Specialist
Former Head, Sales, Games, EMEA at Unity Software Inc (Unity Technologies Inc)
Agenda
- Operating environment for Unity Software (NYSE: U) – video game development trends across mobile, PC and consoles
- Competition vs Epic Games' Unreal Engine and in-house studio game engines vs competitors' – evolution of outsourcing trends and increased importance of cross-platform functionality
- Go-to-market and adoption trends across pricing tiers and add-on services
- Outlook for Q4 2021 beyond – growth drivers via non-gaming verticals, AR/VR adoption, upmarket PC and console studio adoption
Questions
1.
What trends have you noticed for Unity’s Create Solutions division and what is driving the operating environment? What themes should we be monitoring?
2.
What might the TAM for Unity’s Create Solutions division end up being, given it is largely geared towards supporting publishers and developers put their games on the market? An oversimplified way to approach it is if you take gaming revenues in totality and take that 5% royalty that Epic’s Unreal Engine charges, then maybe the TAM for Create is USD 6.5bn. Is there a better or more realistic framework to think about what the total revenue might be for Unity through its Create business and if that USD 6.5bn is largely an underestimation? How might Create’s TAM split between gaming and non-gaming?
3.
What are the artist tools being utilised that aren’t Unity-oriented? Is it purely a lack of functionality and not having the capabilities the artists need on Unity’s part? That is easily fixable for Unity, to your point, as it makes acquisitions or builds tools out organically and that should allow it to penetrate that artist TAM. Is there any stickiness to consider for some of the incumbent tools artists have been using over the years?
4.
How would artist adoption of the Unity engine impact the ARPU per seat? Are those artist tools lower cost than the USD 1,500 to USD 2,000-plus-type of per-seat price range for developers?
5.
How might artist adoption of the Unity engine drive seat-adoption acceleration? I presume developer penetration is getting pretty saturated since Unity focuses a lot on mobile and has a great share there, so the amount of seats it might be able to bring in incrementally per year will probably slow down. Do you expect a lot of penetration coming from artist adoption that would drive meaningful seat increases for Unity?
6.
Is there a rough estimate for triple-A consoles’ insourced vs outsourced game engine utilisation? Is it still an 80/20 or 90/10 split of utilising a proprietary engine vs outsourcing to an engine such as Unity’s? How do you expect that split to trend? What’s the likelihood of triple-A console publishers outsourcing increasingly over the next 2-3 years?
7.
It seems Epic’s Unreal Engine gets more credit for having a knack for triple-A titles. Fortnite is a prime example there. Even if a lot of triple-As begin to increasingly outsource, how large is that window of opportunity? Unreal and Unity, for the most part, don’t really compete with one another. However, in the sense that triple-A outsourcing is the one area where they would compete head-to-head, would you be worried that Unreal reaps most of the benefits from outsourcing, given your points around the Unity engine not being yet ready to take on big-ticket games?
8.
What are the Unity engine’s biggest shortcomings? What are nuances for the company’s focus on mobile gaming development? What needs to be worked through over a 5-6-year horizon to reach a place where Unity’s engine make sense for triple-A developers?
9.
Will Unity’s journey to being adopted by triple-A developers initially not focus on front-end development, but rather towards elements such as the recent beta launch of Unity Gaming Services where it’s more towards back-end monetisation, user acquisition and player engagement? It seems there’s a lot of outsourcing of back- end elements to Xsolla and AccelByte. Is focusing on those back-end elements a good way to increasingly open the door to conversations with console developers and then get to a point where Unity is ready to actually do the development soup to nuts?
10.
What is the TAM for Unity’s non-gaming products? Autodesk has an USD 18bn design and a USD 13bn architecture TAM, but it’s been posited to me that Unity is more collaboration and partner-oriented and not as competitive, maybe aside from Autodesk’s Vred product. What TAM might Unity be targeting for non-gaming out of the Autodesk figure? Will it largely be more complementary in nature or do you expect more direct competition if those TAMs are correct?
11.
We’re separating product and tech so much as go-to-market and industry expertise. Is that timing an issue, where you need to stand up a verticalised sales force by architecture, construction, automotive, film and TV? Or are there long-term inhibitors that would make some of these industries tough to tap into because they’re so different than the go-to-market dynamics that have existed for Unity?
12.
Is it a situation where the designer or programmer is savvy enough to work within the Unity engine for AEC [Architecture, Engineers and Construction] opportunities, whereas for the architect, it’s too complex of a UX and lacks the needed functionality? It sounds like a similar kind of scenario with the developer vs the artist to the designer vs the architect. How is that dynamic playing out?
13.
Are there enough vertical-by-vertical opportunities, despite some of the specific complexities that exist for each, that would allow Unity to become a more non-gaming-revenue business over a gaming one over the next five years? How does a lot of this scale together over the medium term?
14.
In what non-gaming instances is Adobe the incumbent competitor Unity is aiming to displace and how competitive will it be? How challenging will it be for Unity to be disruptive in non-gaming opportunities?
