Unity IPO analysis, Part 2: The bear and bull cases for Unity

In Part 1 of my outline on Unity ahead of its IPO, I explained the scope of its multidimensional business, its R&D efforts and competitive positioning, and its grand vision for powered interactive 3D content across every industry. Part 2 digs into Unity’s financials and how it is marketing its public listing, and frames both the bear and bull cases for its future.

(This post was originally published on TechCrunch)

What are Unity’s financials?

Key financial metrics from the S-1 filing:

  • Revenue grew 42% year over year from $381 million in 2018 to $542 million in 2019 with operating losses of $130 million and $150 million respectively. It hit $351 million in revenue by June 30 this year; that pace suggests a 2020 total around $700-750 million (+30% year over year). 
  • The company has gross margins of about 79%, although costs are overwhelmingly centered in R&D and sales & marketing which account for 47% and 32% of revenue, respectively.
  • The company has cumulatively lost $569 million up to this point, including a $163 million net loss in 2019.

The geographical source of Unity’s revenue in 2019 was: 34% EMEA, 28% US, 21% APAC (ex China), 12% China, and 5% Americas (ex. US). Unlike many other Western tech companies (and game publishers), Unity operates freely in China, where it has built a large sales and professional services team over the last three years.

In Part 1, I explained each of Unity’s 7 main revenue streams. During the first half of 2020, revenue by segment broke down to:

  • $216.9M (62%) from Operate Solutions (products for managing and monetizing content), the “substantial majority” of which is from the ads business.
  • $101.8M (29%) from Create Solutions (products and consulting for content creation), two-thirds of which is from Unity Pro subscriptions.
  • $32.7M (9%) from Strategic Partnerships & Other (Unity Asset Store and Verified Solutions Partners).

The S-1 discloses that less than 10% of overall revenue is from “newer products and services, such as Vivox and deltaDNA” (referencing key 2019 acquisitions for its Operate segment). 

Some takeaways from this data:

  • The largest of the 7 revenue streams must be advertising. At a minimum, 31% of Unity’s revenue is from its ads business but the amount is likely meaningfully higher than that: Unity described it as a “substantial majority” of the Operate Solutions segment revenue. Moreover, it is unclear what else is included in the company’s reference to “newer products and services, such as Vivox and deltaDNA” — in particular Multiplay, which it acquired in 2017 and is likely one of the larger revenue drivers within the Live Services portfolio alongside Vivox and deltaDNA — but that category contributed less than $54 million (10% of $542 million) in 2019. Half of Operate Solutions revenue in 2019 equates to about $146 million. That’s a $92 million gap unlikely to have been filled by the Live Services products not named. Much of it is likely attributable to the ads business.
  • Unity Pro subscriptions comprise over 19% of overall revenue. That leaves under 10% of overall revenue coming from all the other Create Solutions offerings: Unity Plus and Unity Enterprise subscriptions; the engine extensions/tools like Unity Reflect, MARS, Pixyz, and AR Foundation; and consulting services. It suggests a lot of Unity’s growing portfolio of Create products still generate little revenue, especially since consulting work is a large component of Unity’s work with larger customers (as the $55M acquisition of a 200-person consulting firm in April confirms).

My estimation of Unity’s revenue composition based on the first half of 2020 is:

  • 31-50% Ads (revenue-share)
  • 9-20% Live services (usage-based)
  • 19-25% Create subscriptions
  • 4-6% Consulting
  • 9% Other (Strategic Partnerships, the Asset Store, and Verified Solutions Partners)

Unity’s revenue is quite fragmented. It’s surprising Unity hasn’t translated being the most used game engine in the world, including for 53% of the top 1,000 grossing games in the $80B mobile game market, into more revenue from the core engine. 

Unity adopted the freemium model in 2009 at Sequoia Capital’s urging to spur massive adoption among developers. 

  • On one hand, it seems the company gives too much away for free, especially since its position in the market has been the engine of the masses. Unity emphasized its enterprise focus in its S-1, sharing that 74% of overall revenue comes from 716 companies paying Unity over $100,000 annually (versus over 100,000 customers below the $100,000 per year spend level). That its revenue comes overwhelmingly from companies with large budgets (who can then also afford highly skilled developers) is somewhat disconnected from its traditional market position: outside of mobile games, that’s the territory in the market where Unreal tends to win more.
  • On the other hand, perhaps optimizing for wider market adoption will continue to create upward pressure on large companies as well. Many companies do choose Unity because there’s a larger talent pool who know how to use it. As non-gaming companies adopt game engines they will find it easier to hire Unity developers.

