Game engine developer Unity (U 0.23%) tested its ability to extract more money from developers earlier this month with a new fee layered on top of its existing subscriptions. The company even targeted its army of small-time users who have been happily using the company's free plan. Under the new fee structure, that free plan would have become a lot less free.
Unity's plan was to charge developers a "Runtime Fee" starting in 2024. Once certain revenue and installation thresholds were met, Unity would charge up to $0.20 each time a game was installed. There were a few glaring problems with this scheme. For one, games available under subscription services like Xbox Game Pass could be a disaster for developers if they had to pay a fee for every unique user. Free-to-play games with minimal revenue per user would face similar issues.
The new fee did not sit well with developers. Unity intended to apply the fee retroactively to already released games, meaning that developers with successful games could be hit with a big bill come January. If Unity's goal was to anger its customer base as much as possible, it hit the nail on the head.
NYSE: U
Key Data Points
A quick reversal
Unity's long-term success depends on drawing in developers to its game development platform. Switching game engines is an ordeal once development is far enough along, so once Unity wins a customer, that customer is likely to stick around for the long haul. As customers succeed, they can upgrade to Unity's higher-cost subscription plans.
But Unity appears to have overestimated its pricing power and the stickiness of its platform. About a week after the initial announcement, Unity largely rolled back its plans. Unity executive Marc Whitten apologized for the ham-fisted fee policy in a blog post, announcing myriad changes meant to keep developers from jumping ship.
Unity's free plan will be entirely exempt from the per-install fee, and the company doubled the revenue cap before a developer would need to upgrade to a paid plan. For those on paid plans, only games that generate at least $1 million in trailing-12-month revenue will be subject to the fee. Importantly, Unity is dropping the retroactive portion of its plan, with the new fee set to apply only to games using the next long-term support version of the Unity engine.
Unity went even further to win back developers. The new fee will now max out at 2.5% of revenue, and the company will allow both revenue and installs to be self-reported. Under the original plan, Unity would determine the number of installs with little transparency in the process.
Profits remain on hold
Had the original plan been implemented, Unity likely would have lost significant mindshare in the game engine market. There is plenty of competition, ranging from Epic Games' Unreal Engine to a plethora of open-source options.
Even with the changes largely reversed, there's likely been some damage to Unity's reputation. As Warren Buffett says, "It takes 20 years to build a reputation and five minutes to ruin it." Developers deciding on a game engine may now be a little less likely to choose Unity after this ordeal.
While Unity will generate some additional revenue from the scaled-back fee, it probably won't change the company's financial picture dramatically. Unity's organic revenue has been growing slowly, and its losses are enormous. Unity booked a net loss of $193 million on $533 million of revenue in the second quarter of 2023.
Unity needs to find a way to become profitable, and with a limited ability to generate additional revenue from existing customers, cost-cutting is likely in the cards. The company has already gone through three rounds of layoffs, with the latest seeing 600 employees departing. More cuts could be coming as the company tries to make its business sustainable.
While Unity stock is down about 84% from its pandemic-era high, it's tough to see value in the stock. The company doesn't have a real strategy to turn losses into profits, and the stock remains expensive at a price-to-sales ratio of about 5.5 based on the average analyst estimate. While Unity's software will likely remain widely used in the games industry, the business itself just isn't working.
