- Microsoft is discontinuing HoloLens after losing billions of dollars on the project.
- The company’s 10-year IVAS contract to produce goggles for the military is worth up to $22 billion.
- Microsoft is withdrawing the IVAS work, calling into question its involvement in the contract.
Microsoft has lost billions of dollars on its HoloLens mixed-reality project, and the company’s involvement in a related contract with the U.S. military is questionable, according to people familiar with the situation.
The software giant recently confirmed plans to discontinue production of the HoloLens 2 headset and stop supporting the device. This has led to questions about the Integrated Visual Augmentation System, a set of mixed-reality glasses that Microsoft developed for the US military.
The Microsoft team that worked on IVAS has been downsized, with most of its business and technical brainpower moving to other projects, the people said. They asked not to be identified discussing private matters.
The company is no longer investing in major innovative improvements to the IVAS device, instead focusing on smaller, iterative updates as requested by the military. According to people familiar, the military also charges for these updates.
One of the people said the changes sounded the “death blow” to Microsoft’s involvement in IVAS.
“We will continue to invest in mixed reality capabilities with first-party software solutions and services, working with the broader mobile phone and mixed reality hardware ecosystem,” a Microsoft spokesperson said. “In addition, we remain fully committed to the IVAS program with the US Department of Defense.”
The Defense Department did not respond to requests for comment.
HoloLens history
Microsoft’s HoloLens device was unveiled in 2015. The glasses allow the wearer to see digital information about their view of the physical world, such as an instruction manual that a technician can look at while repairing a device.
Unlike previous failed attempts to sell mixed and augmented reality devices to consumers, such as Google Glasspositioned Microsoft HoloLens as a product for enterprises and other large organizations. It invested heavily in the experimental project.
But patience began to wane as the product failed to achieve commercial success. In 2022, Microsoft scrapped plans for a third version of the device, as Business Insider reported.
At the time, between 40,000 and 60,000 units of the original HoloLens had been sold since its launch in 2016. On the high end, that would be $210 million in revenue, based on the sticker price of $3,500-plus.
Big losses
One of the people who spoke to BI, who has direct knowledge of the financial aspects of the project, said hundreds of millions of dollars have been spent on it in recent years. After a few years, Microsoft began to wonder whether the high spending would ever pay off.
This person now estimates that HoloLens has lost a total of more than $5 billion over the years. The other people familiar with the matter estimate total losses at several billion dollars.
In 2022, HoloLens co-creator Alex Kipman left Microsoft following BI’s report on allegations that he behaved inappropriately toward some female employees. Kipman did not respond to requests for comment on BI’s report at the time. At the time, Microsoft began dismantling the team, initially through a reorganization, according to an email seen by BI, and later through layoffs. Many leaders of the mixed reality team have left for other companies.
Although the 10-year IVAS contract was expected to be worth as much as $22 billion, it was delayed and plagued by quality and performance issues.
“The devices would have killed us,” one tester said after a 2022 test of Microsoft’s device for the military, in an excerpt of an Army report dictated to BI. That tester referred to the light generated by the goggles when active, which can alert enemy fighters to the locations of soldiers. Other criticisms at the time included that the device was bulky enough to limit soldiers’ moment and peripheral vision.
AI > AR
Microsoft is now prioritizing investments in artificial intelligence and generative AI over mixed reality and AR.
The company has made significant cuts to its Surface line of hardware products, including canceling the next generation of headphones. Panos Panay, Microsoft’s former chief product officer, left the company for Amazon late last year as it retreated from devices to focus on AI.
From this current fiscal year through fiscal year 2027, Microsoft expects to spend approximately $100 billion on GPUs and data centerstwo people familiar with the plans told BI. Microsoft, for example, has an internal goal of collecting 1.8 million AI chips by the end of 2024, according to a document seen by BI.
Microsoft is pulling out of AR at a time when companies like Meta and Apple are investing heavily. Meta’s Reality Labs unit, which includes virtual reality headsets and AR smart glasses, posted an operating loss of $4.48 billion in the most recent quarter. Apple has spent billions on its Vision Pro headsets and is considering launching its own smart glasses, Bloomberg reports.
In September, Microsoft brought in Anduril to help with its military contract. The defense startup has already integrated its Lattice software into the existing IVAS platform.
Palmer Luckey, a VR pioneer who founded Anduril, recently described the IVAS contract as his “top priority.”
Other companies may also become involved in IVAS. The US Army has discussed an “IVAS Next” project to improve military spectacles, and Breaking Defense reported in August that officials were open to replacing Microsoft as the lead entity in this new contract.
A total of 80 companies, including Anduril and Palantir, showed up at an industry day to learn more about IVAS Next’s plans, the publication said.
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