Why isn’t Unity profitable and what will it take to get there?

Unity’s lack of profitability appears to stem from its enormous investment into expansion. R&D accounts for 47% of revenue, Sales and Marketing for 32% of revenue. Per his own words in one of our past interviews, John Riccitiello expanded the engineering headcount from about 100 when he took over in 2014 to over 1,500 by 2019.

Unity’s expansion into other gaming infrastructure offerings and its expansion into other industries are both in early innings in terms of their revenue impact and market penetration. It will require substantial ongoing R&D and Sales & Marketing investment to fuel growth in those two areas in line with Unity’s stated ambitions. This suggests several more years of operating losses until Unity’s Live Services portfolio and its expansion beyond gaming each gain much greater market penetration.

What to watch for in Unity’s IPO

Unity will hope for investors to value it as a high-growth SaaS company; such companies were hitting valuations earlier this year in the 15 to 30 times revenue range and that jumped over the summer to 20 to 40 times revenue in some cases. It also will want to benefit from comparisons to Epic Games, given it was just valued at $17 billion and has much greater public name recognition and hype.

To accomplish this, Unity seems to be underplaying the significance of its advertising business (adtech companies trade at much lower revenue multiples). In the past, Unity referred to its operations in three divisions: Create, Operate, and Monetize. At the start of August, the SVP and VP leading the Monetize business switched titles to SVP and VP of Operate Solutions, respectively, and then Unity reported the Monetization business as a subset of its Operate division in the S-1. Consolidating Operate and Monetize into one reporting segment obscures specifics about how much revenue the ads business and the live services portfolio each contribute. As noted above, this segment appears to be dominated by ad revenue which means anywhere from 30% to 50% of Unity’s overall revenue is from ads. That should reduce the revenue multiple public investors are willing to value Unity at relative to recent and upcoming SaaS IPOs.

There isn’t a publicly-traded game engine company to directly benchmark Unity against, nor a roster of equity research analysts at big banks who have expertise in gaming infrastructure. Adobe and Autodesk appear to be relevant businesses to benchmark Unity against with regard to the nature of the non-advertising components of the business and Unity’s stated vision. Compared to Unity, those companies have lower growth rates and generate operating profits though; more recent public listings of SaaS companies like Zscaler and Cloudflare are likely to be valuation comps by investors to the extent they focus on its subscription and usage-based revenue streams since their revenue growth and margins are closer to Unity’s. 

Unity’s market penetration holds a lot of strategic value in the gaming and AR/VR markets that may add a premium to its value. Any attempt by one major tech company to acquire Unity would almost certainly cause a bidding war with others. When Facebook hoped to acquire Unity back in 2015, Mark Zuckerberg wrote that the risk of Unity falling into the hands of a competitor “is such a vulnerability that it is likely worth the cost just to mitigate this risk.”

What is the bear case for Unity?

A pessimistic view of Unity is that it’s an advertising-centered business pouring itself into finding new growth in other markets but unable to show substantial ROI yet on those investments in expansion. And it faces better-resourced competitors at every turn.

Unity has nearly saturated the mobile gaming market, limiting future growth for the engine. It is getting ever tougher for small mobile studios to break through the noise and the advantages of incumbents, and top game companies nowadays are focused on expanding their existing hit games rather than launching a lot of new ones. Since successful studios pay Unity on a flat per-seat basis not a revenue-share basis, Unity’s engine revenue doesn’t benefit from more concentrated ownership of the top mobile games. 

Despite Unity’s massive popularity, it makes little to no money off the mid- and long-tail of game developers it is most popular with, given 74% of revenue is tied to the 716 largest customers and two-thirds of all Create Solutions revenue comes from Unity Pro tier subscriptions. 

Moreover, gaming’s future will feature greater dominance by a handful of cross-platform MMOs where people build social lives and participate in non-gaming activities like virtual concerts and trading of digital goods in addition to core game play. That’s a use case Unity’s main competitor, Unreal, is specifically built for. 

Unity’s fragmented revenue streams suggest it has been grasping for better ways to make money off the widespread adoption of its product and struggling to come up with a clear solution. Its revenue comes from a little bit of everything rather than one, massively successful strategy. 

The dominant revenue stream is advertising solutions, which aren’t valued at high revenue multiples by public market investors because it’s a crowded market and hard to differentiate. While Unity Ads is one of the largest mobile ad networks in the world it is still far behind Google and Facebook’s. In-game ads is a $3 billion market according to Criteo (a very small subset of the overall mobile ads market) and most categories of advertisers don’t participate in it. 

