Dented Reality: Magic Leap Sees Slow Sales, Steep Losses

Even that goal, which was shared with Magic Leap’s board, proved too ambitious. About six months after the device’s launch, Magic Leap had sold roughly 6,000 of the headsets, said a person with direct knowledge of the figures. The company’s internal sales figures and goals haven’t been previously reported.

The slow sales aren't the only signs of strain at Magic Leap, which was losing tens of millions of dollars per month throughout last year, said two people with knowledge of its finances. Dozens of employees across various departments have been laid off in recent weeks. A marquee member of its board—Sundar Pichai, the CEO of Google and its parent company Alphabet, a large Magic Leap investor—quietly stepped down from that position last year in a previously unreported departure (another Google executive replaced him).

Two top Magic Leap executives, CFO Scott Henry and SVP of creative strategy John Gaeta, left those posts last month. Their departures were reported by Business Insider.

Few startups have generated as much hype in recent years as Magic Leap, part of a wave of companies working on augmented reality devices that overlay digital imagery on people’s views of the real world. The company, last valued in 2018 at roughly $6.4 billion, has described its technology in ambitious terms, calling it “spatial computing” and suggesting that it will one day replace mobile phones. Prototypes of the technology helped Magic Leap attract a star-studded list of investors, including Google, Alibaba, the government of Saudi Arabia and Andreessen Horowitz, raising about $2.6 billion to date.

But its first product—the Magic Leap One, which retails for $2,300—underwhelmed many reviewers when it came out last year, with Oculus VR co-founder Palmer Luckey calling the device a “tragic heap.” In 2016, The Information reported that some of the prototype technologies that had so dazzled Magic Leap’s early investors were too large to be incorporated into its final product.

Much larger tech companies, including Apple and Facebook, are placing similar bets on AR as the next big tech phenomenon after mobile, which will intensify competition for Magic Leap in the future. Both tech giants are working on their own devices, while Microsoft already offers an AR headset, HoloLens. Technology research firm IDC estimates that there will be about 500,000 AR headsets shipped worldwide this year, compared to about 7 million VR headsets.

Magic Leap has raised more money than any other AR hardware startup of the past 10 years, according to the financial research firm PitchBook. Meanwhile, global venture investments in AR startups hit a high of $3.62 billion last year and were at $2.42 billion for 2019 as of December 2.

The company is currently seeking fresh funding through a series E round that will be a mix of convertible debt and equity, a spokesperson recently told The Information. In August, the company assigned its portfolio of nearly 2,000 patents as collateral to JPMorgan Chase, a participant in an earlier investment round, according to documents filed with the United States Patent and Trademark Office. It couldn’t be learned if JPMorgan was acting as a lender for the company’s Series E round (a spokesperson for the bank declined to comment).

Fundraising under such terms is standard for a bank or private lender, said Alex Urdea, whose firm Upper90 specializes in debt financing for tech companies. But it indicates the lender sees “capped upside returns” and wants “downside protection,” he said.

While it has raised a large amount of funding in the past, Magic Leap is an expensive operation. Throughout 2018, the company burned around $40 million to $50 million per month, according to two people with knowledge of its finances. It currently has roughly 1,700 employees in offices scattered around the world.

This story is based on interviews with more than a dozen former Magic Leap employees and other people close to the company. All of them requested anonymity because of company restrictions on discussing confidential information.

A spokesperson for Magic Leap declined requests to discuss specific details in this story, but provided a broad statement disputing it. “The Information’s reporting is littered with inaccuracies and misleading statements, and erroneously portrays Magic Leap’s operations, internal plans and overall strategy,” the statement read.

After this story was published, The Information learned of an internal Magic Leap all-hands meeting earlier this week. In the meeting, Magic Leap’s chief marketing officer, Daniel Diez, described the story The Information was then working on as “clickbait" and a “bunch of bullshit.” He described this reporter as an “asshole” and said others in the media were looking to expose the next Theranos or WeWork.

He then told employees to “stay the course” and “protect the company” by keeping confidential information “under lock and key.” He didn’t address specifics details in this story.

Building Buzz

Magic Leap was founded in 2010 by Rony Abovitz, an eccentric, 47-year-old Florida native who once gave a TED talk in a spacesuit surrounded by people dancing to music in furry monster costumes. The previous company Abovitz helped create, Mako Surgical, made robotic arms for surgeons and was sold in 2013 for roughly $1.6 billion. He based Magic Leap in Plantation, Florida, far away from Silicon Valley, New York and other traditional tech hubs.

Abovitz has told employees he wants the company to hire people who are akin to Navy SEALs—the elite special operations force. He still personally signs off on new hires, who are told that it’s harder to get a job at Magic Leap than it is to be accepted into Harvard. Abovitz also has a tendency to hyperbolize, at different times telling employees in company meetings he thinks Magic Leap will have a $100 billion valuation one day while also predicting that it will hold the world's first trillion-dollar initial public offering.

Abovitz proved skilful at building anticipation for Magic Leap’s product—even if it required stretching the boundaries of what the final technology would be able to do. The company publicly released teaser videos to drum up excitement, including one from 2015 that showed a game with an employee blasting robots that pop out of the ceiling inside his office. The video was made by a special effects company, rather than an actual demonstration of the technology.

