unity-business-model

How Does Unity Work And Make Money? Unity Business Model Explained

Unity is a platform for 3D content development, free for companies below $100K in revenues, and subscription-based for companies beyond that. It also makes money on a revenue-share basis with its Operate Solutions helping creators monetize their 2D and 3D content across several platforms. Unity also generates revenues through revenue-share arrangements with strategic partners and within its Asset Store marketplace.

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The VTDF Framework which I’ve developed to analyze tech business models on FourWeekMBA will be the basis to this analysis.

The evolution of the Unity platform

unity-software-evolution
Source: Unity Software Prospectus

Founded in 2004, Unity Software evolved over the years, from a simple platform to becoming a real-time 3D content development platform.

More precisely by 2005 Unity had deployed on Mac OS and Microsoft Windows platforms. By 2014, Unity launched its Unity Ads and by 2016 the company started to offer its Create Solutions, on a subscription basis. This would become a major contributor to the company’s revenues.

By 2019, Unity Simulation enabled creators to play and perform complex 3D spatial simulation in the cloud. Unity’s platform currently employs a set of diversified use cases, that go beyong gaming.

The company is trying to position itself as a comprehensive AR/VR platform where to build any sort of virtual reality.

Today some of the key customers/users of the Unity’s platform range from game developers to artists, architects, automotive designers, filmmakers, and others.

Some of the key characteristics of Unity’s philosophy toward 2D and 3D content are skewed toward creating dynamic and interactive content, that can adapt in real-time to users‘ behavior and feedback.

This applies to creators as well, which can use Unity as a collaboration tool to interact with each other and improve the content quality as it gets released, thus reducing the development cycle times, to move toward continuous and dymanic content development.

This is at the core of the Unity platform and philosophy to content.

Value Model

Unity Software value model moves around the way content has evolved over the last two decades. Especially 3D content, that has finally become viable for a series of technological development all coming together (increased compute power, cloud-based infrastructures, massive distribution network made of billions of devices across the world).

These elements together served as the basis for the value model Unity developed and filled over the years.

Vision

As John Riccitello, CEO of Unity Software pointed out at the debut of the company’s IPO:

The world is a better place with more creators in it. And, we intend to make that more true tomorrow than it is today, to the point where real-time interactive 3D is the dominant form of content globally. As a company, we will invest for the long term. And, through this long-term investment orientation, we plan to realize the opportunity we see to drive significant growth in the world of real-time, interactive 3D content. We are building Unity to make this vision a reality.

Therefore, Unity’s vision is to bring 3D, interactive content to the masses by enabling creators to generate content in any niche.

Mission

Unity’s mission is to enable more people to be creators

Creators, therefore, represent the major stakeholder for the company. Born as a company that enabled game creators to develop content in that vertical. Unity’s platform expanded beyond that to offer many other use cases. Beyond gaming, creators use the Unity platform for automobile and building design, online and augmented reality product configurators, autonomous driving simulation, and augmented reality workplace safety training. 

Thus, we can break down Unity’s platform use cases in three primary groups:

  • Gaming.
  • AR & VR.
  • Industries Beyond Gaming.

What makes Unity’s platform compelling to creators?

Value propositions

We’ll break down the value proposition by looking at what core problem Unity identified, and what solution is offered to it, and from there who are the key customers/users that make up the DNA of its platform.

Problem: offer a platform for creators to develop, run and monetize their content

The hardest part of content development, especially when it comes to 3D content, is the fact it might require a separate rendering across formats, platforms, devices, and ecosystems. This makes it hard for content creators, developers, and smaller companies to keep up.

And that is why developing dynamic 3D content can be quite expensive and time consuming. Unity, over the years, built a comprehensive platform to tackle all the aspects, from content development, deployment, interaction/improvement and monetization.

From the development side, for developers and creators, it was (and it is) extremely hard to make sure their content is properly rendered across platforms and devices. That is why Unity built a comprehensive platform for that.

As for the monetization part, apps have been transitioning to a free-to-play model, this means that those same apps will need to make money through in-app purchases that also require the handling of strategic partnerships with big players like Google and Apple.

As a larger platform, with more leverage, over the years Unity has built strategic partnerships that give access to a wide variety of ecosystems for creators (perhaps, as of 2020, most of the games on Nintendo Switch have been developed through Unity).

Solution: from static content, driven by long development cycles, to dynamic content, driven by short development cycles and live feedback between creators and from users

The key change in how content is developed was radical, especially in the last decade, where we moved from static, 2D content to more dynamic, immersive content. It’s possible now to interact in real-time with users, shorten the content development cycle, and improve the experience. Those changes have been driven by a few forces and technological trends:

  • Cheaper computing power:  As GPUs have improved exponentially, this also made it possible to deliver 3D dynamic and high-resolution content on smaller devices and develop the same content on computers and machines that most developers could afford.
  • The proliferation of new content platforms, devices, and ecosystems: Back in the days, 3D content could be primarily distributed through PCs and gaming consoles. Today many more physical platforms are available (comprising smartphones and tablets with a huge global reach). That, of course, also increased the demand for that type of content widely.
  • With the rise of cloud-based infrastructures, the new distribution and monetization models could freely deliver across new platforms. This opened up a vast ecosystem (think of Apple and Android) that also changed how this content could be monetized. For instance, in the past, games would be primarily monetized with a razor and blaze model (the console sold at cost, while most margins were made on games). Today, as most games are distributed via app stores, they are free to download (the free-to-play model), and users will be prompted to upgrade or to buy ancillary things within, via in-app purchases. These new distribution models have greatly influenced how companies do business in the first place.
  • Hyperconnectivity and content feedback loops:  The easy access to the web has enabled billions of users to interact in real-time with content. This proves valuable for the user experience, but it creates a whole new way of developing content.
  • Continous content development, release, and iteration: This hyperconnectivity enables developers to gather feedback even more quickly than they used to, thus giving them the chance to perform more product releases and iterate quickly to improve the user experience further. This endless loop is possible thanks to the above elements (cheaper computing power, cloud-based content platform, and new distribution models).