Moreover, Apple’s forthcoming changes to IDFA — now delayed until Q1 2021 — are causing major upheaval in the mobile ads market due to the dramatically more limited ability to target ads. Unity’s ad revenue could be hurt by this is, as noted in the Risks section of the S-1. Apps will only be able to track user behavior across their phone in order to target ads if the user specifically opts in, which few will do. Apple’s SKAdNetwork will be the only way to receive data on users’ behavior beyond the app and it will be much more limited data. This will make it difficult to target in-game ads and to measure the effectiveness of in-game ads at converting new customers. 

While Unity only provides advertisers with behavioral data of users’ actions within a game, advertisers use the user’s unique identifier to match them with information about them gathered from other sources. Advertisers may pull back from spending on mobile ads overall, including within games. When Facebook tested the removal of personalization features from mobile ad install campaigns in its ad network in June, it saw a 50% decline in publisher revenue. Since Unity earns money through a revenue share with publishers using its ad network, a major decline in their ad revenue would proportionally decline Unity’s ad revenue.

Unity is staking its vision for growth on expansion to other industries and expansion to other types of gaming infrastructure but both of those expansions are still nascent in terms of their revenue impact. 

Unity’s expansion into other cloud-based game infrastructure products appears to only account for 9-20% of revenue, most of which is inorganic growth through recent acquisition of startups. There isn’t dramatic advantage to game studios from the vertical integration of tools for matchmaking, game hosting, and player communications with the engine they use; each of these products will continue to face competition from other startups and large companies and any move by Unity to force engine customers to use only its Live Services products would diminish its popularity as an engine. The more Unity grows in cloud hosting and gaming infrastructure, the more direct competition it is likely to face from tech giants like Google, Microsoft, and Amazon as they each expand both their cloud and gaming businesses. 

Unity claims there is currently a $17 billion TAM for use of their products beyond gaming, with 37 million engineers and technicians who could be using these tools. But the expansion of Unity’s engine into other industries shows little revenue impact thus far despite being a central focus of the substantial investment in R&D and sales & marketing over five years: just 60, or 8%, of the 716 customers who contribute over $100,000 in annual revenue are from outside gaming. 

This expansion faces direct competition from Epic, which has a much larger war chest due to profits from its game development business, but it’s not clear yet whether non-gaming industries offer huge growth opportunities for either of them. If you call professionals in the industrial sectors these engines are targeting, the typical response is that more people are becoming aware of them and experimenting with them but they are not taking the industry by storm. In these segments, Unity’s business is a hybrid of a consultancy and a startup whose software is being used in a lot of promising pilots and an initial group of customers but hasn’t definitively established itself in the market.

Public market investors will be taking on a lot of risk that growth will come from unproven new markets compared to typical NYSE IPOs.

What is the bull case for Unity?

An optimistic view of Unity is that it is positioned to become one of the most important technology companies of the decade ahead as gaming (and socializing within virtual worlds) continues to explode in popularity and as 3D interactive media takes center stage in our personal and professional lives.

The Unity engine is the most popular content creation platform in a massive, fast-growing market. There’s still solid growth in the upper echelons of the mobile games market where studios pay more for Unity. According to App Annie data, 1,121 gaming apps generated at least $5 million in revenue in 2019, up from 1,055 in 2018 and 959 in 2017; at the top of the market, 140 games generated over $100 million in revenue last year, up from 116 in 2018 and 88 in 2017. Unity is used for 53% of the top 1,000 mobile games and has more growth opportunity both in terms of market share and absolute number of large mobile game studios.

The company has an impressive ability to upsell existing customers to add additional products and services — with a 142% net expansion rate on 12-months trailing revenue as of the end of June. That represents substantial untapped potential within mobile games for its growing portfolio of Live Services products. Since the focus of successful game studios is increasingly on expanding existing hit games, there is increased demand for tools to support such “live ops” work and urgency to regularly update the game with new content. Unity’s Live Services portfolio offers those tools as third-party solutions so the studio can keep its staff focused on new content creation.

Unity’s mobile game monetization products still have a lot of growth amid the surging overall mobile ads market ($200 billion with a 14.3% CAGR per Statista). Unity targets ads based on contextual behavior of users’ gameplay so Apple’s IDFA changes will have more limited impact than on other ad networks. The dominant advertisers in mobile games are other mobile games — for them gaming behavior is the most effective personalization data. The insularity of in-game ads by other gaming companies cushions Unity ad revenue from broader ad market shifts (as seen this past March and April as the economic recession hit and mobile games ad revenue increased 59%). It also suggests how much potential growth there is as advertisers in other categories recognize mobile games as an environment in which all demographics of consumers are highly engaged. 

