Microsoft is laying off workers at its Mixed Reality business as the technology that inspired Mark Zuckerberg to rename his company struggles

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Microsoft is scaling back the mixed reality group that manufactures its five-year old headset, the HoloLens 2, in the latest sign that the technology is failing to live up to its promise.

The untethered device that retails starting at $3,500 first hit the market in 2019, a full five years before the similarly priced Apple Vision Pro. Facebook founder Mark Zuckerberg was so convinced devices like it would be the future of the social media giant that he renamed his company Meta in late 2021 and since sunk $45 billion into its Reality Labs division. 

Yet neither his Meta Quest 3 headset, nor Microsoft’s more enterprise-focused HoloLens 2 before it, have moved the needle. The heavily-hyped Apple Vision Pro is already meeting with less than sterling demand in the U.S., according to recent analyst estimates. 

“Earlier today, we announced a restructuring of Microsoft’s Mixed Reality organization,” a spokesman said in a statement to The Verge.

While the company elected to continue selling the HoloLens 2, it left its development path unclear, saying only that it would continue to invest in Windows365 “to reach the broader Mixed Reality hardware ecosystem”.

When the HoloLens 2 first debuted, Microsoft predicted “there’s no competition for the next two or three years that can come close to this level of fidelity.” But the very ecosystem it sought to seed has proven more shallow than broad as weak demand for the actual devices themselves acts as an effective deterrent against greater developer interest.  

By late 2022, the Wall Street Journal was reporting of deep-seated problems for Microsoft’s mixed reality headset, which blends the physical and digital world. Only some 300,000 units had been sold cumulatively in the seven years since the first generation launched, according to estimates from market researcher International Data Corporation, and more than 100 employees left the team.

“We had the opportunity to own this market,“ Tim Osborne, a former director on the HoloLens team at the time, told the newspaper. But Microsoft didn’t put enough people or money behind the effort, he said. 

Fortune contacted the company for a comment on the precise number of jobs affected and the rationale for the cost cuts, but officials have not yet responded.

Steep decline in demand in the AR/VR headset market last year

Global shipments for augmented reality and virtual reality headsets across the industry dropped by nearly a quarter last year, IDC figures showed in March. 

“2023 began in much the same way that 2022 ended: with a series of significant year-over-year declines,” said Ramon Llamas, research director with IDC’s Augmented and Virtual Reality program. (Thanks to the arrival of the Apple Vision Pro, IDC forecasts a 44% recovery this year to 9.7 million units.)

MR headsets have suffered from the perceptions that they are too heavy and aesthetically unappealing to justify their premium prices in a world that already has a vast array of useful smartphone apps to help with our daily tasks. Moreover, older VR headsets that offer no camera-enabled passthrough have earned a reputation for provoking motion sickness.

The Microsoft restructuring comes just as the U.S. Army, its largest customer, enters final testing this year of its Integrated Visual Augmentation System (or IVAS) mixed reality headset, which is based on the HoloLens 2. 

In September, Brigadier General Christopher Schneider told the Army Times that phase II development of the device had been approved after initial problems related to cumbersome cabling, image distortion and moisture control had been rectified.

“We remain fully committed to the Department of Defense’s IVAS program,” Microsoft added in its statement.

The software company founded by Bill Gates and Paul Allen hasn’t had the most successful record when it comes to devices. Products like the Zune MP3 player and Lumia smartphone flopped while even the more successful Xbox gaming console is trailing its two main competitors. 

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