Unity – Russian roulette pt. II

Unity puts down the revolver.

• Unity has realised that developers are the life’s blood of both its business and its long-term potential and has greatly watered down its plans to earn more money which will preserve its position but will do the share price no good whatsoever in the short term.
• Unity has written an open letter to the community where it offers a grovelling apology and waters down its new revenue proposal to such a degree that even the angriest developers are likely to give the company a second chance.
• The whole furore erupted when Unity decided to feather its nest by charging developers a per-install fee above certain thresholds in order to increase the revenue it was earning per developer.
• This is badly needed because the games market has declined since the end of the pandemic and the weakness in the smartphone market is putting a crimp on revenue growth.
• This is a particularly acute problem at Unity because even though the share price has declined by 80%, the company still trades on over 5x 2023 revenues and 48x 2023 PER.
• These are lofty numbers for a company that is struggling with growth and cannot monetise its customers further without stoking a rebellion.
• The new measures were designed to generate more revenues and reinstate growth but have been watered down to the point where revenues may now be less than they otherwise would have been had Unity done nothing.
• The Unity Personal plan will now have no per-install fees added, the threshold for any payment has been increased from $100,000 to $200,000 and there is now no requirement to use the Unity splash screen when the game boots up.
• This puts Unity in a worse position than it was before and the free marketing that it had in customer apps has been lost.
• For Unity Pro and Unity Enterprise, the per-install fee will only apply to future versions of the platform which will be launched in 2024 and beyond and developers can choose between a 2.5% revenue share or the per-install fee.
• A self-reporting system already in place will calculate the two options and will default to charging developers the lower of the two calculations.
• The net result is that it looks to me that Unity is back where it started but it is not difficult to conclude that it is worse off than before.
• Its brand has certainly taken a knock with its clients, and it has been forced to give back more than it took in order to keep developers happy.
• This means that the outlook for a return to growth in revenues any time soon is now worse than before, which could lead to further downside.
• In the long term, I like Unity as it has the potential to solve the most pressing problem in The Metaverse (interoperability), but one is going to have to wait a very long time for that to become a reality.
• Hence, the short to medium-term outlook remains pretty difficult for Unity and I am far from convinced that we have seen the all-time lows on this stock.
• Although it has $1.6bn in the bank, I think that as time passes and there is no recovery, the probability of this company being acquired rises steadily.
• Independence is a key factor in Unity’s appeal for both the gaming segment and The Metaverse and so I suspect that someone like Nvidia, Qualcomm or Arm would be the best fit for an acquisition.
• This is still a distant possibility and so I have no inclination to own the shares for either The Metaverse or an acquisition at this time.