Importantly, Unity doesn’t yet take a revenue-share for optimizing in-app purchases (IAP), but it could. That’s a huge growth opportunity since consumer spending on mobile games is a $77 billion market, growing 13% year over year, according to Newzoo. Mobile game industry revenue is heavily concentrated among the most popular games, the majority of which are made with Unity. Unity could create a multi-billion dollar business in the years ahead just by improving IAP solutions for mobile games and charging with a revenue-share.

Unity has made enormous strides in catching up to the customization and technical feats of the Unreal Engine as it expands beyond mobile games, in particular with its data-oriented tech stack (explained in Part 1). Critiques of Unity’s lesser capabilities stem from old norms that it has since surpassed. For most games and non-gaming use cases, Unity is fully capable of achieving the level of customization and performance needed.

Unity’s popularity is a highly defensible moat itself. It is the engine most students and professionals use to build interactive 3D content. As a result, it is preferred by companies because of the large talent pool to recruit from and there are a lot of young professionals trained in Unity who will see applications for it at non-gaming companies they work at.

Game engines are eating the world, as outlined in Part 1. A vast swath of entertainment and work activities already center on interactive content. Unity has demonstrated value and early adoption across numerous industries for a long list of use cases; it is on the precipice of entering the daily workload of millions of professionals, from engineers to industrial designers to film producers to marketers. Its Create Solutions division is on a path to becoming something of a next generation Adobe ($11 billion in 2019 revenue): a creative suite used by design, engineering, marketing, and sales teams across industries.

As AR and VR technology expands into mainstream use over the decade ahead, Unity’s adoption will only expand further. The majority of AR and VR content is already made with Unity’s engine and Unity’s R&D is improving the ease of creating such content by less technical professionals (and students). This positions Unity to expand into key functions higher up in the tech/content stack of mixed reality by providing identity, app distribution, payment, and other solutions across content experiences.

Unity has only one other core competitor as a game engine expanding into these industries, and in the scope of the dramatic market size and different product design philosophies there is room for both to co-exist. The biggest barrier to growth is educating the market on what game engines are and how they can be used; Epic’s investment in growing Unreal does more to help this effort than to hurt Unity. 

Unity’s rise has been a consistent story of staying ahead of the curve, building content creation solutions for new formats of content as they gain popularity. It is simultaneously becoming more powerful of a platform and easier to use, a combination that allows it to compete at the top of the market while expanding the overall market to more users.

Unity IPO analysis, Part 1: What Unity does and where it’s going

Unity Software Inc. is set to list on the New York Stock Exchange this month, following its S-1 filing two weeks ago. The 16-year-old tech company is universally known within the gaming industry and largely unknown outside of it. But Unity has been expanding beyond gaming, pouring hundreds of millions of dollars into a massive bet to be an underlying platform for humanity’s future in a world where interactive 3D media stretches from our entertainment experiences and consumer applications to office and manufacturing workflows. 

(This report was originally posted on TechCrunch)

Much of the press about Unity’s S-1 filing mischaracterizes the business. Unity is easily misunderstood because most people who aren’t (game) developers don’t know what a game engine actually does, because Unity has numerous revenue streams, and because Unity and the competitor it is most compared to — Epic Games — only partially overlap in their businesses. 

Last year I wrote an in-depth guide to Unity’s founding and rise in popularity, interviewing over 20 top Unity executives in San Francisco and Copenhagen, plus many other professionals in the industry, in the process. Here is a two-part guide to get up to speed on the company and make your own assessment about its future.

  1. This first part (this post) explains what Unity’s business is, where it is positioned in the market, what its R&D is focused on, and how game engines are “eating the world” as they gain adoption across other industries. 
  2. The second part (read here) breaks down Unity’s financials, explains how Unity is positioning itself in the S-1 to earn a higher valuation, and outlines both the bear and bull cases for its future.

For those in the gaming industry who are familiar with Unity, the S-1 might surprise you in a few regards: the Asset Store is a much smaller business that you might think; Unity is more of an enterprise software company than a self-service platform for indie developers; and advertising income, rather than subscriptions to the engine, appear to make up the largest segment of Unity’s revenue.

What is a game engine?

Unity’s origin is as a game engine. To oversimplify it, think of a game engine as Adobe Photoshop but for editing games and other interactive 3D content instead of editing photos. You import digital assets (often from Autodesk’s Maya) and add logic to guide each asset’s behavior, every character’s interactions, the physics and lighting, and countless more functions that build up to a fully interactive game. You then export the final product to any of the over 20 platforms that Unity supports, such as Apple iOS and Google Android, Xbox and Playstation, Oculus Quest and Microsoft Hololens, etc.

