🕹 Unity IPO - The Backbone of Mobile Gaming

Overlooked #36

Hi, it’s Alexandre from Idinvest. Overlooked is a weekly newsletter about underrated trends in the European tech industry. Today, I’m digging into Unity which is a game engine that started to trade on the public market last week.

Last week, Unity started its journey as a publicly listed company raising $1.3bn from public investors and ending its first trading day with a valuation above $20bn.

Unity is a European success story started in Denmark back in 2004. It has become a dominant game engine in the gaming industry forming a duopoly together with its best enemy Unreal Engine.

Unity has a leading position in the mobile gaming market with a market share above 50% and is one of the most advanced player in Virtual Reality and Augmented Reality technologies. It’s a great timing to take a step back and dig into Unity’s past and future history.

In this paper, I will cover the following topics:

  • Why I’m excited by the gaming industry

  • Unity’s history started in Europe back in 2004

  • Unity’s vision to democratize gaming development and empower creators

  • Applying Christensen’s Theory of Disruption to Unity

  • Looking at Unity as a picks and shovels play

  • Going beyond gaming as a key challenge for the future of Unity

  • Unity as a key building block in the advent of the Metaverse

  • Unity’s relative dependency towards mobile advertising

  • Unity vs. Unreal key differences

Why I’m so Excited about Gaming?

  • Gaming is the biggest category in the media industry and it's has a strong room to grow further. It generates more revenues than the music and film categories combined. We are still in the early days of gaming. Despite being the most immersive media, gaming is under-monetized compared to other categories.

  • Young people are doing less of everything (TV, drugs, going out, watching movies etc.) but are playing more games. It's a paradigm shift in which gaming will play a preponderant part in the life of the coming generations.

  • The next generation of social networks will be games. Social media consumption is mainly linear and asynchronous. You scroll and react to an historical feed fueled by content from your friends, your favorite brands and advertisers. On the contrary, multiplayer games offer a more immersive experience with a richer interactivity and in real time. Fortnite is the best example. It's much more than a battle-royale game. It's the new playground: a place to hang out with your friends, to express your unique self with specific skins, etc. The game in itself is almost an excuse to fulfill our social needs.

  • Gaming is much more advanced than many other sectors in terms of technological innovation. Game engines are the best illustration of this idea. I hope that you will understand why with this deep dive into Unity.

A Company Founded in Europe

Unity's story started in 2002 in Copenhagen by Nicholas Francis, Joachim Ante and David Helgason. The founders were developing games on the small Mac ecosystem and had to develop game engine bricks on the side because of the limitations from existing solutions on the market. They decided to combine their bricks to have a more robust game engine to power their Mac games. A game engine is a suite of software tools for developers to help them build video games including key building blocks as a rendering engine for 2D and 3D graphics, a physic engine (what happens when you press a button), real time visuals, sound and script production management, artificial intelligence, memory and network management etc. The company was incorporated in 2004 financed by personal and family savings.

They realized in 2005 while launching a game called GooBall that they were bad game developers and should shift their focus into selling to third parties in the Mac community the game engine they had been developing. Unity's first version was released at the Apple WWDC in June 2005.

It started to get traction because the game engine was focused on key attributes valued by independent developers: the ability to reuse some workflows for several projects, the ease of use, the self service distribution, the business model (based on free trials and a cheap licensing fee) and cross platform compatibility.

The iPhone was released in 2007 and it was a turning point in Unity's history. Familiar with Apple's ecosystem, Unity quickly became the must have game engine to ship a game on the AppStore. Today, Unity has a 53% market share on top 1,000 games on both Apple AppStore and on Google Play.

In 2009, Unity strengthened its cross platform distribution model by integrating PC as a distribution channel and also started to offer its product for free to hobbyists. This year, Sequoia led a $5.5m series A in the company (7 years after the beginning of the story) and pushed Unity intop opening an office in San Francisco.

In November 2010, Unity released its Asset Store allowing developers to trade digital assets. It was a game changer to accelerate the game development process. You no longer have to develop every digital asset in your game. You can start building on top of raw assets purchased on the marketplace. Without this store, we would not have experimented this Cambrian explosion of hyper casual games with super similar design (just think about these little red 3D characters).

In October 2014, John Ricitiello joined the company as CEO to scale the company to the next level. He had been the CEO of major game publisher Electronic Arts. Since then, he has managed to (i) expand the game engine capabilities to be a competitive solution even for the higher end of the gaming market, (ii) make the business model shift in 2016 from a licensing to a subscription based business model, (iii) be the leading game engine when it comes to AR and VR, (iv) prepare Unity to conquer industries beyond gaming.

