Initial Headset Sales Show Magic Leap is a $2.6 Billion Flop

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Weeks after Magic Leap announced that it was in the process of closing a high-risk Series E funding round -- which included its entire patent portfolio as collateral -- a new report says that sales of its $2,300 Magic Leap One headset have only hit a fraction of CEO Rony Abovitz’s targets.

According to a report by The Information, Abovitz initially wanted the company to sell one million of the headsets -- which was later revised down to 100,000 -- within its first year. The number so far? 6,000. All this while the company has raised $2.6 billion in venture capital funding.

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Amidst news of disappointing sales numbers and cash flow challenges, The Information's report also states that two board members departed the company without much fanfare in 2018: Google (NASDAQ:GOOG) CEO Sundar Pichai and former Qualcomm executive chairman Paul Jacobs. Pichai's departure was blamed on scheduling while Jacobs was removed from Qualcomm itself.

The report also says that Magic Leap is working on a second-generation headset with 5G connectivity and a wider field of view (the smaller than expected field of view is something the company has been criticized for) though this is at least two years away due to “fundamental technology constraints”.

Given the gravity of this report, Magic Leap is going to have a considerable challenge moving forward and providing a return to investors. Technically Magic Leap might have considerable IP, but it lacks the capital to exploit it. Now that this news is public, its deep-pocketed competitors such as Microsoft (NASDAQ:MSFT) might use this opportunity to pounce and get the tech on the cheap.

Regardless of whether the Magic Leap succeeds or fails as a product, the more important impact will be on the capital markets. Magic Leap has already swallowed enough capital to feed dozens of startups. If you take a look at the number of unicorns – a start-up with a valuation of over $1 billion – there is a suspicious absence of AR/VR companies. According to CB Insights Global Unicorn Club, only two of the nearly 345 companies it tracks fit the bill as unicorns. This is largely because of expensive failures like Starbreeze's StarVR (the question of if this was killed by infighting between ultra-conservative Acer and Starbreeze's nimble startup mentality is a question for another time) and the capital drain that is Magic Leap.

$2.6 billion later and what do we have? The end result is nowhere near what was promised in initial videos and products like the HoloLens 2 have usurped it technically.

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"I had high expectations -- especially when they are hyping before you even saw MagicLeap’s product. And we were one of the first to get one," recounts Glimpse Group's Lyron Bentovim about when his firm first got a Magic Leap.  "Everyone was lining up here at our office’s conference room – everyone wanted to see and use it – but after that everyone just moved on with their life. Everyone was like, ‘Ok, got it, not too exciting’."

"Personally, I prefer to have AR through my phone rather than Magic Leap at this point."