Unity Takes a Big Risk to Boost Growth and Profit

Motley Fool2023-09-14

KEY POINTSUnity will start charging developers a per-install fee when certain revenue and install base thresholds are met.This new fee is in addition to pricey per-seat subscription fees, and it ...

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yngwin111
2023-09-14
yngwin111
Profit will increase too

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Since hitting its pandemic-era peak in late 2021, the stock has tumbled a whopping 80%.A crashing growth rate has been part of the problem. Revenue grew by 25% in 2022, down from 44% growth in 2021, and the situation has gotten worse this year. Revenue edged up 2% in the first quarter and 11% in the second quarter. These growth rates are on a pro forma basis to account for the acquisition of ironSource.Unity relies on subscription fees for a big chunk of its revenue. The company's Create Solutions segment, which covers subscriptions, support, and professional services, accounted for a bit more than half of total revenue in 2022. For anyone not a student or hobbyist, Unity charges hefty per-seat fees for using its platform. The company boosted some of these fees last year, which helped keep revenue growing.A price increase for serious game developers already paying hundreds of dollars per month per seat isn't going to dissuade anyone from using Unity, but the company's latest change might. In addition to some other changes, Unity will begin charging a per-install \"Runtime Fee\" in 2024 on top of its subscription fees.Squeezing developersUnity is making two meaningful changes to its pricing model. First, the company is eliminating its lower-cost Unity Plus plan entirely. Current subscribers will be able to upgrade to Unity Pro at the same $400 per-year rate for one year, but after that, they'll need to shell out the full $2,040 for the pricier plan.Second, Unity is implementing a fee for developers each time a game is downloaded and installed. This fee applies to those using Unity's free plan as well as its paid plan, although the thresholds are different. For the free plan, anyone with more than $200,000 in revenue over a 12-month period and at least 200,000 lifetime game installs is on the hook for this new fee of $0.20 per install. For paying subscribers, the thresholds are $1 million in revenue and 1 million lifetime installs, and the fees are smaller.While this fee won't mean much for bigger game studios that use Unity, the company risks pushing away its solo and small-time developers. Free-to-play games that rely on in-game transactions for monetization are particularly problematic under this new model, although Unity will provide credits for those using Unity services beyond the core game engine.There was plenty of confusion around this new fee initially, particularly around fees for multiple installs and for games that are available under subscription services like Xbox Game Pass. Speaking to Axios, Unity executive Marc Whitten clarified that only the initial install of a game will result in a fee, game demos won't result in fees, and developers won't have to pay fees for every user on subscription services.Beyond costing developers more money, this new fee sends a message that Unity is going to be increasingly finding ways to squeeze its developers. While any developer deep enough into development isn't going to be switching game engines, those starting new projects may be more likely to consider alternatives.Unreal Engine from Epic Games is a major competitor, and it involves a simple 5% revenue share with no subscription fees. Developers also have the option to create their own game engines and tools, which plenty of larger studios already do. There's also a plethora of open-source game-engine alternatives, although they obviously don't have the backing or support of a for-profit company.Profit remains elusiveThis new fee will boost revenue in the short term, as developers too deep into the process of making a game will have no choice but to pay it. That should help push Unity's bottom line up, although the profitability hole the company finds itself in is deep.In Q2 alone, Unity posted a net loss of $193 million on $533 million in revenue. The problem is not necessarily revenue but expenses. For one, Unity doled out a whopping $158 million worth of stock-based compensation in the quarter, roughly equivalent to 30% of revenue. Sales and marketing expenses doubled year over year, partly due to the ironSource acquisition.In the short term, this new fee will boost Unity's revenue and likely reduce its net losses. But it risks choking off the pipeline of free users who could eventually become paying users as developers balk at the company's escalating fees. There are plenty of alternatives to Unity, and the company may not have the pricing power to push through this new fee without a meaningful developer exodus.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[{"id":219801959608416,"gmtCreate":1694692788207,"gmtModify":1694692793087,"author":{"id":"3565225896317833","authorId":"3565225896317833","name":"yngwin111","avatar":"https://static.tigerbbs.com/7b6da8ffb6e7348c5800f5edb3ff9e62","vip":1,"crmLevel":2,"crmLevelSwitch":0},"htmlText":"Profit will increase too","listText":"Profit will increase too","text":"Profit will increase too","images":[],"top":1,"highlighted":1,"essential":1,"paper":1,"likeSize":2,"commentSize":0,"repostSize":0,"link":"https://ttm.financial/post/219801959608416","repostId":2367683954,"repostType":2,"isVote":1,"likeStatus":false,"favoriteStatus":false,"reportStatus":false,"tweetType":1,"langContent":"EN"}],"isCommentEnd":false,"newsSizeData":{"likeSize":4,"commentSize":0,"repostSize":1,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2367683954"}