In this regard, Unity is more comparable to Adobe and Autodesk than to game studios or publishers like Electronic Arts and Zynga.

What are Unity’s lines of business?

Since John Riccitiello took over as CEO from co-founder David Helgason in 2014, Unity has expanded its scope of business beyond just the game engine. It now organizes its activities into two divisions: Create Solutions (i.e. tools for content creation) and Operate Solutions (i.e. tools for managing and monetizing content). Unlike many SaaS and consumer app IPOs where the company has one dominant product and revenue stream, Unity’s revenue is more fragmented. It has 7 noteworthy revenue streams overall.

Create Solutions (29% of H1 2020 revenue)

  • The Unity Platform: the core game engine, which operates on a freemium subscription model. Individuals, small teams, and students use it for free whereas more established game studios and enterprises in other industries pay (via the Unity Plus, Unity Pro, and Unity Enterprise premium tiers).
  • Engine extensions: a growing portfolio of subscription-based tools and templates of the core engine purpose-built for specific industries and use cases. These include MARS for VR development, Reflect for architecture and construction use with BIM assets, Pixyz for importing CAD data, Cinemachine for virtual production of films, and ArtEngine for automated art creation.
  • Professional services: hands-on, specialized consulting for enterprise customers using Unity’s engine and other products. Unity expanded its consulting capacity further in April with a $55 million acquisition of Finger Food Studios, a 200-person team in Vancouver that builds interactive media projects for corporate clients using Unity.

Aside from those three Create product categories, Unity is reporting another group of content creation offerings separately in the S-1 as “Strategic Partnerships & Other” (which accounts for further 9% of revenue):

  • Strategic Partnerships: major tech companies pay Unity via a mix of structures (flat-fee, revenue-share, and royalties) for Unity to create and maintain integrations with their software and/or hardware. Since Unity is the most popular platform to build games with, ensuring Unity integrates well with Oculus or with the Play Store is very important to Facebook and Google, respectively, for example.
  • Unity Asset Store: Unity’s marketplace for artists and developers to buy and sell digital assets like a spooky forest or the physics to guide characters’ joint movements so they don’t each have to design and code every single thing from scratch. It is commonly used, though larger game studios often use Asset Store assets just for initial prototyping of game ideas.

Operate Solutions (62% of H1 2020 revenue)

  • Advertising: via the 2014 acquisition of Applifier, Unity launched an in-game advertising network for mobile games. This expanded substantially with the Unified Auction, a simultaneous auction helping games get the highest bid from among potential advertisers. Unity is now one of the largest mobile ad networks in the world, serving over 23 billion ads per month. Unity also has a dynamic monetization tool that makes real-time assessments of whether it is optimal to serve an ad, prompt an in-app purchase, or do nothing in order to maximize each player’s lifetime value. (While the Unity IAP feature enables developers to manage their in-app purchases, Unity does not take a cut of that revenue at this time.)
  • Live Services: a portfolio of cloud-based solutions for game developers to better manage and optimize their user acquisition, player matchmaking, server hosting, and identification of bugs. This portfolio has primarily been assembled through acquisitions like Multiplay (cloud game server hosting and matchmaking), Vivox (cloud-hosted system for voice and text chat between players in games), and deltaDNA (player segmentation for campaigns to improve engagement, monetization, & retention). There is also Unity Simulate for training AI models in virtual recreations of the real world (or testing games for bugs). Live Services products have usage-based pricing, with an initial amount of usage free.

Unity vs. Unreal vs. other engines

Unity is compared most to Epic Games, the company behind the other leading game engine, Unreal. Below is a quick overview of what differentiates each. The cost of switching game engines is meaningful in that developers are typically specialized in one or the other and can take months to gain high proficiency in the other, but some teams do vary the engine they use for different projects. Moving an existing game (or other project) over to a new game engine is a major undertaking requiring extensive rebuilding and is rarely done.

Epic Games

Epic has three main businesses: game development, the Epic Games Store, and the Unreal Engine. 

  • Epic’s core is in developing its own games and the vast majority of Epic’s $4.2 billion in 2019 revenue came from that (principally, from Fortnite). 
  • The Epic Games Store is a consumer-facing marketplace for gamers to purchase and download games; game developers pay Epic a 12.5% cut of their sales. 

