Facebook‘s parent company, Meta, is engaged in discussions with Magic Leap, an augmented reality (AR) start-up, in an effort to establish a multiyear agreement. This collaboration reflects Meta’s ongoing commitment to investing billions of dollars into the creation of the metaverse, a virtual world filled with avatars. Industry insiders familiar with the initial talks reveal that Meta is exploring opportunities for Magic Leap to provide intellectual property licensing and contract manufacturing in North America, thereby aiding Meta in the development of mainstream AR products.

Magic Leap specializes in producing custom components, including advanced lenses and associated software, which are integral to the construction of a metaverse. However, sources familiar with the discussions emphasize that the partnership is unlikely to result in the creation of a joint Meta-Magic Leap headset. Former employees of Magic Leap highlight the value of the company’s “waveguides,” a sophisticated technology that allows thin glass in front of users’ eyes to generate lifelike images at various depths.

However, Magic Leap did not confirm the ongoing talks but acknowledged that partnerships have become a significant aspect of their business and represent a growing opportunity.

Meta’s sustained interest in augmented and virtual reality coincides with Apple’s imminent launch of its own “mixed reality” device. Both industry giants are banking on these headsets to establish a lucrative computing platform capable of rivaling mobile devices. Despite investor frustration with Meta CEO Mark Zuckerberg’s annual $10 billion investment into the metaverse project, the company’s pursuit of this ambitious vision has persisted. Meta, valued at $612 billion, faces challenging macroeconomic conditions and a decline in advertising, leading Zuckerberg to initiate restructuring efforts and lay off approximately 20,000 employees as part of the company’s “year of efficiency” initiative.

Meta’s interest in collaborating with Magic Leap also reflects Silicon Valley’s growing pressure to reduce its reliance on China for hardware manufacturing. This issue has become increasingly pertinent to the social media giant as it ventures into the VR and AR headset market within its metaverse vision.

Established in 2010 and headquartered in Florida, Magic Leap is one of the most well-funded AR start-ups, having generated significant hype and raised over $3.5 billion in multiple funding rounds led by major players such as Google, Alibaba, and Qualcomm. Following underwhelming sales of its Magic Leap 1 headset, which reached only a few thousand units, the company pivoted away from consumer-focused products and shifted its focus exclusively to enterprise applications.

In 2020, Magic Leap explored potential sales opportunities, including interactions with Facebook that did not materialize. The Saudi Arabian Public Investment Fund became a majority stakeholder, acquiring over 50% of the company in 2021. Peggy Johnson, the CEO of Magic Leap, alluded to a new revenue stream in a recent company blog post, expressing the company’s receptiveness to licensing its intellectual property and utilizing its patented manufacturing process to produce optics for other mixed-reality technologies.

Magic Leap currently possesses the capability, in collaboration with contract manufacturer Jabil in Mexico, to assemble tens of thousands of headsets annually. Addressing the challenges associated with developing true augmented reality technologies and the complexities of manufacturing optics, the company has entered non-exclusive IP licensing and manufacturing partnerships with companies seeking to enter or expand their presence in the AR market, while also addressing issues related to overseas supply chain dependencies.

Although Meta dominates the VR/AR headset market, accounting for nearly 80% of sales with its VR Quest models, the market itself remains relatively small, with fewer than 9 million units sold last year according to IDC. This market lead faces uncertainty with the imminent entry of Apple, expected to be announced during its developer conference next month.