Unity: Reaction to pricing shake-up weighs on monetization ambitions

In its announcement on September 12, Unity announced the introduction of a staggered fee structure for every game install. Starting on Jan 1, the fee a customer would pay would be determined based on the SKU they are on and how many game installs they garner past a given threshold. Facing backlash from the industry, Unity noted it will be making changes to the below policy. While the details of this strategy will likely be finalized in the coming days, don’t expect Unity to eliminate its plans of monetizing Runtime via a new fee structure as this being a meaningful growth lever. This is predicated on the fact that Unity has expressed increased focus on growing its wallet-share of existing customers and leaning into more ratable revenue opportunities.

To quantify the revenue that can be generated from this initiative, Goldman conducted a bottom-up analysis that started with the number of mobile game downloads per year (~60-90bn per sources such as Sensor Tower and Data.AI). Given Unity holds the lion share of the mobile games developed, attributed a 70% share of this activity to Unity. To account for the aforementioned thresholds, assumed only 50-250bps will reach or exceed both the revenue and install levels needed to be subject to Unity’s Runtime Fee. In the base case, Goldman averaged the take-rate across all plans and sizes equally, reaching an average cost of $0.08/install. Skew this average toward the larger scale customers, who are likely to pay a reduced fee. This results in a wide range of revenue outcomes, from $8mn-120mn. This broad scope is prudent given the pending updates to this plan and the nascency of charging for such a service.

See Runtime-Levelplay monetization crossover as opportunity to lean into platform-flywheel. While the fee structure may change, particularly at the low/high-end ranges, don’t expect Unity to walk back its policy that would allow customers to pay their Runtime fee via credits in the company’s ad-tech platform Levelplay. This caveat would support management’s goal of incentivizing increased usage of its Grow and Create platforms. While this also raises the debate around the strength of the competition Unity is facing from comps such as APP, Unity holds a unique advantage by having both the foundational, operational and monetization components of game development. Expect strong and steady execution from the company to capitalize on this proposition

Majority of revenue lift should flow through to Adj. EBITDA. Though remain focused on revenue support as it pertains to user conversion, customer retention and monetization uplift, the revenue generated from Unity’s Runtime Fee will likely be high-margin. Given the feature is already in market, any incremental revenue should be associated with roughly 100% margins. This supports Unity’s focus on profitability and should Unity reach its LT margin targets of mid-20% to 30%

In conjunction with its Runtime Fee announcement, Unity discontinued its Unity Plus plan, which was the company’s lowest-priced paid tier. As the Plus plan (~$400/year) was the company’s lowest paid plan for users, expect Unity may need to accelerate its product roadmap to drive its free users toward a paid plan. Unity may also need to incentivize existing Plus customers to migrate to its Pro Plan ($2,040/year) after offering a free upgrade for the next twelve months. Given this transition period, do not expect significant revenue contribution from this change until 2H24/CY25. Downgrades/churn, however, may more than offset this upside. Evaluated this against Unity’s pricing model prior to the recent changes. The analysis suggests that Unity would need to convert, or add ~20% of its current customer base of ~150K Plus customers to generate the same revenue base it has today (of ~$60bn). Considering the vast price differential between Plus’ $400 point and Pros’ $2,000+, game developers’ willingness to pay still needs to be determined. The potential for Unity to drive net new user growth may also close this gap. Product enhancements, such as gen-AI tools and other value-added services, may also drive adoption.