In those two areas of business, Unity and Epic don’t compete. While much of the press about Unity’s IPO frames Epic’s current conflict with Apple as an opportunity for Unity, it is largely irrelevant. A court order prevented Apple from blocking iOS apps made with Unreal in retaliation for Epic trying to skirt Apple’s 30% cut of in-app purchases in Fortnite. Unity doesn’t have any of its own apps in the App Store and doesn’t have a consumer-facing store for games. It’s already the default choice of game engine for anyone building a game for iOS or Android, and it’s not feasible to switch the engine of an existing game, so Epic’s conflict does not create much of a new market opening. 

Let’s compare the Unity and Unreal engines:

  • Origins: Unreal was Epic’s proprietary engine for the 1998 game Unreal and was licensed to other PC and console studios and became its own business as a result of its popularity. Unity launched as an engine for indie developers building Mac games, an underserved niche, and expanded to other emerging market segments considered irrelevant by the core gaming industry: small indie studios, mobile developers, AR & VR games. Unity exploded in global popularity as the main engine for mobile games.
  • Programming Language: Based in the C++ programming language, Unreal requires more extensive programming than Unity (which requires programming in C#) but enables more customization, which in turn enables higher performance.
  • Core Markets: Unreal is much more popular among PC and console game developers; it is oriented toward bigger, high-performance projects by professionals. That said, it is establishing itself firmly in AR and VR and proved with Fortnite it can take a console and PC game cross-platform to mobile. Unity dominates in mobile games — now the largest (and fastest growing) segment of the gaming industry — where it has over 50% market share and where Unreal is not a common alternative. Unity has kept the largest market share in AR and VR content, at over 60%.
  • Ease of Authoring: Neither engine is easy for a complete novice, but both are fairly straightforward to navigate if you have basic coding abilities and put the time into experimenting and watching tutorials. Unity has prioritized ease of use since its early days, with a mission of democratizing game development that was so concentrated among large studios with large budgets, and ease of authoring remains a key R&D focus. This is why Unity is the common choice in educational environments and by individuals and small teams creating casual mobile games. Unity lets you see but not edit the engine’s source code unless you pay for an enterprise subscription; this protects developers from catastrophic mistakes but limits customization. Unreal isn’t dramatically more complex but, as a generalization, it requires more lines of code and technical skill. It is open source code so can be completely customized. Unreal has a visual scripting tool called Blueprint to conduct some development without needing to code; it’s respected and often used by designers though not a no-code solution to developing a complex, high-performance game (no one offers that). Unity recently rolled out its own visual scripting solution for free called Bolt.
  • Pricing: While Unity’s engine operates on a freemium subscription model (then has a portfolio of other product offerings), Unreal operates on a revenue-share, taking 5% of a game’s revenue. Both have separately negotiated pricing for companies outside of gaming that aren’t publicly disclosed.

Proprietary Engines

Many large gaming companies, especially in the PC and console categories, continue to use their own game engines built in-house. It is a large, ongoing investment to maintain a proprietary engine which is why a growing number of these companies are switching to Unreal or Unity so they can focus more resources on content creation and can tap into the large talent pools that already have mastery in each one.

Other Engines

Other game engines to note are Cocos2D (an open source framework by Chukong Technologies that has a particular following among mobile developers in China, Japan, and South Korea), CryEngine by Crytek (popular for first-person shooters with high visual fidelity), and Amazon’s Lumberyard (which was built off CryEngine and doesn’t seem to have widespread adoption, or command much respect, among the many developers and executives I’ve spoken to). 

For amateur game developers without programming skills, YoYo Games’ GameMaker Studio and Scirra’s Construct are both commonly used to build simple 2D games (Construct is used for HTML5 games in particular); users typically move on to Unity or Unreal as they gain more skill.

There remain a long list of niche game engines in the market since every studio needs to use one and those who build their own often license it if their games aren’t commercial successes or they see an underserved niche among studios creating similar games. That said, it’s become very tough to compete with the robust offerings of the industry standards — Unity and Unreal — and tough to recruit developers to work with a niche engine.

UGC Platforms

User-generated content platforms for creating and playing games like Roblox (or new entrants like Manticore’s Core and Facebook Horizon) don’t compete with Unity — at least for the foreseeable future — because they are dramatically simplified platforms for creating games within a closed ecosystem with dramatically more limited monetization opportunity. The only game developers these will pull away from Unity are hobbyists on Unity’s free tier. 

I’ve written extensively on how UGC-based game platforms are central to the next paradigm of social media, anchored within gaming-centric virtual worlds. But based on the overall gaming market growth and the diversity of game types, these platforms can continue to soar in popularity without being a competitive threat to the traditional studios who pay Unity for its engine, ad network, or cloud products.

