How does Unity, the only software partner of Apple Vision Pro, make money?

Unity

Company Profile

History

Unity (ticker: U) was founded by three young people, David Helgason, Nicholas Francis, and Joachim Ante, in 2004 in a dark basement in Copenhagen, Denmark.

Company mission

Their first mission is to develop a software that can make the developed game run on all platforms with a single button. They put forward a resounding slogan to popularize the game development engine, so that game developers and enthusiasts all over the world can use an affordable and easy-to-use game development engine.

With this idea in mind, they developed the first game engine in the game industry that can be implemented in this regard, and thus broke the game industry’s silos and independently developed their own unique game engine relying on their own hardware and software environment pattern.

Introduction

Unity has always been a big name for anyone in the game industry. tens of millions of mobile games and
Millions of game developers, through the technology provided by Unity, have developed games that are well-known in the global market. As of June 30, 2020, the Unity real-time 3D platform has 1.5 million active creators in more than 190 countries and regions around the world, and as many as 2 billion monthly active users use applications developed on the Unity platform.

Among the top 100 game studios in the world by revenue in 2019, 93 of them are Unity customers. In 2019, 53% of the world’s top 1,000 mobile games (Apple and Android markets) were developed and produced using the Unity platform.

Self positioning

Unity positions itself as a platform for creating and manipulating real-time 3D (RT3D) content. Unity aims to be the technology provider of the ultimate end-to-end solution for creating and manipulating RT3D content. This is evident through a series of strategic acquisitions (including ironSource, Weta, Ziva, SpeedTree, etc.) that complete the process and pipeline for developing RT3D game content using Unity. Moreover, this also gives Unity a competitive advantage over its competitors.

Utility is a key player in gaming

Major Game Engine Vendors

The main business of Unity, a 2D and 3D game engine provider, is to provide game development and release tools. Since the release of the first mobile game supporting the iPhone in 2008, it has continued to expand various mobile game engines.

Unity’s customers will use its game engine software to create games for phones, consoles and virtual reality headsets, such as using AI software from independent companies Inworld AI or Polyhive to generate game dialogue or context and graphics.

AI companies will be able to distribute their software to game makers for a fee through Unity’s Asset Store.

XR software heavyweight platform provider

Unity has been providing technical support to VR/AR developers for many years: 60% of VR content in 2019 was developed based on the Unity engine.

In terms of AR, 90% of HoloLens content is developed based on the Unity engine. Unity powers 50% of novice games. Most importantly, its advertising reach is very wide.

Wide range of applications

In the past few years, Unity has invested 450 million US dollars in research and development in the fields of digital twins, industrial Internet, automobiles, transportation, construction, VR/AR, and digital cities, and has acquired Applier, deltaDNA, Finger Food, Multiplay, and Vivox. The tool company brings greater functionality to it and furthers its goal of becoming a one-stop integrated platform for all creator needs.

Heavyweight customer endorsement

Unity has many top customer groups and partners around the world, including: Google, Microsoft, Meta, Amazon, BMW, Honda, Volvo, Daimler, Hyundai Kia, Lexus, Disney, Samsung, Huawei, Xiaomi, Tencent , Alibaba, NetEase, ByteDance, etc.

Business

Source of revenue

Unity commoditizes its services in three ways:

  • Advertising (under the Unity Grow division)
  • Developer Seat (under the Unity Create department)
  • Cloud computing services (coming soon)

Unity, on the other hand, makes more complex software for those who want to build games from scratch, rather than just create mini-levels in video games.

Which is has some pros and cons. First, models in Unity may be more difficult to commercialize, as Unity games have much longer game development cycles than most Roblox games. Additionally, many of Unity’s games are developed for mobile and rely on ad spend, which tends to fluctuate with economic and business cycles, which is bad for the company and investors.

Technology

On June 27, 2023, the game engine Unity announced the launch of an artificial intelligence software mall, positioning it as a platform in the hottest field in the technology industry, which inspired the company’s stock price to soar by more than 15% to $42.38 per share that day.

