Most platform founders start out by building an application and in the process realize that the underlying infrastructure/platform problem is more appealing than the application itself. We saw that with Plaid. Founders started with building a fintech app & moved towards building an API infrastructure that powers those apps. Unity’s story is quite similar in that regard.
Launched in 2005, by David Helgason, Joachim Ante, and Nicholas Francis in Denmark, Unity focuses on provides technology (game engine). It executes physics, audio, interactions, and networking for game developers to build games. The idea is that developers focus on the creative aspect of the game and other challenges are taken care of by a platform.
To better understand where Unity fit’s in the value chain of the gaming ecosystem, let’s understand the stakeholders involved. First, we have publishers who finance the games. These are Electronic Arts, Activision Blizzard, Take-Two Interactives of the world. Games are developed either by their internal team (studio) or the externally hired developers team. Most of these large publishers developing AAA games (games that are heavy in marketing budgets categorized as AAA or AA) have their own proprietary game engines. Why don’t they use game engines like Unity or Unreal? The reason is simple: They have deep pockets to build their own engine, the revenue sharing model doesn’t work for the amount of revenue successful game titles will bring in its lifetime, and sometimes they don’t want to get limited by the constraints of game engines.
Though this is changing. Today you see some AAA games using Unity or Unreal eg: Valorat from Riot Games uses Unreal, Legends of Runeterra from League of Legend franchise uses Unity. Game engines have matured a lot in terms of technical capabilities. At times due to time & resource constraints, these studios prefer outsourcing. But this trend is still not significant for AAA games as compared to the rest.
Coming back to the stakeholders, we also have gaming platform owners for each of the consoles, PCs, mobiles & tablets. You have a trifecta of consoles: Microsoft, Nintendo, and Sony. Mobile being dominated by Google & Apple whereas in XR we have Oculus, Hive, Samsung, and others.
Consoles like PlayStation or Xbox usually have a 5-year cycle for every new release Example: the latest being Playstation 5 or Xbox series X and Xbox Series S released in Nov 2020. Traditionally AAA games developed with their own proprietary game engines dominate the charts for the console cycle. The consoles tie up to have exclusives games with the game publishers. Those exclusives ensure good demand on the launch for the console. That in turn attracts new developers to build games for the console. For AAA publishers, their game will be fine-tuned to say only PS5 but at the same time, thereby limiting the overall market.
As stated, most of these AAA game publishers are using their own engines for creating games for these consoles. Neither Unity nor Epic’s Unreal has any significant market share in the AAA league. But today, more than half of the total gaming revenue comes from Mobile & tablets. Not just that, mobile gamers and revenue are growing at a faster rate compared to console & PC. This is where game engines like Unity dominate.
Next, we have games stores: distribution channel to access or purchase games. Here again, platform owners have their own game stores Xbox (Game Pass), PlayStation Store for consoles where they charge 30% from the publishers. Similarly for mobile, Apple and Android charge 30% one time for paid games and 15% share on transactions throughout the game cycle. Steam’s Valve pretty much dominates the PC’s digital distribution. Steam is unique in the way that it’s the only dominant app store that’s not owning any hardware like Apple, Microsoft, or Google. Although larger publishers do have their own game stores like Battle Net for Blizzard, you get the benefits of a ready audience, customer support, and services from established game stores.
This characterization is purely based on each stakeholders’ dominant business. In reality, the difference between them is all blurred. Example: Epic (a game engine) has its own game store: EGS (Epic game store) & a successful gaming franchise: Fortnite. Microsoft & Nintendo (platform owners) also publish games. Nintendo's success is mainly attributed to its own first-party titles (built by Nintendo). Hence these characterizations are more to have a starting point in terms of understanding the ecosystem. Coming back to Unity.
