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By Josh Ye

HONG KONG (Reuters) - ByteDance's virtual reality (VR) arm Pico will cut jobs and undertake its biggest overhaul since it was acquired by the TikTok maker two years ago as global demand for VR headsets weakens, three people with direct knowledge of the matter said.

China-based Pico held an internal meeting on Tuesday announcing the unit would keep its hardware team, but much of its software team would be folded back into ByteDance's own product development team, the people told Reuters on condition of anonymity because they were not authorised to speak publicly.

At the meeting, Pico's CEO Zhou Hongwei said "the VR industry remains in a very early stage" and the company's "estimation for the industry and market growth was too optimistic as (real growth) did not go as fast as expected," acording to a transcript of his speech verified by two of the sources.

Zhou also said that the company would lay off staff from its sales, videos and platform operation teams.

The meeting did not specify how many jobs would be cut, but the three people said "hundreds" of staff were expected to be affected globally.

Pico said in a statement it was restructuring the business to focus more on hardware and core technologies, but declined to comment on possible job cuts.

The reorganisation is a setback for ByteDance as its 2021 acquisition of Pico, which valued the VR company at more than $1 billion, was seen as the Chinese group's attempt to take on Meta (NASDAQ:META) Platform's Quest line of VR headsets.

However, VR demand has sputtered this year. Augmented reality (AR) and VR headset shipments have fallen for the last four consecutive quarters, according to data from research firm IDC ended June 30, with volumes down 44.6% in the second quarter year-on-year.

Since the acquisition, Pico has been aggressively expanding both inside and outside China. In China, it has become the leading VR producer by total shipments and globally it trails only Meta.

But two of the people said ByteDance had pared back efforts to develop Pico as a brand in recent months as the outlook dimmed. A number of senior managers have left Pico this year, one of the people added.

ByteDance declined to comment on the change of Pico's position as a strategic priority within the company and the senior personnel changes.

ByteDance said last month it remained committed to the VR industry in the long term following media reports that it planned to gradually wind down Pico.

China's ByteDance to overhaul VR arm Pico as global demand declines -sources