As Unity’s stock price soared, its CEO John Riccitiello recently said that he sees the company’s potential in the AI ​​field and believes that AI will greatly change the game. One of them is to speed up the production of games and make games cheaper and better. . “It’s happening,” he said in an interview on Monday.

The company can expand beyond games with its digital company and other enterprise-oriented simulation products. While consolidation in the interactive entertainment industry may drive larger studios to develop their own game development tools/assets in the long run, Unity still has a strong competitive position in this space.

Before investors noticed Unity’s AI highlights, Unity was closely related to headsets, such as Meta’s headset, because Unity’s software can be used to create mobile programs for virtual reality (VR).

Apple released Vision Pro, a mixed reality (MR) headset, and announced that it is cooperating with game engine developer Unity, prompting Unity’s stock price to rise sharply for several days in a row. Vision Pro is scheduled to start selling in the market early next year.

Toxicity detection solution

This detection solution for harmful speech, called Safe Voice, enables video game studios to enhance their ability to quickly and efficiently detect bad actors and take appropriate responses or actions.

Safe Voice is a situational awareness technology that uses acoustic and semantic intelligence to identify toxic and disruptive behavior. Safe Voice analyzes unique speech characteristics such as pitch, loudness, pitch, intonation, emotion, and the context of player interactions to quickly provide nuanced insights. Safe Voice leverages advanced machine learning algorithms to provide proactive and player-initiated toxicity detection. It is activated when players flag instances of toxic or destructive behavior, and it also monitors in-game behavior or activity that may indicate a toxic incident.

Safe Voice will analyze a set of voice characteristics of players to collect their insights, basically it has nothing to do with the game engine, it belongs to artificial intelligence and advanced voice analysis technology, for the well-maintained online game world, it shows Utility in the online game world Another flip of leadership.

Artificial intelligence products

With the wave of generative artificial intelligence content (AIGC) driven by OpenAI’s ChatGPT, Unity also decided to seize the market dividend of AIGC. Driven by the new wave of AIGC, technology companies have accelerated the transformation of intelligence. For game software maker Unity, this is also an opportunity not to be missed.

The company added generative artificial intelligence technology to its platform, which is used by millions of developers to create video games and other programs for game consoles, computers and headsets such as Apple’s new Vision Pro. These include being able to use text prompts to access instructions for coding and other tasks, and ways to have background video game characters engage in unique dialogue with the player that can be customized based on the player’s real-world location. Unity says its AI-powered chat is designed to let the data that powers it be processed on the player’s device, helping developers save on cloud computing costs.

Recently, Unity just announced two new artificial intelligence products: the Unity Muse authoring platform and the Unity Sentis engine, designed to help creators enhance real-time 3D (RT3D) content. While Unity’s 3D authoring platform isn’t as powerful as its competitors, these two tools will go some way to bridge the gap.

Major Competitors

The main competitors of Unity can be divided into the following two categories:

Epic Games

Unreal provided by Epic Games is Unity’s main competitor in the field of game engines.

Roblox

Unlike Apple, Apple Vision Pro chooses Unity as its main software partner; Meta (ticker: META) headset Quest chooses Roblox (ticker: RBLX) as its main software partner. The program of the Roblox is also put on Meta’s Quest app marketplace for Quest users to download. From this partnership, we can know the importance of the Roblox in the AR/VR metaverse.

Matterport

Matterport is a spatial data company focused on digitizing and indexing the construction industry.

Four catalysts for business outlook

IronSource Integration

The biggest challenge Unity faces in 2022 is the update of Apple’s iOS version update’s privacy restriction feature, which allows users to opt out of data tracking in an app. The sudden change has prevented Unity Ads — a core component of its Grow business, which accounted for 63% of revenue in the latest quarter — from delivering effective targeted ads in its games.

Unity initially attempted to rewrite its ad algorithms in response to Apple’s drastic changes, but ultimately restarted its ad business by merging with ad tech company ironSource in a $4.4 billion all-stock deal in November 2022.

During Unity’s first-quarter 2023 conference call, CEO John Riccitiello said the combination of Unity and IronSource has brought in more data to enhance the capabilities of both networks. Unity expects these synergies to increase its market share in integrated advertising and drive accelerated growth in its Grow business for the remainder of the year.