What is the forefront of Unity’s technical innovation?


For the last three years, Unity has been creating its “data oriented technology stack,” or DOTS, and gradually rolling it out in modules across the engine. 

Unity’s engine centers on programming in C# code which is easier to learn and more time-saving than C++ since it is a slightly higher level programming language. Simplification comes with the trade off of less ability to customize instruction by directly interacting with memory. C++, which is the standard for Unreal, enables that level of customization to achieve better performance but requires writing a lot more code and having more technical skill.

DOTS is an effort to not just resolve that discrepancy but achieve dramatically faster performance. Many of the most popular programming languages in use today are “object-oriented,” a paradigm that groups characteristics of an object together so, for example, an object of the type “human” has weight and height attached. This is easier for the way humans think and solve problems. Unity takes advantage of the ability to add annotations to C3 code and claims a proprietary breakthrough in understanding how to recompile object-oriented code into “data-oriented” code, which is optimized for how computers work (in this example, say all heights together and all weights together). This is orders of magnitude faster in processing the request at the lowest level languages that provide 1s-and-0s instructions to the processor.

This level of efficiency should, on one hand, allow highly-complex games and simulations with cutting-edge graphics to run quickly on GPU-enabled devices, while, on the other hand, allowing simpler games to be so small in file size they can run within messenger apps on the lowest quality smartphones and even on the screens of smart fridges.

Unity is bringing DOTS to different components of its engine one step at a time and users can opt whether or not to use DOTS for each component of their project. The company’s Megacity demo (below) shows DOTS enabling a sci-fi city with hundreds of thousands of assets rendered in real-time, from the blades spinning on the air conditioners in every apartment building to flying car traffic responding to the player’s movements.


The forefront of graphics technology is in enabling ray tracing (a lighting effect mimicking the real-life behavior of light reflecting off different surfaces) at a fast enough rendering speed so games and other interactive content can be photorealistic (i.e. you can’t tell it’s not the real world). It’s already possible to achieve this in certain contexts but takes substantial processing power to render. Its initial use is for content that is not rendered in real-time, like films. Here are videos by both Unity and Unreal demonstrating ray tracing used to make a digital version of a BMW look nearly identical to video of a real car: 

To support ray-tracing and other cutting-edge graphics, Unity released its High Definition Render Pipeline in 2018. It gives developers more powerful graphics rendering for GPU devices to achieve high visual fidelity in console and PC games plus non-gaming uses like industrial simulations. (By comparison, its Universal Render Pipeline optimizes content for lower-end hardware like mobile phones.)

Next-Gen Authoring

Unity’s Research Labs team is focused on the next generation of authoring tools, particularly for an era where AR and/or VR headsets become widely adopted. One component of this is the vision for a future where non-technical people could develop 3D content with Unity solely through hand gestures and voice commands. In 2016, Unity released an early concept video for this project (something I demo-ed at Unity headquarters in SF last year):

Game engines are eating the world

The term “game engine” limits the scope of what Unity and Unreal are already used for. They are interactive 3D engines used for practically any type of digital content you can imagine. The core engine is used for virtual production of films to autonomous vehicle training simulations to car configurators on auto websites to interactive renderings of buildings.

Both of these engines have long been used outside gaming by people repurposing them and over the last five years Unity and Unreal have made expanding use of their engines in other industries a top priority. They are primarily focused on large- and mid-size companies in 1) architecture, engineering, and construction, 2) automotive and heavy manufacturing, and 3) cinematic video. 

In films and TV commercials, game engines are used for virtual production. The settings, whether animated or scanned from real-world environments, are set up as virtual environments (like those of a video game) where virtual characters interact and the camera view can be changed instantaneously. Human actors are captured through sets that are surrounded by the virtual environment on screens. The director and VFX team can change the surroundings, the time of day, etc. in real-time to find the perfect shot.

