Microsoft lost billions of dollars on HoloLens, and its huge IVAS military contract is in trouble

• Microsoft is discontinuing HoloLens after losing billions of dollars on the project.
• The company's 10-year IVAS contract to make goggles for the Army is worth up to $22 billion.
• Microsoft is pulling back on IVAS work, putting its involvement in the contract in doubt.

Microsoft lost billions of dollars on its HoloLens mixed-reality project, and the company's involvement in a related contract with the US Army is in doubt, according to people familiar with the situation.

The software giant recently confirmed plans to halt production of the HoloLens 2 headset and will stop supporting the device. That's led to questions about the Integrated Visual Augmentation System, a set of mixed-reality goggles that Microsoft has been developing for the US Army.

The Microsoft team that's been working on IVAS has been whittled down, with the majority of the business and engineering brainpower moving on 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 and is instead focusing on smaller, iterative updates requested by the military. It's also having the military pay for these updates, according to the people familiar.

One of the people said the changes signal the "death knell" for Microsoft's involvement in IVAS.

"We will continue to invest in mixed reality opportunities with first-party software solutions and services, partnering 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 Department of Defense did not respond to requests for comment.

HoloLens history

Microsoft's HoloLens device was unveiled in 2015. The goggles allow the wearer to see digital information overlaid on their view of the physical world, displaying, for instance, an instruction manual that a technician can glance at while repairing an appliance.

Unlike previous ill-fated efforts to sell mixed- and augmented-reality devices to consumers, like Google Glass, Microsoft positioned HoloLens as a product for businesses 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 BI reported.

At the time, the original HoloLens had sold between 40,000 and 60,000 units since it launched in 2016. At the high end, that would be $210 million in revenue, based on the device's $3,500-plus sticker price.

Big losses

One of the people who spoke with BI, who has direct knowledge of the project's financials, said it had been burning through hundreds of millions of dollars in recent years. After several years, Microsoft began to question whether the heavy 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 put total losses at multiple billions of 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. Microsoft started to dismantle the team at that time, initially through a reorganization, according to an email viewed by BI, and later through layoffs. Many of the mixed-reality team's leaders have left for other companies.

While the 10-year IVAS contract was expected to be worth as much as $22 billion, it suffered delays and has been plagued by quality and performance problems.

"The devices would have gotten us killed," 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 was referring to the light generated by the goggles when they're active, which could alert enemy fighters to soldiers' locations. Other criticisms at the time included that the device was bulky enough to restrict moment and limited soldiers' peripheral vision.

AI > AR

Microsoft is now prioritizing investments in artificial intelligence and generative AI rather than mixed reality and AR.

The company has made significant cuts to its Surface line of hardware products, including canceling its next generation of headphones. Panos Panay, Microsoft's former chief product officer, left the company for Amazon late last year as it pulled away from devices to focus on AI.

From this current fiscal year to the 2027 fiscal year, Microsoft expects to spend around $100 billion on GPUs and data centers, two people familiar with the plans told BI. Microsoft, for example, has an internal target to amass 1.8 million AI chips by the end of 2024, according to a document viewed by BI.

Microsoft is pulling away from AR at a time when companies like Meta and Apple are investing heavily. Meta's Reality Labs unit, which includes its VR headsets and AR smart glasses, posted an operating loss of $4.48 billion in its most recent quarter. Apple spent billions on its Vision Pro headsets and is considering launching its own smart glasses, according to Bloomberg.

In September, Microsoft tapped Anduril to help with its military contract. The defense startup has already integrated its Lattice software into the existing IVAS platform.

Palmer Luckey, a virtual-reality pioneer who founded Anduril, recently described the IVAS contract as his "top priority."

There may be other companies getting involved in IVAS, too. The US Army has been discussing an "IVAS Next" project to improve the military goggles, and officials are open to replacing Microsoft as the prime entity on this new contract, Breaking Defense reported in August.

A total of 80 companies, including Anduril and Palantir, showed up to learn about IVAS Next plans at an industry day, the publication noted.

Are you a Microsoft employee or do you have insight to share?

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