Magic Leap, the once-hyped augmented-reality company, is looking to turn a profit with its high-tech optics as bigger rivals like Meta and Apple enter the market.

The Florida-based startup was valued at $6.4 billion in 2018 and has raised funding from investors including Alibaba, Google and Qualcomm. But poor sales of its consumer headsets have led to layoffs, restructuring and a shift to business customers.

Saudi Arabia’s Public Investment Fund bought a controlling stake in the company by the end of 2021, injecting it with more cash, bringing total funding to $4 billion and its valuation falling to $2 billion.

Since then, the company seems to have stumbled upon a new revenue line: manufacturing and licensing the intellectual property of components crucial in AR devices that overlay images on real-world environments.

“The highest-value, most difficult, most complex area is optics,” said Peggy Johnson, who ran Microsoft’s business development before becoming Magic Leap’s CEO in 2020. “And it’s hard to replicate. So the industry is interested in our intellectual property, manufacturing technology, capabilities and high yield.”

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

The Financial Times reported in June that Facebook parent Meta, which spends $10 billion a year on a project to create a “metaverse” filled with avatars, had held talks with Magic Leap to make optics for its future devices.

The company says its focus remains on its own headphones, the latest starting 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, which are widely believed to be harder to manufacture than virtual reality headsets. Google ended its decade-long Glass project in March but reportedly still wants to build an AR software platform, while Microsoft recently scaled back its HoloLens team.

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Apple reignited enthusiasm for the industry with the introduction of its Vision Pro headset, a “mixed reality” device that allows users to fully immerse themselves in a digital world or show video of a real-world environment that includes other digital images.

A long-term goal of big tech companies is to create thinner AR glasses, which may take advantage of technology pioneered by groups like Magic Leap.

LexisNexis Intellectual Property, an organization that measures the “competitive impact” of filed patents, gave Magic Leap an industry-leading score of 9.5 in mixed reality, roughly double Microsoft’s and four times Meta’s.

“Essentially, they have an optical system that is significantly ahead of other companies, and they have patents to support that system,” said a person familiar with Magic Leap’s technology. “Can they turn that into a business, that’s the challenge for Peggy Johnson.”

How important that leadership is remains to be seen. Company executives acknowledge that the AR industry is still in the “bricks” stage of development — referring to early cell phones.

Jeri Ellsworth, chief executive of Tilt Five, a 3D gaming company that makes AR glasses, called Magic Leap “one of the worst offenders in over-exaggerating what the device actually does.” She said she wasn’t convinced it had much better optical performance than the competition.

Magic Leap declined to comment on its revenue or sales of its Magic Leap 2 headset since it went on sale last year.

While the sales numbers aren’t impressive, what matters is whether the company can win enterprise customers who are still testing its headsets and may find future uses, two people close to the company said. Its factories have the capacity to manufacture optics for 3 million devices per year, well in excess of current demand.

Magic Leap thinks new uses will come from its software and hardware. Its advances have shrunk the product from an unwearable prototype the size of a refrigerator in 2012 to a reasonably comfortable headset tethered to a hip battery pack with battery life of more than three hours.

These advancements are on display at its 250,000-square-foot headquarters in Plantation, Florida, which sits atop five factories where the core of the manufacturing process is fully automated.

Some manufacturing takes place in “clean rooms,” using fabrication techniques more common with semiconductors. For example, glass “lenses” — technically “liquid crystals on silicon” displays — etched with tiny patterns 3,000 times thinner than a human hair, can project images into the wearer’s field of view.

“These diffractive structures allow us to point the projector at the world and basically direct the light back to your eyeball, but still allow you to see the real world, so it’s a transparent display,” said Scott Card, head of eyepiece engineering. Deng said.

Magic Leap’s intellectual property extends to the machines that make the lenses, which are also designed and built from the ground up, thanks in part to a decision in 2015 to acquire the non-semiconductor business of Texas-based nanoimprint lithography group Molecular Imprints. business.

Magic Leap’s unusual degree of control over the manufacturing process is the legacy of founder and former CEO Rony Abovitz, who left in 2020 after the company ran into financial trouble.

“Everything I do is complex systems, new areas of technology,” he said. “I was thinking, ‘Why shouldn’t we have this expertise in the US? Why are we exporting all this expertise overseas? It just doesn’t make sense to me.'”

Magic Leap’s Florida factory has proven to be an asset as tech companies face pressure to shorten supply chains and reduce the risk of exposure to China in the wake of the coronavirus pandemic, Johnson said.

“We’re spending a lot of time in Washington, D.C., because as this technology continues to evolve, we want to make sure Congress understands what it’s for,” she said.

“So[having a factory in the U.S.]is not only a technical advantage because our engineers sit upstairs and the manufacturing plant is two floors below, but in this environment, it’s definitely an advantage.”

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