Potential investors, including leaders of top tech companies and venture firms, made pilgrimages to Florida for demonstrations of the company’s AR technology, an early version of which was a  refrigerator-sized prototype called the “Beast” by company employees. Many were dazzled by what they saw, and wrote checks to be a part of the revolutionary new computing medium they believed Magic Leap was building.

In 2014, Magic Leap secured an eye-popping $514 million investment led by Google. Sundar Pichai, the now-CEO of Google parent Alphabet, joined as a board director, while Don Harrison, Google’s longtime head of mergers and acquisitions, became a board observer. Magic Leap later lured other big name investors such as Alibaba and Qualcomm. AT&T and Japan’s NTT Docomo also bought stakes in the company, which has said that faster 5G wireless data speeds will be essential to deliver a software platform aimed at developers that it calls the Magicverse.

In 2018, Magic Leap lost two tech luminaries connected with its board through corporate investments. Sundar Pichai and Paul Jacobs, the former executive chairman of Qualcomm, quietly stepped off as a director and observer, respectively. Neither departure has been previously reported.

Pichai left the board due to the demands of his schedule, according to a person familiar with the matter. He was replaced by Jennifer Fitzpatrick, a Google senior vice president who leads Google Maps. Qualcomm pushed Jacobs off its board in 2018 after Jacobs disclosed an effort to organize a buyout of the company.

The Launch

To ensure that it could produce enough of its headsets to avoid back orders and to satisfy Abovitz’s demands for secrecy, Magic Leap made big bets on its supply chain. It built its own factory capable of pumping out a million displays for its headset a year at its sprawling Florida headquarters, an unusual move for an electronics startup, according to three people involved in the effort. It also set up another facility in Mexico with an outside partner dedicated to assembling the devices, the people said.

Right before the headset went on sale in August 2018, Abovitz told employees in a memo that he wanted to have 100,000 “insanely happy customers,” according to five people who received the message.

Magic Leap employees set up a war room at the company’s Florida headquarters for the August 2018 sales rollout of its first headset. Screens around the room displayed sales figures for the device, but the numbers represented the quantity Magic Leap hoped to sell, which was higher than actual sales, said two people with direct knowledge of the matter. Employees were later told the company didn't have time before the launch to put a real-time sales reporting system together that could show actual numbers in the war room, said one of the people.

Inside the company, Magic Leap executives have been cagey with rank-and-file employees about how well its product is selling. They haven’t disclosed the figures in company-wide meetings—which are known internally as The Loop—even though questions about the topic are frequently submitted and upvoted by employees in an internal system it uses to compile anonymous questions ahead of the meetings, said two people with knowledge of the meetings. When asked how Magic Leap plans to build a sustainable business in those meetings, Abovitz has said multiple times that the company is still “learning to swim,” said two people who heard the remarks.

There are signs of belt-tightening at the company. Magic Leap recently laid off dozens of people across different departments, including its recruiting and engineering teams, and earlier this year the pace of hiring in parts of the company slowed, said multiple people with knowledge of the matter. Work travel for some Magic Leap groups was temporarily frozen earlier this year, said one of those people. Employees started receiving free headsets earlier this year, with some managers telling staffers it was because the company couldn’t sell enough and had extra inventory, said multiple people.

While Magic Leap hosted an inaugural developer conference in October of last year to rally app makers around its product, it didn’t hold a follow-up conference this year. It also hasn’t yet reopened an annual developer grant program—another method to spur the creation of apps, which it first offered last year.

Magic Leap also bid on a roughly $500 million contract last year to provide AR headsets to the military, which was ultimately awarded to Microsoft (Magic Leap’s bidding on the contract was reported by Bloomberg). It also sought a lucrative deal to participate in the Dubai 2020 Expo to demonstrate a city of the future concept with Magic Leap technology, said four people with knowledge of the effort, which hasn’t been previously reported.

Delegates from Magic Leap flew to Dubai multiple times in 2018 to try to secure the deal, one of the people with direct knowledge said. It couldn’t be learned what the current status of the Dubai effort is. In March, the company also expanded sales of its headset beyond its web site through a partnership with AT&T, which sells the product through some of its wireless stores.

Magic Leap is currently prototyping the second major version of its headset, codenamed ML2, that features 5G compatibility, higher quality graphics, a wider field of view, greater depth perception and a smaller and lighter headset that comes in multiple colors. Earlier this year, a person involved with the project told employees the device is still years away from launch due to fundamental technology constraints, said a former Magic Leap employee who heard the remarks and saw a prototype.

The company has also worked on a shorter-term update to its first headset with slight hardware improvements that could be released sooner, said two people with knowledge of the matter.

In a 2018 all-hands meeting, Abovitz told employees that Magic Leap has received acquisition offers that he has declined, according to a person who heard the remark. But in 2016, the company showed enough interest in a potential deal to tap the investment bank Allen & Company to arrange talks with Apple, Google, and Facebook, said three people with knowledge of the talks.

Representatives from the three companies, including their respective CEOs, flew to Magic Leap’s headquarters to meet separately with Abovitz and his senior executive team, according to the three people. The discussions didn’t progress to formal acquisition offers.

Spokespersons for Allen & Company, Apple, Google and Facebook either declined to comment or didn’t respond.

—Kevin Dugan contributed to this article.