Microsoft (MSFT 0.01%) was the first company to introduce a revolutionary device in a new emerging technology called mixed reality (MR). At the time, many thought Microsoft was the leading player in what could be a next-generation computing platform. However, although it might have jumped out of the gate into pole position in this exciting new technology, there is no guarantee that it can maintain the lead.

Here is one big reason why Microsoft's vision for mixed reality could ultimately fail.

Microsoft sees a mixed reality

Alex Kipman, the inventor and lead developer of HoloLens smart glasses, described it as the first fully untethered holographic computer -- a mixed reality device. HoloLens can blend the real world with computer-generated virtual objects or holograms that users can interact with via hand gestures or voice commands. The first version was sold in 2016 as an experimental proof-of-concept device to developers for $3,000 and enterprises for $5,000.

Microsoft introduced its second version of the device, HoloLens 2, in 2019 to fix some of the more significant flaws of version one, namely its highly narrow field of view. Unfortunately, while HoloLens 2 did improve some things, critics of the second version have pointed out that flaws remain, like lousy image quality, poor color uniformity, flickering images, hard-to-read small text, and a strain on the eyes if worn for too long. And worse, the product's field of view still doesn't fill the entire area of a person's vision -- version 2 is still far from the wondrous experience company executives display during onstage demos. And with the cheapest version of HoloLens 2 costing $3,500, it is far from being ready as a consumer product.

HoloLens loses its vision

In 2021, rumors abounded about a March 2024 release date for HoloLens 3. The third version was supposed to improve on many of the flaws of the previous versions and become Microsoft's first consumer mixed reality product -- possibly beating Apple and Alphabet to the punch. Yet within a year of all the speculation over HoloLens 3, everything seemed to fall apart.

According to a Feb. 2, 2022 report by Business Insider, several people inside the company said that project leaders had scrapped plans for HoloLens 3. However, a day later, Alex Kipman, the project's primary visionary, tweeted a denial that the company had canceled HoloLens 3. 

These back-and-forth rumors were simply the outward signs of a massive internal struggle over the direction of HoloLens -- a battle that HoloLens creator Kipman ultimately lost. By June 7, 2022, Business Insider reported that Kipman had resigned due to sexual misconduct allegations. With Kipman out of the way, it looks like Microsoft could be making considerable changes in its MR division. Chief Product Officer Panos Panay and his Windows & Devices team have now taken charge of the hardware portion of the MR team, which includes HoloLens. Jeff Teper, president of collaborative apps and platforms, will take over the software part of the group.

In addition to losing its leader, rumors proliferated that the company's high-profile $22 billion HoloLens contract awarded in March 2021 by the U.S Army is significantly behind schedule and could potentially fail. As a result, you should not be surprised if, ultimately, the Army cancels the contract -- another embarrassment for Microsoft's MR division.

Finally, well before Kipman left, employees saw the internal power struggles and the writing on the wall. As a result, some 100 Mixed Reality team members left the company, with many heading to Meta Platforms, a Microsoft competitor.

Heavy competition is on the way

Meta is not Microsoft's only worry.

Google is also building out a mixed reality vision of the future. Its headset is code-named Project Iris, and anonymous company insiders told reporters at The Verge that the company plans to ship its new headset in 2024. On another front, there are rumors that Apple plans to introduce a headset in 2023, followed by a more advanced set of glasses coming at an unspecified date. 

Microsoft's position as an MR hardware platform leader is in serious jeopardy. As a result, investors probably should not count on Microsoft being a significant hardware player in MR. Although a successful HoloLens 3 launch would be important diversification for the company, it would likely take up too many resources to make its MR vision succeed in the long term. Additionally, HoloLens was never part of Microsoft's core business, and the device is not necessary for the company to continue growing its revenue and profits

The good news for Microsoft is that if it cancels non-core projects like HoloLens, it can focus more on growing its bread-and-butter product -- cloud services.