real-world surroundings.

“The highest value, the hardest and most complex area, is the optics,” said Peggy Johnson, who led business development at Microsoft before taking on the role of Magic Leap chief executive in 2020. “And it’s hard to replicate. So we’re getting interest from the industry in our IP, our manufacturing knowhow, our capabilities and our high-yield rates.”

While Magic Leap said it could not comment on specific partners, the company said it had signed commitments to license its IP and to manufacture optics for “multiple” companies.

The Financial Times reported in June that Facebook parent Meta, which has spent $10bn a year on projects to create an avatar-filled “metaverse”, had held talks with Magic Leap to manufacture optics for its future devices.

The company said its focus was still on its own headset, the latest of which starts at $3,299, but this new line of business could be significant.

Apple, Microsoft and Snap are all in various stages of developing AR glasses, a product widely understood to be more difficult to make than virtual reality headsets. Google killed its decade-long Glass project in March but is reportedly still hoping to build an AR software platform, while Microsoft has recently downsized its HoloLens team.

Apple has reinvigorated enthusiasm for the sector after unveiling its Vision Pro headset, a “mixed reality” device that can fully immerse users in a digital world or show a video feed of their real surroundings containing other digital images.

The long-term goals of the Big Tech companies are to make much slimmer AR glasses, which may need to utilise technology pioneered by groups such as Magic Leap.

LexisNexis Intellectual Property, a group that measures the “competitive impact” of filed patents, gives Magic Leap an industry-leading score for the mixed-reality sector of 9.5, roughly double that of Microsoft and four times that of Meta.

“At the core, they have an optics system that is significantly ahead of everybody else’s, and they have the patents to support it,” said a person familiar with Magic Leap’s tech. “Whether they can turn that into a business or not is Peggy Johnson’s challenge.”

How much this lead matters remains to be seen. Company executives admit the AR industry is still in the “brick” stage of development — a reference to early mobile phones.

Jeri Ellsworth, chief executive of Tilt Five, a 3D gaming company that makes its own AR glasses, called Magic Leap “one of the worst offenders out there for overhyping what the device could actually do”. She said she was not convinced its optics were leagues better than the competition.

Magic Leap declined to comment on its revenues or how many units the Magic Leap 2 headset had sold since becoming available last year.

Two people close to the company said that while sales numbers were unimpressive, what would matter is if the company could secure enterprise clients who were still testing its headsets and may find future uses. Its factories have the capacity to build optics for 3mn devices a year, far above current demand.

Magic Leap argues new uses will come from both its software and hardware. Already, its advances have allowed the product to shrink from what was once, in 2012, an unwearable prototype the size of a fridge, to a reasonably comfortable headset linked to a hip-based pack offering more than three hours of battery life.

Those advances are on display at its 250,000 square foot headquarters in Plantation, Florida, which sits atop five factories where core parts of the manufacturing process are completely automated.

Some of the manufacturing takes place in “clean rooms”, exploiting fabrication techniques more commonly associated with semiconductors. For instance, the glass “lens” — technically a “liquid crystal on silicon” display — is etched with tiny patterns 3,000 times thinner than a human hair that allow images to be projected into the wearer’s field of vision.

“Those diffractive structures are what allow us to take a projector pointing towards the world and essentially steer the light back into your eyeball but still allow you to see the real world so it’s a transparent display,” said Scott Carden, head of eyepiece engineering.

Magic Leap’s IP extends to the machines fabricating the lenses, which were also designed and manufactured from scratch, thanks in part to a 2015 decision to buy the non-semiconductor business of Molecular Imprints, a nano-imprint lithography group in Texas.

Magic Leap’s unusual degree of control over its manufacturing processes is a legacy of founder and former chief executive Rony Abovitz, who left in 2020 following the company’s financial troubles.

“Everything I was working on were complex systems, whole new technology sectors,” he said. “And I was thinking, ‘why shouldn’t we have that knowhow in the US? Why do we export all that knowhow overseas?’ It made no sense to me.”

As tech companies come under pressure to shorten their supply chains following the coronavirus pandemic and to de-risk their exposure to China, Magic Leap’s factories in Florida are proving to be an asset, according to Johnson.

“We spend a lot of time in Washington DC, because as this technology continues to evolve we want to make sure we educate the Hill on what it can do,” she said.

“So [having factories in the US is] not only an advantage technically, because our engineers sit upstairs and the manufacturing plants are two floors down, but in this environment it’s definitely an advantage.”