United Against Unity. A Company in Trouble?
Unity (U) recently ran into some trouble after announcing a new pricing model, at a time when the stock is already struggling from macro-economic pressure. But putting it like that would be playing it down…
It was really a massive SHIT-STORM and PR Nightmare: The hobbyist userbase revolted, indie studios issued damning letters of concern, and online communities unanimously proclaimed Unity the devil. Online communities were flooded with complaints, and ways for switching to competing services, disgruntled brand ambassadors quit and dropped their Unity sponsorships, a few employees left the company - and one even issued their boss a death threat, resulting in offices shutting down.
The company is still unprofitable and following this, the company was forced to remedy its new pricing model. Trust is now at an all-time low, likely both from a developer and investor perspective. I happen to be both: A Unity developer by day and an investor in the company since its 2020 IPO. Unity remains one of my largest positions. Why is that? And what good can come of all this?
An example of a letter of concern by Seattle-based indie studio Mega Crit behind successful multi platform title Slay the Spire. “We have never made a public statement before. That is how badly you fucked up.”
Why a new pricing model is necessary
By and large, Unity is a free product for most developers, which is also part of why it enjoys such a large market share. Up until the change, Unity required only those developers generating more than $100,000 in revenue to subscribe to its Pro software, which costs around $2000 per seat, per year. The only other way Unity was able to monetize its massive user base was by offering its own advertising and in-game monetization services for live projects. The company has more than 8000 employees with a large part of that dedicated to developing and maintaining the engine, known as Unity Create. But over the past couple of years, the monetization part of the business, or what is now known as Unity Grow, has been paying for the whole party.
Unfortunately, that model is incompatible with the current macroeconomic environment. Tech in general, but game development in particular, has been struck hard by cost-cutting and layoffs; And layoffs mean fewer seats to pay a subscription. At the same time, global advertising spending has been way down, leading to little or no growth in this area. Something had to change - and I would argue that the biggest misstep was not doing it sooner.
Competing models and Unity’s approach
Part of what I like about my investment in Unity is the market they operate in. Despite numerous players, it is effectively a duopoly between them and Epic Games with its Unreal Engine. Unity is by far in the lead market share wise, however Epic targets more high-end customers. Since 2014, when Epic took a lesson out of Unity’s playbook to become much more accessible to all, by making its core services free, they have had a different way of monetizing. The model here is simple: a 5% cut on all revenues made above 1 million dollars. This works, naturally because big AAA productions often make a lot of money.
I have long wondered why Unity did not have a similar model in place. Even on top of its subscription model, I think it could have gotten away with a revenue share model like that of Epic’s - creating a baseline paid tier and a way to benefit highly from huge commercial customer successes, even if expected to charge a lower percentage because of the subscription.
But Unity did not opt for such a model. I have a few theories as to why, but let us first go over what Unity announced on that fateful day of September 12th. Hang on tight, because it gets a bit complicated! You can skip it if you like or if you are already familiar but there is no doubt this was a big reason for the reaction they faced in its wake:
Firstly, the pricing change does not go into effect until January 2024. That still applies. However, originally, it affected all projects made in Unity, including those built and published prior to the change.
Secondly, Unity now requires developers to pay a small fee each time their game or product is installed. There exist two thresholds for this: One fee that applies to revenue generated above $200,000 and with more than 200,000 installs, and a lower one that applies to revenue generated above $1000,000 and with more than 1000,000 installs, based on which subscription tier is being utilized (Unity free or Pro). Within this also exist several different rates, for different numbers of installs AND separate pricing for emerging markets.
Then came rules for exceptions: Games sold for charity are exempt. Edge cases (like games with massive user counts but very low levels of monetization) will have to be negotiated individually. It is also vaguely hinted that choosing Unity’s own advertising services over a third-party provider could mean a complete avoidance of any install fee.
Unity included this “handy” table for figuring out its massively complicated new pricing tiers. It was retired following the outrage.