Adjusted EBITDA turned positive

Bears often claim that Unity will never be profitable. Even on an adjusted EBITDA basis, its losses more than doubled, from $20 million in 2021 to $51 million in 2022.

But over the past year, Unity has aggressively reined in spending through three rounds of layoffs. As a result, it now expects to generate $250 million to $300 million in positive adjusted EBITDA by 2023, which would be its first year of profitable adjusted EBITDA, and the metric will reach $1 billion in EBITDA profitability by 2023.

Mixed reality partnership with Apple

In early June, Apple revealed that it was working with Unity to develop mixed reality apps for its new Vision Pro headset. The announcement wasn’t too much of a surprise, since developers were already using Unity to create apps for the Meta virtual reality Quest, but it was clearly a vote of confidence in Unity’s future in the nascent mixed reality market.

The Vision Pro’s hefty $3,500 price tag could hamper sales, but the broader mixed reality market could still grow at a 35% CAGR from 2022 to 2032 as more devices hit the market, according to Persistence Research . Unity could take advantage of this long-term expansion by diversifying its core game development engine away from the mobile, console, and PC gaming markets.

Introducing a new AI market

Shares of Unity surged 15% on June 27 after it launched a new AI-as-a-service marketplace for its game development engine. Through the marketplace, developers can purchase AI tools from independent companies such as Inworld AI and Polyhive to add AI-generated in-game dialogue, graphics, and textures to their games.

As CEO John Riccitiello said in a recent interview, these AI tools can help developers create games faster, cheaper and better. The AI market is also likely to lock more developers into its game development engine, which drives much of the growth in its Create segment (which generated 37% of its revenue last quarter).

Company’s prospects

Competitive Advantage

As a platform, Unity can be scaled up and scaled out to develop critical infrastructure enabling RT3D technology and applications to meet industry needs. This may be why Unity’s digital twin solutions can be applied to applications such as construction, manufacturing, automobiles, airports, etc., but competitor Matterport’s (ticker: MTTR) digital twin solution is only focused on the field of real estate.

Additionally, Unity’s expansion into real estate may also be easier to scale than Matterport to a wider range of digital twin applications. In addition, Unity’s partnership with Apple gives Unity direct access to Apple’s relatively untapped large pool of registered developers. In this case, Apple’s registered developers are more likely to use Unity’s digital twin solution rather than completely switch the platform to Matterport.

This shows Unity’s unique competitive advantage over other competitors in the RT3D space.

Challenges

For Unity in particular, ad spending slows rapidly in 2022, and challenges to his own ad model will only exacerbate that.

So Unity suffers a triple whammy in 2022: lower global ad spend, ad share loss to competitors, less play time (fewer consumers seeing ads, slower game development).

Apple boosts its stock price

Apple’s Apple Vision Pro is expected to drive customer adoption of VR/AR technology, benefiting companies like Unity and Roblox (RBLX ). Since June 2, 2023, Unity’s stock price has risen 37%, while Roblox’s stock price has only risen 4% in the same period, which may be due to the differences in the two companies’ business models and future growth prospects. While lower interest rates have also been positive for Roblox, their response has been decidedly less positive, as the stock has only risen about 4% over the same period.

Besides Apple, there are many other companies that could be affected by this technology. Although Apple Vision Pro has many non-gaming applications, this article only focuses on two companies, Unity and Roblox.

Unity has gained a lot of attention thanks to its high-profile partnership with Apple. Investors are eager for companies that can benefit from artificial intelligence, but it remains to be seen how important these new game development tools will be to Unity, and how the company will demonstrate connections to the broader trends driving AI forward. .

Conclusion

Unity provides game developers with a technologically advanced 3D engine. This part of the competitive advantage has not yet shown sustainable profitability. Therefore, investors still have to follow the hype cautiously. Management has yet to grow revenue and profitability from its AI solutions, but the market has tried to price it in. Also, Unity’s stock valuation is too expensive right now. However, Unity is likely in the early stages of a turnaround, and bullish investors should keep a close eye on its subsequent pullback for attractive buying opportunities.

Unity
credit: Wiki

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