Augmented Reality – Crunch time.

The shake-out begins.

• Osterhout Design Group (ODG) looks to be in the process of being wound up in what I suspect is going to be a procession of small companies failing as Augmented Reality (AR) is turning out to be a ludicrously expensive technology to develop.
• ODG has long touted its technical prowess in bringing AR to small and light head units, but this has come a cropper as Hilco Streambank is conducting a sale of the company’s patents on behalf of JGB Collateral LLC which is a secured lender.
• Clearly, ODG has been unable to meet the obligations of its debt financing and has had to surrender the patents against which it borrowed in lieu of the debt.
• I strongly suspect that ODG attempted to raise equity to meet its obligations but was unable to attract any interest resulting in the ignominious wind-up of its assets.
• Putting any issues of poor financial management to one side, this is a further indication of just how massively expensive it is to develop AR.
• Magic Leap, for example, has consumed billions of dollars in financing which, following its underwhelming device launch, prompted a number of commentators to ask where all the money had gone.
• I think that this is a little unfair.
• Microsoft is another leader in AR which I suspect has also spent vast (billions) sums of money on its product, but because the body corporate is so massive, one can never see it in the numbers.
• Hence, I suspect that Microsoft (and now Apple) have spent as much if not more than Magic Leap and continue to invest very large amounts of money in this technology.
• This is not a huge surprise as the technical challenges involved in getting augmented reality to work well remain substantial (see here)
• This does not bode well for the smaller companies involved in this space because they will never be able to raise the kind of money that is going to be needed to produce a competitive product.
• I think Magic Leap is a special case as I see it as a Google proxy.
• This is because Magic Leap is largely backed by Google and I suspect that if AR becomes a big thing, there is a good chance that Google will end up acquiring the company.
• Hence this could well become a three-way fight between the three very deep-pocketed digital ecosystems, meaning that all of the smaller players get squeezed out.
• Therefore, the way to make money in AR is not to make a device but to find a clever way to solve some of the huge technical problems that this technology has and then licence it to one or all of the players or sell oneself to the highest bidder.
• A good example of this is 6D.ai (see here) which has a system for creating accurate 3D maps of the environment with just a smartphone camera.
• The 3D map is critical in order to ensure that the artificial objects know how and what to interact with in the real world such that they appear to be real.
• Most of the AR units use expensive depth sensing systems that increase the size of the headset, its power consumption and its cost making this an interesting proposition.
• Consequently, while the outlook for these types of companies remains pretty good but those that are small and who are trying to develop an entire proposition are likely to really struggle.
• I expect to see this field narrow further in 2019.