$Unity Software Inc.(U)$

It's time to discuss on one of my favorites: Unity software which generated close to 30% returns so far!

HISTORY

Unity Technologies was founded in 2004 under the name Over the Edge Entertainment in Denmark by David Helgason , Nicholas Francis and Joachim Ante. The company failed in its first video game commercial launch in 2005 but saw potential value in the game development tools they had used to build it. The objective of the company was to “democratize” game development by making the development of 2D and 3D interactive content more accessible to a wide variety of creators, not just professional developers. The first game launched was gooball.

The company’s success grew with the launch of the iPhone in 2007 as it was positioned to support creators who developed mobile games. That same year, the company changed its name to Unity Technologies. In 2010, the company launched the Unity Asset Store as an online marketplace where users could sell project assets to each other. The idea of the asset store was to democratize game development even further by making it a collaborative activity. Several years later, the company started expanding outside of the gaming industry to industries such as film and television and automotive.

In 2014, Unity acquired Applifier, which had a mobile video ad network that would later become Unity Ads. This same year the company acquired two additional companies: Playnomics, which would become Unity Analytics and Tsugi, which would become Unity Cloud Build. In October of this same year, Helgason stepped down as CEO (he remained in the company as executive VP) and John Riccitiello, former CEO of Electronic Arts, took over.

In 2016, Niantic released Pokemon Go, which was built using the Unity engine.

Facebook had also used the Unity engine several times as part of its VR ventures. Taking advantage of this success, the company held several rounds of funding that valued the company around $3 billion (2016).

From 2017, the company started working with Alphabet in ventures related to augmented and virtual reality. The company completed its IPO in September 2020 and traded at an initial valuation of $13.7 billion.

WHAT UNITY DOES AND HOW IT EARNS MONEY

What the company does

Unity develops their own game engine.A game engine is basically the core software where developers create content and then use to run this content. Imagine having a place where you can place objects, personalize them and then give them the motion you desire, well that would be a game engine. I avoided the word “game” in the definition and I used “content” instead because there are many use cases for game engines outside the gaming industry.

Unity allows creators to create and operate interactive, real-time 2D and 3D content (from now onwards you will probably see the following acronym “RT3D” which stands for Real Time 3D).

Creators are the direct users of Unity and use its software to develop their content. They range from game developers to artists, architects, automotive designers, filmmakers and others. Creators also have differing levels of expertise which shows that someone without a developer background can also learn to use Unity. This is coherent with the company’s vision since the beginning: the democratization of game development

Interactive because it allows end-users to connect with the content and with one another. For example, in a multiplayer game, what one end-user does instantly influences the experience of another end-user. End-users are the people who play the game, watch the film etc.

Real-time because it instantly adapts to end-user behavior and feedback. Images are rendered very fast (up to 120 photorealistic images per second) to create a lifelike experience

3D because graphics are expressed with shape and depth. This allows the company to add value in the Augmented and Virtual reality (ARVR) segment which, as we will see later on, has widespread applications across many industries

Unity’s software offers several advantages for creators as it allows them to visualize and iterate on their creations real-time and collaborate with each other to edit the content simultaneously. These editions are rendered and displayed very fast to create a more seamless and efficient development experience. This is very important because it reduces considerably the time required for any specific workflow.

Another important advantage is that it allows creators to deploy these developments in many platforms without needing to incur in additional development. 

gaming is at the core of Unity’s offering but Unity’s products and technology enjoy widespread application in several industries beyond gaming, some of which are listed below:

-Automotive, transportation and manufacturing

-Film, animation and cinematics

-Government and aerospace

-Architecture, engineering and construction

-Brands and creative agencies

-Gambling

-EdTech

Being able to apply its technology to so many different industries gives the company a huge amount of optionality

To summarize, the company offers software that allows creators to create and operate interactive content across many different industries and through many different platforms without needing extra developments. The words create and operate are of vital importance to understand the company

HOW DOES UNITY MAKES MONEY

Unity offers many products across two distinct but complementary solutions: Create Solutions and Operate Solutions. Unity also makes money through strategic partnerships with several technological providers and other revenue from sales mainly coming from their asset store.Being which, Create and Operate Solutions drive the majority of unity's revenue

Create solutions

Create Solutions enable creators to create, edit, run and deploy real-time 2D and 3D content through a robust software development engine that can be augmented both with Unity features and/or third party functionality. Content only needs to be created once to be later deployed across more than 20 platforms which include Windows, Mac, iOS, Android, PlayStation…

There are many products embedded under this solution but Unity offers a modular platform in which creators can leverage the products and use what they need. This way, solutions can be “personalized” for creator needs.

The full stack of technologies are configurable through the Unity editor user interface that is available on Windows, Mac and Linux operating systems. This editor allows creators to drop content (images, textures, sounds…) into a virtual workspace from which they can configure and compose scenes of objects. Once all of the objects have been included, creators have a wide variety of components that they can add to these objects to make content dynamic and interactive (i.e. Unity physics is an example of a component that makes objects subject to the forces of friction and gravity). 

Once the creator has finished creating his/her content and he/she is ready to deploy, Unity runtime interactively renders the content in real time on end-user devices.

The company has a subscription based revenue model for its Create Solutions, which is divided into 5 sections: unity student, Unity personal, unity plus, unity pro and unity enterprise.

basically , Unity is free for everyone making less than $100,000 in revenue with the content created using the engine. This has important implications because it seems as if Unity is only targeting monetization of the big guys while empowering smaller creators to keep improving.

only annual subscriptions are allowed and there is no option to cancel subscriptions in advance (well, you can cancel it if you like, but you are not getting the money back). Unity Enterprise only offers monthly payments while the other paid plans can be paid either monthly or in a one-time upfront annual payment. The fact that cancelations are not allowed and that payments are upfront allows the company to have a more predictable cash flow.

Another important thing to note is that only Unity’s Enterprise product allows customers to modify the source code, making the platform totally adaptable to their needs

I like that the company is specifically targeting students because this will increase the stickiness of the product going forward. Customers will be hiring graduates that are already familiar with the engine which will increase switching costs and will create a similar effect than the one created with AutoDesk’s ($ADSK) software.

Unity also offers a wide range of other products that specifically target certain creators and/or industries which can be bought as an addition to the core offerings discussed above or independently as add-ons. For example, Unity Reflect targets the construction industry and can be bought independently. 

Operate solutions

Once the content has been created and deployed, Unity offers its customers the ability to: 

Grow and engage their end-user base

Run and monetize their content

Cloud operations

Unity offers several products that allow their customers to achieve these goals such as Unity Ads, Unity In-App purchases (IAP), delta DNA and Vivox. 

Unity does not disclose how Operate Solutions revenue is distributed across its different products. One could imagine that Unity Ads make up the majority of these revenues because, Ingrid Lestiyo, the manager in charge of Op. Solutions, is a digital ads specialist. 

Operate Solutions are monetized through a combination of revenue-share and usage-based business models depending on the product.

Overall these 2 represents close to 91% of unity's revenue. The other 9% is coming from their strategic partnerships and unity asset store.