There are a vast scope of commercial uses for Unity since assets can be imported from CAD, BIM, and other formats and since Unity gives you the ability to build a whole world and simulate changes in real-time. There are four main use cases for Unity’s engine beyond entertainment experiences:

  1. Design & Planning: have teams work on interactive 3D models of their product simultaneously (in VR, AR, or on screens) from offices around the world and attach metadata to every component about its materials, pricing, etc. The Hong Kong International airport used Unity to create a digital twin of the terminals connected to Internet of Things (IoT) data, informing them of passenger flow, maintenance issues, and more in real-time.
  2. Training, Sales & Marketing: use interactive 3D content so staff or customers can engage with: a) photorealistic renderings of industrial products; b) VR trainings for risky construction situations; c) online car configurators that render custom designs in real-time; or d) an architect’s plan for new office space with every asset within the project filled with metadata and responsive to interaction, changes in lighting, etc. 
  3. Simulation: generate training data for machine learning algorithms using virtual recreations of real-world environments (like for autonomous vehicles in San Francisco) and running thousands of instances in each batch. Unity Simulation customers include Google’s DeepMind and Unity teamed up with LG to create a simulation module specific to autonomous vehicles.
  4. Human Machine Interfaces (interactive screens): create interactive displays for in-vehicle infotainment systems and AR heads up displays, as showcased by Unity’s 2018 collaboration with electric car startup Byton.

Unity’s ambitions beyond gaming ultimately touch every facet of life. In his 2015 internal memo in favor of acquiring Unity, Facebook CEO Mark Zuckerberg wrote “VR / AR will be the next major computing platform after mobile.” Unity is currently in a powerful position as the key platform for developing VR / AR content and distributing it across different operating systems and devices. Zuckerberg saw Unity as the natural platform off which to build “key platform services” in the mixed reality ecosystem like an “avatar / content marketplace and app distribution store”. 

If Unity maintains its position as the leading platform for building all types of mixed reality applications into the era when mixed reality is our main digital medium, it stands to be one of the most important technology companies in the world. It would be the engine everyone across industries turns to for creating applications, with dramatically larger TAM and monetization potential for the core engine than is currently the case. It could expand up the stack, per Zuckerberg’s argument, into consumer-facing functions that exist across apps, like identify, app distribution, and payments. Its advertising product is already in position to extend into augmented reality ads within apps built with Unity. This could make it the largest ad network in the AR era. 

This grand vision is still far away though. First, the company’s expansion beyond gaming is still early in gaining traction and customers generally need a lot of consulting support. You’ll notice other coverage of Unity over the last few years all tends to mention the same case studies of use outside gaming; there just aren’t that many than have been rolled out by large companies. Unity is still in the stage of gaining name recognition and educating these markets about what its engine can do. There are promising proof points of its value but market penetration is small.

Second, the era of AR as “the next major computing platform after mobile” seems easily a decade away, during which time existing and yet-to-be-founded tech giants will also advance their positions in different parts of the AR tech, authoring, and services stack. Apple, Facebook, Google, and Microsoft are collaborators with Unity right now but any of them could decide to compete with their own AR-focused engine (and if any of them acquire Unity, the others will almost certainly do so because of the loss of Unity’s neutral position between them).

Read Part 2 of my Unity IPO analysis for a break down of Unity’s current financial position, how it’s positioning itself in the S-1 to achieve a higher valuation, and what both the bear and bull cases are for its future.

Webinar on the state of kids media

I hosted a webinar on TechCrunch about the state of kids media amid the Covid-19 crisis. My guests were:

  • Craig Donato, chief business officer of Roblox, the $4 billion gaming platform that counts the majority of U.S. kids age 9-12 among its active users.
  • Nancy MacIntyre, co-founder and CEO of Fingerprint, the company behind Kidimo, a leading subscription video and gaming service for children.
  • Dylan Collins, co-founder and CEO of SuperAwesome, the London-based creator of “kid-safe” adtech and privacy tools.

Read the transcript or watch the video here on TechCrunch >>

A guide to Virtual Beings

Last week in San Francisco, I spoke at the first Virtual Beings Summit (organized by Fable Studio CEO Edward Saatchi).

The term “virtual beings” gets used as a catch-all categorization of fictional personalities that humans can interact with. This ranges from activities like Amazon, Apple, Google, and Microsoft pouring resources into conversational AI technology to chip-maker Nvidia and game engines Unreal and Unity advancing real-time ray tracing for photorealistic graphics to VCs backng “virtual influencer” startups like Brud and Shadows.

There are really three separate fields getting conflated though:

  1. Virtual Companions
  2. Humanoid Character Creation
  3. Virtual Influencers

These can overlap — there are humanoid virtual influencers for example — but they represent separate challenges, separate business opportunities, and separate societal concerns. I’ve outlined an overview of at these fields and how they collectively comprise this concept of virtual beings… Read my article on TechCrunch >>

A guide to Virtual Beings and how they impact our world

Where top VCs are investing in media, entertainment, & gaming

In my TechCrunch column, I just posted long-form quotes from these 9 sharp VCs on their investment interests in the media, entertainment, & gaming space. If you’re an entrepreneur planning to raise money (or an investor curious what your peers are focused on), I suggested you give it a read.