Unity Technologies is not having a great month. A few weeks back, they introduced a new pricing scheme and their customer base revolted. They were attacked online and someone called in bomb threats to their offices. Ultimately, they had to backtrack and reverse the policy. Long-time readers may recall that we have long been fascinated by Unity’s products and read their IPO materials closely. As much as we extolled their technology in that post, we concluded that they had a hard job in front of them.
We have followed Unity for a long time and really like their story. We play a lot of their games. And we buy into the strategic vision of a more graphical future. That being said, there a lot of worries beyond that fundamental under-monetization – competition, gaming platform power and the very unproven notion that non-gaming customers will adopt Unity’s technology.
In particular, we noted that the company seemed to be struggling with revenue growth. At the time of the IPO we noted that they really had two ways to grow – diversify beyond gaming or raise prices. Well, they tried raising prices and that did not pan out.
So now the question is can they diversify beyond their core user base of mobile games developers. Reading back on that earlier post, we recognize that as cautious as we were, we treated the company with kid gloves. Expanding beyond gaming was always going to be difficult – movies, cars, construction? – those are very different markets both from each other and from Unity’s core market. Penetrating those always struck us as a bit of fantasy, not totally unrealistic but expressed in such a way to gloss over the difficulties involved. Our chief concern was that company really required strong execution, and all that talk about other markets seemed like a big distraction.
And of course, the company had to face many other distractions. At heart, Unity’s revenues are based on advertising, or at least their customers’ ability to monetize via ads. The company had an ads strategy, did not execute on it very well, and was almost acquired by a big competitor. Then Apple dropped a bomb on the mobile ad market with their ATT ‘privacy’ policies. Those are beyond are scope today, but suffice to say ATT has wreaked havoc on the market, with aftershocks still rippling across the industry.
All of which is to say the company did not execute well. Now they are trying to pick up the pieces and are left desperate to restructure their economics.
What shocked us the most was how poorly the new policies seemed to have been thought out. The company seems to have been taken by surprise by the reaction, which makes us question how well they researched and prepared the changes. Subsequent communications all appeared hasty and fragmented.
Put simply, this really seems like a company which banked too heavily on its ‘vision’ and neglected the gritty reality.
At this stage, we think the company faces drastic change. At the very least, it seems like a change of management is highly likely. However, that may not be enough. They are now stuck strategically facing declining revenues, an inability to alter pricing and a user base in full rebellion. With the stock under pressure, a sale seems a highly possible outcome, and we have to suspect that the Board has already been receiving offers.
We are, to put it mildly, disappointed. We closed that 2020 post saying:
Our take is that the stock is actually a buying opportunity for the short term, the near-term trends continue to work in its favor. However, the longer-term question remains open.
Deep down in our hearts, we want to believe. But in our heads, we are not quite there yet.Digits to Dollars “We Want to Believe” November 2020
And it looks like we never get there.