The first point in particular resulted in mistrust and questions about the fairness of the change. Earlier versions of Unity’s EULA have mentioned that projects built under terms of service would be protected against future revisions or changes. The second point resulted in mass confusion and worst-case scenarios being shared publicly. Only the highest possible $0.20 fee and the lowest possible $200,000 revenue threshold trigger were quoted in headlines. No one could be bothered reading the table. The third point resulted in community threads like this one being shared online, ignoring negotiable terms and spreading fear, amplified by tracking concerns raising common questions such as:
What counts as an install?
How does Unity track this?
Have they always been able to do so? (apparently this came as a surprise for some)
Would Unity not just be incentivized to boost reported numbers?
What about piracy or illegally obtained copies?
What about gaming streaming services?
What happens if someone reinstalls a game over and over?
What about organized “install attacks” using bots and virtual machines?
Ultimately the outrage, boycotts, and critique resulted in a huge revision of the pricing model:
It was changed to only apply to projects using versions of Unity from 2024 onwards. The install model was simplified to only apply for Unity Pro subscribers generating more than $1,000,000 in revenue. It was clarified that developers would self-report numbers. The company removed reinstalls from the equation (only counting the first install). A maximum cap on revenue share was set at 2.5% and it was even made possible to avoid the install model altogether and opt for this simple percentage instead, if preferred or cheaper.
Why complicate things in the first place?
As previously mentioned, I may have an idea as to why Unity did not just go with a simple copy of Epic’s revenue share model, bundled with a subscription, and coming in at a lower percentage from the get-go. The first potential reason is that Unity’s developer base is much more diverse than Epic’s, consisting of many more, smaller studios. Unity is also much more focused on mobile, currently powering 90%+ of the top mobile games. Incidentally, the mobile market drives much higher profits than that of the PC/Console market. I think that Unity originally wanted to find a way to modestly profit off the many mid-size PC/Console developer studios, while really raking it in from large-scale mobile studios. At a surface level, install fees may be a good way to achieve this, as mobile games are much more “liquid” in the way that users much more often install new apps and discard old ones because the convenience of pre-installed app stores and small file sizes that makes this easy to do. Mobile games are also much more reliant on ads and because they would be hurt the most by install fees, these developers would be much more likely to switch over to Unity monetization in order to avoid fees, which in turn would then hurt Unity’s direct competitors in the ad space, like AppLovin (APP).
Another reason could be Unity’s ambition and focus on becoming the go-to player in delivering non-gaming RT3D experiences. The focus on this mission and its potential remains an outsized reason for my continued long-term investment. However, monetizing such projects is very different from games and a revenue share model might not work at all. This claim is verified by Epic’s recent move to change Unreal Engine’s pricing for non-game developers to a per-seat subscription model. Earlier in the year, Unity introduced a specific SKU for non-gaming developers called Unity Industry which quickly saw success. It is its fastest-growing SKU ever, despite also being its most expensive. Many of these projects could be government-founded or scientific in nature, not even meant to generate revenue. It could be that non-game developers might prefer more control over their pricing or that a whole lot of these customers receive most revenues from other sources.
Interestingly, both the reactions of AppLovin, who joined the parade by issuing a letter of concern (directly aimed at John Riccitiello at that), and Epic’s sudden downsizing are good indicators that these theories may hold some truth. But of course, it was not the right approach, as so clearly settled by the reaction of Unity’s user base. Introducing such a complicated and opaque solution to a problem, with only vague answers to potential issues was a clear error in judgment by management. Not only that, it was a massive error of communication - something which CEO John Riccitiello, has been guilty of before.
Not all are fair on Unity
Now, there are always two sides to each story, and to take the view of the investor for the sake of fairness, Unity also received quite a lot of unfair criticism and publicity during this period. The first issue was a large amount of misinformation being shared. For example, Massive Monster, the developer behind Cult of the Lamb, shared a cheeky post on X claiming that they would delete their game on January 1st, 2024, as a result of the new pricing model. Anyone already following their channel, would likely understand that this was meant as a joke. They quickly confirmed it to be so, but regardless, it was shared in news articles, various headlines, Reddit, and on X as the factual truth. Other misinformation came in the form of people looking into financial statements and disclosures without any clue of how the whole thing works. Legitimate, officially disclosed, automatic stock sales by management (such as those set up to cover the tax on expiring options) were labeled as insider trading and twisted the pricing model announcement into something it was not, on the basis of personal greed.
