ANALYSIS: Magic Leap Isn’t Going to Get the $10 Billion It’s After

This is not investment advice. The author has no position in any of the stocks mentioned. WCCF TECH INC has a disclosure and ethics policy.

Magic Leap is looking for the nearest emergency exit.

According to reports from Bloomberg, the company, which has raised a total of $2 billion, has approached Facebook (NASDAQ:FB) with regards to a sale. The price tag? Nearly $10 billion, according to Bloomberg's sources. Discussions between the two companies never progressed to anything formal, and Facebook cited concerns regarding tariffs and Coronavirus impacting manufacturing as reasons to pause discussions. 

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Despite Magic Leap's level of funding (it's probably one of the best-funded startups in the history of tech), the fact is market signals to justify a $10 billion sale just aren't there. As Wccftech reported before, consumers aren't interested in the product: CEO Rony Abovitz wanted to sell 1 million of the headsets at $2300, however, the actual count came in at around 6,000.

The AR/VR Headset Market Is Thin

Magic Leap likely got the idea that they could command a $10 billion price tag for their company given the size of checks given to prior VR headset manufacturers -- namely the $2.3 billion acquisition of Oculus Rift by Facebook in 2014.

However, that was in the early days of AR/VR euphoria. Fast forward to 2020, and despite all of the hype from the press, analysts, and other stakeholders, the market for AR/VR headsets remains thin. Per SuperData's numbers, the total install base for premium, PC-attached VR headsets is 2.8 million. But neither Facebook's $2.3 billion baby, nor HTC's Vive holds the mantle as the biggest VR headset by install base. That goes to Sony; it's PSVR headset is market leader thanks to aggressive bundling with the PS4 Pro and deep holiday discounts.

The Oculus Quest, Facebook's high-end stand-alone device, had a solid launch but further data shows that sales dropped off as interest waned:

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SuperData's final data for the year had the Oculus Quest pushing itself over the symbolic 1 million mark, though the PSVR still is the leader by far:

Adding up all of this data from SuperData, and we have an install base of approximately 11.3 million for VR headsets.

Now, rewinding to 2016, IDC predicted that by 2020 there would be approximately 61 million headsets shipped. Although this number includes commercial shipments, and shipments of screenless headsets that rely on a smartphone, such as the Galaxy Gear VR, the delta in numbers shows that the VR (and by extension XR, which accompanies AR) market is much softer than expected. This point needs to be emphasized: The numbers that were used to validate the market in order to price out the $2.3 billion acquisition of Oculus are no longer valid. So considering that the market continues to soften, how does Magic Leap expect to get a $10 billion check?

To get a better idea of the type of dollar figures that are realistic, consider Acer's (TPE:2353) investment in StarVR. It was approximately $14 million delivered in two tranches of $9 million and $5 million. Ultimately StarVR was a failure, but the cash Acer injected into the company could be reflective of what firms are willing to risk on AR/VR aka XR these days.

The Future of AR Headsets? Microsoft Not Magic Leap

As soft as the market for VR headsets is, the next question should be, are headsets even the right choice for AR? Or is the future of AR on the mobile phone?

Last fallWccftech spoke with Glimpse Group’s, a startup incubator in New York City that purchases early-stage AR/VR companies, CEO Lyron Bentovim about the future of AR headsets.

Bentovim was largely unimpressed with the capability of the Magic Leap. For now, Bentovim thinks that AR is best delivered via mobile phones for the time being and that when it comes time to build headsets its going to be from established players like Microsoft (NASDAQ:MSFT) with deep pockets of capital.

"I was initially very supportive of their product. It’s not much better than the HoloLens, and I think the HoloLens 2 is even better. I’m disappointed in what Magic Leap did, and I’m shocked that they raised that kind of money. But hardware is a hard game to play," Bentovim said of the Magic Leap compared to the HoloLens. "We had one [Magic Leap] headset and it's basically accumulating dust. Nobody cares about it. None of our customers really wants to do development for it; none of our developers are even in to taking it home for the weekend or messing around with it."

Next Time Don't Lie About Capabilities

Magic Leap isn't likely going to be able to deliver on the capabilities it promised in early demos. Flying whales augmented into mundane scenes and living room dinosaurs simply aren't things that the company is able to deliver.

But even if Magic Leap was technically able to render what it promised, seamlessly augmenting the virtual over reality, what is the point? For this to drive consumer headset sales there needs to be a deep library of software available. There needs to be games, and lots of good ones. The Oculus and Vive have a large software library but are still niche products with a thin install base.

The underlying technology in the Magic Leap has a place somewhere, likely in future headsets for Enterprise.

But it's not a company worth $10 billion.