Unity Software (U): Huge Problems, Negative Outlook, Big Changes Required
Oct 3, 2023
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This podcast discusses Unity Software's business, financials, pricing changes, and future outlook. It explores the impact of recent pricing changes, compares Unity's management to Twitter's inefficiency, and emphasizes the need for change and management realignment in public gaming companies.
Unity's business is divided into two segments: create and grow, with the majority of revenue coming from the gaming industry.
The recent pricing changes by Unity have sparked backlash from developers, raising concerns about customer value and long-term sustainability.
The pricing changes have created opportunities for competitors like Epic and AppLovin, altering the competitive landscape and opening doors for market share gain.
Deep dives
Unity's Business Overview
Unity's business is comprised of two main segments: create and grow. The create segment offers a suite of developer tools and services, with the primary component being the Unity Engine. It also includes various tools for distributed teams, visual communication, version control, multiplayer solutions, game server hosting, and data analytics. 70% of the revenue from the create segment comes from the gaming industry. On the other hand, the grow segment focuses on ad-based products and game publishing. It includes ad mediation, ad networks, ad exchanges, and the level play ad mediation product. The pricing changes and revenue growth are key considerations for Unity's future.
Challenges with Unity's Pricing Changes
Unity's recent pricing changes have faced significant backlash from developers. The increase in fees for runtime usage and level play ad mediation has led to concerns about the company's approach and value for customers. Developers are wary of the potential impact on their businesses and the added costs associated with the changes. There are questions about the viability of switching to alternative solutions like Unreal or other engines, as the process can be difficult and time-consuming. Unity's management team's fixation on revenue growth and stock-based compensation has raised doubts about their focus on customer value and long-term sustainability.
Opportunities for Competitors
The pricing changes by Unity have created opportunities for competitors like Epic and AppLovin. Epic Games' Unreal Engine may attract developers who are looking for alternatives to Unity. However, the switch to a new engine can be challenging and time-consuming. AppLovin, with its existing dominance in ad mediation, may benefit as developers seek alternatives to Unity's level play. AppLovin's established position as the main game in town for ad mediation could make it an attractive option for developers. Overall, the pricing changes have altered the competitive landscape and opened the door for competitors to gain market share.
Effects of Stock Buybacks on Unity's Shareholders
Unity has been consistently buying back stock, which has offset dilution and reduced the shares outstanding. This has been beneficial for shareholders as it shows that the company's investments with its equity are paying off.
Challenges with Unity's Compensation Structure
Unity's stock-based compensation (SBC) and overall compensation structure have raised concerns. The amount of SBC paid to Unity executives, including the CEO, is deemed to be too high relative to the company's growth and financial health. This has led to worries about the management's decision-making and corporate governance. Additionally, the lack of independence in the board and the need for restructuring the compensation agreements for executives are major considerations.
