Some quick notes on Unity as I go through their just filed S-1. The timing of their filing is impeccable, and their IPO will benefit from industry tailwinds, Epic/Apple, etc. I would be shocked if the stock doesn’t rip!
From a gaming perspective, Unity’s the mobile winner. When AAA fidelity is often unimportant, what you want is speed to market, proven tools, technical stability, quick developer ramp, etc. Unity is the clear choice, hence why most of mobile gaming revenue runs though Unity.
The reason why Unity has been winning in mobile is also why it’s in a good position for emergent gaming platforms like VR/AR, which need easy on-ramps for developers. Same underlying dynamics which drove mobile.
To date, Unity hasn’t been great for high fidelity AAA applications and simulations, where Unreal is far better positioned. Non-gaming industry usage likely splits on these axes. Long-term, I think Unity must go upstream as quickly as Unreal is working to go downstream.
Unity, the gaming engine, is remarkable. What it’s done to democratize game dev is incredible. As a hobbyist, Unity is free. As a business user, Unity is dirt cheap. It’s taught at schools, it’s easy to use, has a wide base of development talent, great for cross-platform, etc.
Unity Technologies, the business, is less awesome. The same factors that drive Unity’s ubiquity means that Unity doesn’t make much money from its engine. Per the S-1: only ~25% of revenue comes from license sales, which are growing slower than the rest of the business.
One way to look at this: mobile gaming in 2019 was ~$70 bn. Unity, with >50% penetration, but with no royalties, generated only ~$135 million in license revenue. This isn’t a problem per se, unless you’re trying to drive to an exit. This is why they hired John.
Unity’s revenue growth is driven by “Operate” services which are >70% of revenue. This business is just not that exciting. The bulk of Operate is UA/Ads, which are fine businesses, but are highly competitive and subject to real business model risk. IDFA, privacy, incumbents, etc.
There is perhaps surprisingly low overlap between Create and Operate customers. Most major gaming players don’t really need much of what Operate is providing. But this is a bulky business that is fairly easy to acquire revenue through S&M / M&A.
If you want to know what Wall Street usually thinks of these sorts of businesses, go look at the historical stock price for Rubicon Project. That’s where the head of the Operate division at Unity came from. To be clear though, I don't think matters for the market today.
I do think it’s good that they have these services businesses. Building and supporting the Unity engine is expensive, and they need to fund it! Is it better to fund these sort of investment with a massive cash machine like Fortnite? Sure! But we can't all be so lucky.
My main fear for Unity is they let the needs of the public stock outweigh the needs of the engine/community. Executive focus is limited, and the stock narrative will require substantial and ongoing growth in services.
If you follow the Unity community, there are some minor whispers that this focus has already led to underinvestment in core tech over the last few years. If I'm Epic, I'm thrilled to compete with a public Unity.