Empowering Creators as a Mission

I love Unity's vision. "We believe the world is a better place with more creators in it. Creators, ranging from game developers to artists, architects, automotive designers, filmmakers and others, use Unity to make their imaginations come to life."

Initially Unity wanted to democratize game development and now the vision has expanded beyond the gaming sphere to empower all creators with their tools. I'm excited by this company because I believe that creation will be the last frontier that will never be disrupted by automation. Moreover, we are also moving towards a world were the number of independent workers will dramatically increase.

Unity is providing the perfect toolkit for the gaming category in the passion economy. People are empowered to become independent and make a living from their creativity.

1.5m creators are using Unity every month to create 8k new games and applications per month. Unity has become a core tool in their daily lives. Unity Pro users are spending 5.1 hours per day on Unity. It's insane: more than 35 hours per week...

The Theory of Disruption

Unity is a great illustration of Clayton Christensen's theory on disruptive innovations. Unity did not start by targeting established players in the gaming industry but tried to solve the pain points of independent developers who were looking for a simpler and cheaper game engine.

Obviously, in the early days, Unity's game engine did not have the same capabilities as competitive solutions or in-house game engines developed by AAA studios. Progressively, Unity has managed to go upmarket addressing the needs of more sophisticated organizations (small and medium gaming studios and now AAA studios and other industries beyond gaming).

Today, we are at a turning point. Unity's game engine product performance has increased sufficiently to be able to be on par on certain attributes with existing solutions (in-house or competing game engine) and much better on other attributes (cloud based, portability, ease of use, collaboration etc.). Alternative solutions are being taken over by Unity's disruptive innovation.

AAA studios which spent hundreds of million in internal game engines are no longer able to compete with Unity and are starting to develop some of their games on Unity's game engine. Moreover, Unity's game engine has become so powerful that it can be used beyond the gaming industry.

A Pick and Shovel Play

There is this famous distinction between picks and shovels manufacturers on the one hand and prospectors on the other hand.

During the Gold Rush in the 1840s and 1850s, many people took a shot at moving to California and try to find a gold mine. You had to be extremely lucky to find a good spot and become wealthy. But guess who won a ton of money during these period? People manufacturing and selling picks and shovels to all those prospectors.

The lesson to learn from this story is that you should better invest in the underlying infrastructure required to build a final product or services instead of trying to build directly this output.

In gaming, Unity is the picks and shovels manufacturers when independent creators and gaming studios are the prospectors. Gaming is a hit-driven business and you will fail most of the time as a developer but Unity is winning every time you use its platform to build a game.

Going Beyond Gaming

I told you that I'm excited about gaming partly because the industry is ahead of the game in terms of innovation. Infrastructure players like Unity will be able to bring their innovations in other industries beyond gaming.

In the S-1, Unity is mentioning a total $29bn total addressable market: $12bn in gaming targeting 15m game developers and $17bn beyond gaming with 37m potential users in other industries who could be developers, architects and designers. It means that Unity believes that there is a huge upside to be explored beyond its core market.

The company has already started to test its product market fit in other industries talking about use cases in "architecture, construction, training, media and entertainment retail and in the auto/transportation industry".

For instance, Unity is working with Swedish car manufacturer Volvo. More than 30 employees are using Unity on a regular basis in R&D, product design, simulations, sales and marketing.

The most impressive use cases are related with mixed reality experiences in which Volvo is using Unity and a VR headset to offer new experiences to drivers.

  • You can have an augmented driving experience by wearing a VR headset giving you information on your surroundings.

  • You can discover a Volvo car through a VR headset to facilitate your purchase experience.

Obviously, Unity is also used in the entertainment industry to complement or replace existing film and editing existing solutions. Disney used Unity for the last The Lion King movie to recreate the African Savanna.

In late 2019, the company released Reflect which is a product to import building information modeling into Unity’s platform targeting explicitly the architecture and construction industry. Unity has also a strategic partnership with Autodesk - a key player in this space - to facilitate imports and exports between both platforms.

Beyond the media industry, Unity is mainly used to create and work on "digital twins": it could be a car, a building, a plant, an infrastructure. Imagine when we will be able to integrate these virtual assets into existing games or combine them together to create... the metaverse.

The Metaverse

The Metaverse is a tricky concept and I'm still struggling to understand all its dimensions. The basic idea is to upgrade our physical reality with a digital layer that will enable us to make actions that were otherwise not possible. Unity's game engine is considered asa key ingredient to move closer towards this Metaverse.

