Stepping into the Unity CEO's calfskin loafers

Your alarm goes off at 6am, but you’ve already been wide awake for the last hour. Sleep hasn’t come easily ever since you got the big news that you’d been handpicked to be the new CEO of Unity Technologies. No one expected you to be chosen. Although you’ve had a stellar career, starting with an MBA at Harvard Business School, a stint at Goldman Sachs, and capped with a meteoric rise at Johnson & Johnson, your relative youth and lack of experience in the game industry made you a long shot. But you’re here now and today’s a big day. It’s the day to right some of the wrongs of your predecessor and to present a turnaround plan to the board.

Your brain is in overdrive while you’re getting dressed. There’s just so much to fix. You put on a suit and strap on your Patek Philippe without even thinking. As you climb into your 911 Turbo S, you think about the last guy in charge. He made a gigantic mess for you to clean up. A botched pricing increase to improve the balance sheet and steady the share price had gone horribly wrong. Well it didn’t start out too badly - sure, there were loud complaints from many of the smaller developers and, more worryingly, a handful of annoyed emails from a few enterprise customers. And of course the company got roasted by the press. But the damage in the short-term was minor. Over time though, it was a different story. There were cascading effects that caused developers to flee and the board got spooked. Now the last guy is out and you’re in.

You can’t totally blame the last management team. They were commanding a publicly-traded company that was losing money at a dizzying pace. Unity grew on the back of the rise of mobile games, powering most of the free-to-play games that became the dominant form of gaming. During COVID when everyone was stuck inside with nothing to do but play games to preserve their sanity, the share price soared and the company went on a hiring binge. It was a great party, but the post-COVID hangover was epic. The management team responded by laying off a good chunk of the staff. But costs were still outpacing revenue, and the company was bleeding.

So what’s the core problem? Making game technologies is expensive. And it never ends. If you stop innovating, you die. The company spent $280m in a quarter on R&D. Game engines on their own are just giant cost centers. If you are in the enterprise SaaS space, your life is so much easier. Sure there are some R&D costs, but they are trivial in comparison. You need to handle scale and maybe you need an innovative algorithm here or there, but for the most part you are just pulling things out of a database and spitting them out to the user, ideally with some flashy charts that look good in sales demos.

But games? You need complicated technology that works anywhere from a 6-year old Android phone to the latest tricked-out gaming PC. And for that gaming PC, the graphics better shine, buddy, or you’ll hear it from the devs, the press, the players, and…everyone. You need to support 2D, 3D, VR, AR, and whatever else is on the horizon or else Epic’s Unreal Engine will make you look weak. And at the same time, lots of up-and-coming engines are threatening to take away some of your smaller developers that could one day become your big customers.

That’s just the game stuff. Then there’s all the enterprise solutions you have to create, maintain, and support: cloud builds, analytics, source control, and now AI. Oh god, AI, the board is going to be asking about your AI strategy. A lot of companies have to do one or two of these things, but you have to do it all.

So how do you stem the tide? Unity makes most of their revenue from two places: Create Solutions, the licensing of the engine to developers and Grow Solutions, the ad marketplace. Grow is your moneymaker and is getting bigger. Due to how the mobile app stores are structured, the main way to make money as a mobile game developer is selling ad space in games, and the company makes a few pennies every time an ad is displayed. Create is a big chunk too, but it’s not growing that fast. It’s kind of weird that a game engine company makes most of their money from ads. Everything else, like your Asset Store, is not even worth your precious time. So what do you do?

The previous team thought, well, there’s a fraction of mobile developers with millions of players and a decent chunk of revenue that aren’t paying enough through ads and aren’t using the priciest Unity license. So the way they got more money out of them was to have them pay per install or have them move up to a higher Unity tier and then get more money that way. The team also removed one of the mid-tier plans to force the developers to pay more. But there were a couple of problems with that plan.

One, nobody charges per game install. It’s just not done. As rapacious as all the app and game stores are with their 30% cuts, they always charge a percentage of sales through their stores. The stores only win when the developer wins, so the developer pays, albeit grudgingly. But by charging per install, all those free players that a developer is not monetizing suddenly become a large cost center. The optics of that are just not good, since the only thing worse than charging more is charging weirdly.

The other problem is that the last team was looking at the money that some of these mobile developers were making and saw an opportunity. They thought by providing reasonably high revenue minimums, they wouldn’t do much harm. But they were looking at revenue and not income. A lot of these mobile developers were operating at razor-thin margins. Even with hundreds of thousands or even millions of players, a small increase in costs destroyed their business models.

And to cap it all off, everything was handled as gracefully as that one time you tried ballroom dancing. There was no warning and it just dropped on a Tuesday with a thud and shook the industry. A lot of the details weren’t even worked out. The team didn’t know how to accurately count installs. They didn’t even know if it was possible. The company didn’t initially clarify if reinstalls counted. Or demos. Or web games. So much was left out that the world assumed the worst.

So, now it’s up to you. What do you do? Unity lost $250m in the quarter before the announcement and although the price hikes help slow the bleeding, your cash reserves are still dwindling quickly. If you completely reverse course, then you go back to losing money, the investors become agitated, and you’re probably out of a job. You wouldn’t even win back any of the developers you lost in the first place.

Ideally you could charge more to the developers that are not on the highest tier that also have the margins to spare. But this is difficult to do without knowing the financials of your customers. You could do it how Unreal does it, where you take a percentage of revenue over a certain minimum bar. But you can’t do it exactly like Unreal, since they tend to work with fewer, but higher revenue games with bigger budgets.

There are a couple of solutions that your predecessor ruled out, but in hindsight, would work out better. Unity wants to be an innovator in gaming technology, not pricing models. So you’ll take the well-trodden path. You’ll plan to raise prices across the board on the Create Solutions products. Price increases are never popular, but they’re not unprecedented. You’ll also start charging for the in-app purchase solutions. The price has to be small enough that most developers won’t bother to try to recreate it in-house. But at least it aligns the incentives – when the dev makes money, you will too.

You’ll have to roll back a lot of the per-install fees as that has been an ongoing fiasco. The flip-flopping won’t be popular with the board but raising prices with the per-install fees still in place will have your customers revolt. Your changes will shore up cashflow for the near term, but you’ll need a long-term strategy for Unity to be a going concern. Maybe you can plug some of the gaps by making some acquisitions? Perhaps acquiring another VFX company to go along with the Weta acquisition to make more inroads into the film market? How about owning more of the asset pipeline by getting into the authoring space and making some acquisitions of 3D tools? You have a lot more to think about after the board meeting.

As you turn into the company parking lot, you realize it’s been a few years since you’ve played a video game - you should probably do that soon.

You pull into your parking space and head into the office. It’s almost game time, as the board will be there soon. Then it’s just you and your grand vision. And then once that’s done, you can play a few holes at the course this evening. You’ve earned it.

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