15.
Will Nvidia’s Omniverse virtual collaboration platform become a large competitor for Unity? How do you stack the two’s ecosystems? Is that something that’s directly competitive so much as nuanced?
16.
A source of pride for Unity is its development for Call of Duty: Mobile on Activision Blizzard’s behalf. It seems a lot of console publishers are focused more on extrapolating their triple-A console IPs down into a mobile form. Could that be a tailwind? Maybe Unity won’t be tapping into these pure play console game development opportunities. However, if console publishers are more focused on not driving new console IP but trying to extend the life cycle of their already USD 1bn franchises through a mobile form of the game, how does Unity seize that opportunity?
17.
Are there any penetration opportunities for Unity due to developments by console manufacturers themselves? Obviously, we’re heading into a new next-gen console cycle with product innovation around ray tracing, AR and memory layouts changing. Is the development of a game becoming so complex that maybe publishers, while they’ve invested a ton of money historically, might cater to Unity or Unreal Engine being the better option for incremental needs as opposed to continuing to invest into their own proprietary engines? How do you think next-gen consoles lower the moat a little bit for potential penetration for Unity?
18.
How do cloud gaming and streaming impact the Unity engine’s value prop? It’s been posited to me that removal of the need to target every device, so to Microsoft to Sony to Nintendo, might drive a higher propensity to develop that proprietary game engine as opposed to outsourcing. How do you anticipate cloud streaming as a tailwind vs headwind for third-party game engines?
19.
You’ve characterised Unity Engine’s biggest competitor as the in-sourcing and proprietary engines themselves. There are also open source engines such as Amazon’s Lumberyard – now rebranded as Open 3D Engine – Godot and Cocos. Is Unity’s share gain potential among devices such as console, PC, mobile, AR and VR largely done its course? Is it over-indexed towards highest growth areas in mobile, AR and VR, maintaining share in those high-growth areas to maintain its own revenue trajectory?
20.
It seems there’s a developer network effect with just having a scale of developers for those device types that you cater to. Is there a competitive dynamic from Unreal having a different go-to-market strategy with royalty fees? It also offers MegaGrants if you develop a good game on the actual engine. Is there anything Unreal or other companies might be able to do to dilute Unity’s developer value proposition over the next few years?
21.
It’s been posited to me that Unity and Unreal would be the piping above which Roblox develops the tools developers care most about. Is it so much that Roblox moves downmarket and tries to invade Unity’s territory or is it cutting off the upside? When we think about the metaverse as this big growth opportunity for video gaming over time, is that something Roblox is much better-positioned to capture the tailwind of and not Unity? Is Roblox cutting off the top of the TAM vs actually entering into Unity’s TAM specifically?
22.
Unity’s revenue has been growing at north of 30% for quite some time. Would you consider anything a risk that could drive that revenue growth profile to dilute over time? It seems the main one would be regulation in China around mobile gaming. Unity is heavily indexed towards mobile and China drives a lot of the mobile industry. How is the company’s mobile gaming exposure in China a headwind for the business over the next couple of years?
23.
Is there a tailwind stemming from how under-monetised you consider Unity’s Create division to be? I see it from two avenues. Is the amount of free users relative to paid just an inherent mix where, to your point, start- ups and indie developers will not want to pay for this and so that probably remains static in nature? You also ran through some of the pricing dynamics that exist for the plus, pro and enterprise tiers. Will a lot of the growth come towards raising the monthly ARPU closer to USD 200 and beyond, so about USD 2,500-3,000 per seat rather than USD 1,800-2,000?
24.
You brought up the challenge of discovery where presumably a lot of the gaming industry is more and more driven by those top 50-100 by device type. To the extent the focus ends up being on the developers making those games, is there much go-to-market pricing power for Unity’s plus, pro and enterprise tiers? Presumably, you have to add on functionality to cater to the developer to make them want to pay more. Are we getting to a point where Create’s per-seat pricing is plateauing where there’s not much more to add to drive more ARPU?
25.
It seems the Unity Reflect product will be the biggest driver of adoption and uptick in revenues for AEC. What else does Unity to need work through when considering its product road map? It seems a lot of it comes through natively integrating with Revit, Navisworks and BIM 360. What other improvements are necessary to broaden this option for architects?
26.
Reflect is priced at USD 690 a year. Do you find the pricing aspect of Reflect’s go-to-market drives any obstacles to broader adoption as well? Is it prohibitively expensive or is that an affordable rate for what it provides?
27.
How do you think about cross-sell opportunities for Operate with customers already using Create? Are there easy cross-sell opportunities with DeltaDNA, GameTune, Vivox and Multiplay for driving post the game being live dynamics? Should we expect a lot more from Create customers utilising Operate on an ongoing basis as well?
28.
Is there anything you think would have been worth mentioning to leave us with food for thought as we wrap up?
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