First, games developed on Unity are cross-platform. It means that games can be released on all the major gaming platforms (20+ including iOS, Android, PC, PS4, Xbox etc.) and players are able to play the same live game without playing on the same platform. I can play on my Switch the same exact game you play on your computer and we can compete against each other in a live game.

Second, digital assets are portable from one experience to the other. It's interesting when you are a game developer because you don't need to start from scratch and you can re-integrate assets from previous games and projects. You reduce your development time thanks to this reusability.

But it becomes even more interesting when you use existing assets from another game to augment the experience of your game. For instance, I can make an update on Animal Crossing to include characters from other franchises like Mario, Pokemon or Zelda and make a more enjoyable experience if everything is built on Unity.

The next step is when you use assets from industries beyond gaming to include them in a digital experience. I told you about "digital twins". Volvo can start thinking about integrating its cars into other experiences like games also built on Unity.

Third, I already mentioned the introduction of Unity's Asset Marketplace back in 2010. This marketplace can become the economical backbone of the Metaverse. Anyone will be able to craft an asset or an experience that can be re-used multiple times by other parties.

A Relative Dependency Towards Advertising

Unity has two ranges of solutions. On the one hand, create solutions which are tools to help creators build 2D and 3D interactive and real time content. These solutions are monetized through monthly subscriptions.

On the other hand, operate solutions which are tools to help creators operating and monetizing their applications. These solutions are monetized through revenue share and usage based models.

Create solutions generate 43% of Unity's revenues vs. 57% for operate solutions. Obviously, there are synergies between both activities. In fact, once the game is developed on Unity's game engine, the developer also needs to distribute and monetize it. 60% of revenues generated with business solutions come from people also also using creator solutions.

When you dig into operate solutions, you discover that Unity has several products related to mobile advertising: personalized advertising (campaign based on personal data like potential propensity to install a game, to have a high retention overtime and to pay in-game), contextual advertising (to keep advertising customers if they opt-out from personalized advertising) and Unity Ads (an ad network for mobile advertising).

This mobile advertising activity could be significantly impacted with Apple changes announced for iOS14. Indeed, Apple is planning to crack down on tracking in mobile advertising. It was delayed for a date yet to be announced because of advertisers push-backs. It's hard to evaluate the impact of these changes but it's sure that effectiveness and hence ad price will be reduced. For Unity, the logical consequence could be a decreased in revenues.

Unreal vs. Unity

It's impossible to write a detailed paper on Unity without mentioning Unreal. Unity and Unreal are the companies behind the two dominant game engines. It's key to understand what the three main differences between them are.

  • Management and long term vision. Unreal is still founder led while Unity is managed by an industry veteran that stepped in back in 2014. As a result, Unreal seems to have a long term vision based on becoming the dominant infrastructure for the Metaverse and accelerating its advent. On the contrary, Unity is more pragmatic focusing on empowering more creators to build their games with Unity and to find new revenue sources beyond the gaming industry.

  • Game engine positioning. Unreal's game engine has more capabilities. Unity is easier to use especially for independent developers and small studios. It's also the dominant player in the mobile industry.

  • Business model. For the game engine, Unity charges a monthly subscription fee to use its software and no revenue-based fee if you don't use its operate solutions. On the contrary, Unreal's game engine is free to use and you are charged 5% of the sales generated by your game if you generate more than $1m in revenues. Beyond the game engine, Unity is generating revenues based on its operates solutions (advertising, cloud services etc.) while Epic has Fortnite as a cash cow to fund the company's operations.


There is no doubt that Unity is an outstanding company. It has built a game engine that has become a major player in the industry forming a duopoly with Unreal Engine. It’s going to be interesting to follow the company in the next 12-18 months. In fact, when you look at the current pricing of the company, the market has high expectations for the company.

Unity will have to deliver the numerous potential upsides it has laid down during its IPO roadshow:

  • Going beyond gaming.

  • Going one step closer to the metaverse.

  • Being at the forefront of the AR and VR revolution.

Moreover, the company could be struggling in several ways in the coming years on its core business with:

  • A relative dependency to the mobile advertising market.

  • A potential glass ceiling to extract much more value from the gaming market (as it has already a 50% market share).

  • A competitor called Unreal Engine…

Let’s see how Unity will solve this complex equation!

Thanks to Julia for the feedback! 🦒 Thanks for reading! See you next week for another issue! 👋