Unity:
In 2003, most of the game development was focused on big AAA titles. Game engines were closely guarded by the publishers for their own games. Unity decided to focus heavily on small teams like themselves. It was launched in 2005 at the Apple World Wide Developer Conference (WWDC). Interestingly, iPhone was launched in 2007, and AppStore in 2009. Since Unity started off with MacOS (the only platform it supported at that time), the migration to the iOS AppStore was a natural one. The growth of AppStore and Unity being the only game engine supporting games on mobile at that time catapulted their growth.
With time, it started adding more platforms. Today it supports over 20+ platforms. That’s one of the motivations for developers, they no longer just target platforms like PlayStation or Android, they target Unity and then make games available on all platforms. For AR & VR, Unity has a market share of over 60% of all games built. Most of the games built for Oculus are with Unity engine. Unity serving as a platform for next-generation content was one of the reasons for Mark Zuckerberg’s failed attempt to acquire it. (Highly recommend reading Zuckerberg’s email of 2015 to understand his plans to be a platform and how much he dislikes having Apple or Google as an intermediary between Facebook and its users. )
When you’re building a business-to-developer (B2D) platform for millions of developers, you require to have a good community. As a developer, once you start building the game on Unity it’s an empty stage, you require assets to get started. Launched in 2010, the Unity Asset Store was a brilliant idea that played a key role in building a successful community. It’s a marketplace where you can trade 2D, 3D and environmental assets. There are developers who make good money by just selling assets at Unity.
Business:
With 772.5M USD annual revenue in the year ending Dec-2020, Unity is growing over 40% YoY. Gaming is the fastest-growing category (bigger than media like movies & songs combined) with 2.5B gamers worldwide. Online distribution, increasing compute power available per person per device, and high connectivity (4G & advent of 5G) is fueling the growth.
For game engines, there are two business models. It can be either based on per seat or based on royalty i.e. % on the total earning of the game. Unity follows the former whereas its biggest competitor Unreal Engine follows the latter. From John Riccitiello’s, CEO of Unity, own words for the rationale to not have a revenue share model:
I have the benefit of having been involved in publishing north of $40 billion worth of games in my life (while being a CEO of Electronic Arts). And I tell you, the one thing I hated more than anything was a royalty model or a rev share to a toolmaker. … It's a particularly unfriendly model when it comes to content creating tools. You don't want to give Photoshop a royalty on your photo if it ends up in some large social media outlet. You don't feel like you should owe them a percent.
Till 2009, Unity charged 199$ per seat with different tier pricing. Post that, it made Unity Personal free for everyone if your total revenue from Unity was <100K USD. Unity Pro & Unity Enterprise are paid plans for the business. In comparison, Epic’s Unreal has been rather generous since May-2020. It charges a 5% royalty only when your gross revenue for the game exceeds 1M USD. It is calculated on the amount over and above the first 1M USD. And if you’re distributing through EGS (Epic Game Store), even that is waived off, it only charges a commission of 12% for EGS. (Details: here)
When you own a single product in a growing market, you’re bound to have a threat from competitors. These can be either 70-30 competitors (70% features for 30% pricing), “make money from something else” competitors (Like Intel used to be), or open-source competitors. A lasting way to tackle them is to diversify. Moving to monetization business of games in 2014, expanding to AR/VR games in 2016, and moving to industries beyond gaming since 2019- are all attempts in that direction. Unity has made over 18 acquisitions so far, mostly small teams with the required talent (acqui-hire).
Unity has 3 business segments today with the following split for the year ending Dec-2021.
Create Solution :30%,231.3M USD
Operate Solutions:61%, 471.2M USD
Strategic partnership & others :9%, 70M USD.
Unity’s Create solution allows the creation of real-time, 3D, interactive content. Real-time means the next frame the player sees is created instantaneously. Interactive is that content responds based on input from players rather than being linear.3D allows to see the front side and also move the characters to see the other side. It is used by developers through the Unity editor user interface. It includes a scripting tool, high-definition render pipeline, graphics, audio, and a whole host of other tools to create content that can be deployed to more than 20 platforms. You can also migrate content/tool from the Unity Asset store.