Vandals even edited the Wikipedia article for “Greed” to include a picture of John Riccitiello.
The death threat, which was issued against a manager at the company and resulted in offices shutting down temporarily, was initially mocked on the internet. A lack of trust meant that misinformation was spread online that it had somehow been organized on purpose for cheap sympathy points. This was indeed not the case, as local police later confirmed the existence of the threat as coming from an aggravated employee.
Unfair criticism of the past resurfaced, such as the company’s newest acquisition ironSource once again being reduced to being a malware operation (because a single now long-discontinued product of theirs had some issues in that regard). This part of Unity’s business is by some considered the root of all evil and because ironSource is originally Israeli, even anti-Semitic comments surfaced in a Reddit discussion titled “ironSource is the reason” resulting in the thread being locked by moderators.
People also criticized the company based on its stock performance. And while I admit it has been somewhat of a rollercoaster, this was blown way out of proportion. During the week of despair, people were nitpicking every little thing and sharing 2-3% daily drops in the stock as a clear indication of its inevitable doom. The stock does trade below the IPO price, but people forget the very good reason behind that: Unity went public at an opportune time, in late 2020 when all tech was being hyped beyond belief. The timing was impeccable and the company raised money at valuations almost beyond belief. I did not buy the stock when it was trading at $200, but some did, and for a company trying to raise money for its future operations, that is exactly what you want. The company is far closer to true profitability now than in 2020-2021 and whether you like it or not, taking a bigger cut from developers is a significant part of what takes them all the way there. Furthermore, this is a volatile stock and a 3% movement really means absolutely nothing.
I, like many others, believe instead that Unity probably had the right intentions. They are doing this out of necessity and in all honesty, there was no way a price hike was going to go over completely smoothly with everyone. I see a large user base with an expectation of this service staying free forever. That does not make any sense. I deduced quickly that the studio I work for myself would be impacted very minimally (we will likely have to upgrade to Unity Pro) just like what is the case for 90% of the user base out there. However, this whole thing earlier suspections I have shared, that communication and trust remains the company’s biggest issue.
What good can come of all this?
So, with all that out of the way, what good comes of it? This move was necessary, but also really really important. On its latest earnings call, management finally shared ambitions for the company to become profitable on a GAAP basis. That means true profitability, unlike how it is now, where stock-based compensation outweighs margins. This change in pricing was honestly long overdue and something that I have eagerly been anticipating from the start of my investment. The fact that it caused a shitstorm of this magnitude is extremely unfortunate, and obviously not something I like to see. But what it does help with is increased attention on scrutinizing management very much in need of it - in particular how they are profiting while everyone else is not. I have long called for stock-based compensation to come down before I consider adding to my position any further. Now that management is not only criticized by investors but also in public for its massive user base, perhaps they will work harder to achieve a more conservative approach.
Finally (and this is a big one) is how this reflects on CEO John Riccitiello. Former CEO as I may add, as in the final hours of writing this post, Unity finally announced his immediate departure. As I mentioned in my investment journal for September, I still believe Riccitiello to have been the right guy for bringing Unity public - but that he is not the right guy for this next phase of the job. Riccitiello’s claim to fame was leading EA (EA) in the past, which is by far and large the most hated company in gaming. He is ultimately also responsible for this horribly mismanaged announcement and his failure really is a hit to the company’s future profitability. Had they succeeded in establishing a simpler variant of their original model, we would have seen massive revenue share come in from the first day of 2024. But now existing games built in earlier iterations of the software are exempt, and the company will have to create a very good reason for its biggest customers to upgrade to a 2024 version of the software (thereby triggering the revenue share model). For this reason, the boot can be justified we now need the next CEO to be someone more product-focused and one that can reestablish some credibility with the company. I am excited to see the company move into its next era under new leadership. For now, former President and CEO of Red Hat, Jim Whitehurst will take the reigns as Interim CEO.
Disclaimer: I am not a financial advisor, the opinions expressed in this article are entirely my own – always invest at your own risk.