In an attempt to offer end-to-end solutions to game developers, Unity made services acquisitions in 2014. It formed a new business segment: Operate Solutions. The acquisition was in alignment with the trend we were seeing in the gaming industry: movement from a traditional one-time purchase to free-to-play (F2P) games, that demand new monetization models: inApp purchase and Unity Ads. It will be interesting to see the split of revenue between inApp & Ads, my guess is that it will be skewed towards in-app purchases. Unity views itself more as a monetization platform rather than an ad platform.
The diversification is continued with acqui-hire strategy for some of the services like:
Providing a solution to deliver content for multiplayer hosting in games: Multiplay (Nov-2017)
Offering deep analytics to optimize end-user engagement and behavior. Thus increase the LifeTime Value of gamers: deltaDNA (Sep-2019)
Player to Player communications, in-game voice, and text chat: Vivox (Jan-2019)
Pricing for these are unique to each offering: Multiplay is based on customer’s hosting needs (storage, compute, bandwidth), deltaDNA is based on the number of active users in the app each month whereas Vivox is based on the number of peak concurrent users in a given month.
A small but important component of revenue (9%) comes from Strategic partnerships & Others. So what exactly is Strategic Partnerships? To keep platform deployment ready for next-generation game consoles, devices, OS, hardware, Unity usually charges a fixed fee to the platform /technology/ecosystem partners. This can be based on milestones and in very few cases royalties for the products that incorporate the use of Unity. These partnerships can be with platforms (Google, Apple, Facebook-Oculus, Nintendo), technology (Intel, ARM, Nvidia, Samsung), ecosystem partners like third-party tools, plugins, SDKs built on Unity. Others small component of revenue relates % of share Unity gets from the marketplace: Unity Asset store.
Industries outside games
Unity is investing heavily in industries outside gaming. One may wonder what’s the need to go beyond gaming when gaming is growing at a good pace? There can be a couple of hypothesis for that:
It’s not much engineering effort for Unity to extend Real-Time 3D (RT3D) content outside gaming.
Unity’s vision to have most of the content that we consume in the future be RT3D -is a driving force behind this. Gaming is just an aspect of the overall content. In the future, as most contents being created on a common platform(Unity in this case), the movement of assets from one environment to another becomes easier. ( “Interoperability” in Metaverse )
A major factor to enable that is to make content creation easier. Using Unity editor in its current form has a steep learning curve, it requires you to be a professional. However, with new products, Unity attempting to make content creation with a click of buttons.
With Forma, launched in Dec-2020, Unity is target marketing and sales professionals. I can build a website of consumer brands showing a 3D view of their product, and letting customers play with it to configure a custom product for themselves. Automative brands like Volkswagen, luxury brands, leading hospital chains are the early adopters. The next version of Forma also focuses to have the sales team show compelling, real-time demos that can be used either through Zoom or F2F. Back-end streaming of this content will be handled by another product: Furious. In the future, everything will be rendered. Similarly, a tool like Reflect is built for architecture to view real-time 3D models across different platforms.
An interesting thing about all these examples is that Unity has limited experience in these industries. Hence go-to-market adopted based on what works well for a particular industry. In the AEC industry, it makes sense to work with establish tool maker like Autodesk as a partner. In the Automotive industry, it picked a leader (Volkswagen) that would serve as a good example for others to follow. Since these players require a bit of hand-holding in terms of skill set to harness the power of Unity. Its services arm acquisition: Finger Foods is leveraged.
Future Ahead…
Unity is adopting a different strategy compared to its competitors like Epic or Roblox. It doesn’t own a mega-successful first-party title like Fortnite (Epic) that generates huge cash from the current IP or has the luxury to build an entire ecosystem around a single title. In contrast, its strength lies in a huge developer base and 2.7B Monthly Active Users who are using games built on top of Unity. As industry by industry undergoes the transition from 2D to RT3D interactive content, it wants to be a front-runner of that change.
Very detailed and quality article. This covers full spectrum on the company. What is your perspective in terms of investing in Unity? Do you remain long on $U?