Therefore, the killer value proposition for Unity is its ability to provide faster content creation and efficient deployment across formats, use cases, and distribution platforms.

Unity does that via two core set of solutions:

  • Create Solutions used by content creators (developers, artists, designers, engineers and architects) to create interactive, real-time 2D and 3D content.
  • Operate Solutions enablung cystomers to grow and engage their end-user base, run and monetize their content.

Customer composition

customers-more-than-100k-unity-software
The makeup of Unity Software customers. At the same time, the company acquires any customers, ranging from individuals to enterprise clients. Most of the sales and marketing efforts are skewed toward acquiring and retaining larger enterprise accounts. Perhaps, as of June 2020, Unity had 716 customers with over $100K in revenues per year, which made up 74% of its total revenues. (Financials source: Unity, S-1).

Unity serves a variety of customers, that range from individual creators to large enterprises.

Most sales and marketing efforts instead are focused on acquiring larger enterprise accounts (customers with over $100K in revenues per year), which by June 2020 were 716, making up 74$ of its revenues.

growth-of-over-100k-per-year-customers-unity-software
The growth of enterprise customers over the years (financials source: Unity S-1).
The growth of the portion of revenues coming from larger enterprise accounts, between 2018-2020 (Financials source: Unity S-1).

Technological Model

Technological models don’t just start from an engineering standpoint. In many cases, there is a whole new philosophy behind them. And this is true also for Unity. Over the years technology has enabled a philosophical shift in the way we conceive content.

From a world primarily captured through a 2D lens, finally, compute power. bandwidth and new devices enabled the distribution of real-time 3D content.

Gaming proved as an incredible platform for that evolution. Where 3D virtual, interactive objects could be created. This led to the growth of an industry that only a couple decades back was worth a few billion and that now is moving toward the hundreds of billions mark.

But what makes up interactive, real-time 3D content, from a technological perspective?

  • Interactivity:  not only the quality of 3D content lets users dive into virtual environments that are incredibly immersive, but the fact that those same users can play experience the same in a multiplayer mode, this changes the whole experience of gaming.
  • Real-Time:  content rendering makes it possible for users to instantly interact with the content which like never before appears lifelike.
  • 3D:  finally 3D content makes it possible to experience content from multiple angles, and have a whole new way around it.

Interactive, real-time 3D is also driving innovation in the content creation process. For example, with real-time technology, creators can:

  • Live-edits of the 3D objects part of the virtual world, thus pushing out those changes at the speed of light.
  • This what Unity defined as instantaneous adaptation where creators collaborate to bring faster changes, driven by fast feedback loops between creators and users.
  • New use cases: Unity’s use cases well expanded beyond games, to help architects, designers, and project partners use real-time 3D models with an ultrarapid iteration process.

Core technology

unity-software-products
The set of products part of the Unity platform. They move around two core: Create Solutions and Operate Solutions. The former primarily focused on content development. The latter primarily focused on distribution and monetization.

Unity platform is made of two core sets of solutions:

Create Solutions

where the content created can be deployed to more than 20 platforms (some of which include Windows, Mac, iOS, Android, PlayStation, Xbox, Nintendo Switch, and other leading augmented and virtual reality platforms).

Some of the games developed with the Unity Create Solutions products (Source: Unity S-1).
Other use cases developed beyond gaming, by companies using the Create Solutions products.

Operate Solutions

This is the part of the platform interfacing with customers, building the customer base, and optimize the acquisition of users, the cost of acquisition, and the lifetime value of those accounts.

R&D management

Most of the R&D expenses are about maintaining and evolving the existing platform. Therefore, those comprise the personnel-related costs for the design and development of the same, sustain the third-party software services, and maintain the current infrastructure.

Leapfrog Innovation

What we can call the leapfrog innovation is represented by the AR&VR applications and the fact that Unity is trying to establish itself as a leading platform for generating content for augmented and virtual reality. If AR and VR will prove to be the next hardware platform for the next wave of the web, being positioned as a platform/CMS for 3D content creation might be very powerful.

Distribution Model and Go-to-market strategy

Unity Software distribution model and strategy moves around four elements:

  • Direct sales.
  • Digital channels.
  • Customer and community support.
  • Strategic partnerships.

Direct Sales

The direct sales is used primarily to acquire enterprise-sized customers and increase the adoption of products and services among them.

The direct sales force here is made of:

  • Inside sales (salespeople working within the company remotely from the customer) and field sales (accounts able to build stronger relationships with enterprise customers).
  • Customer success.
  • And field engineering teams.

Unity also has a group of technical professionals helping customers completing and facilitating the content development and deployment process.

For mid-sized and smaller companies the salesforce is primarily made instead of the inside sales team. This acquisition process is justified by the fact its more cost-effective for the company.

For smaller accounts Unity also leverages on certified resellers.

Unity also leverages conferences and live events to support its communities of developers.

Digital Channel

Digital channels are used to bring in independent creators and mid-sized, or small and independent studios through a self-service digital model. The workflow starts by enabling smaller companies to use the platform for free, until they reach $100K in annual revenues or funding.

The company makes money there, by enabling those same companies to monetize their content via the Operate Solutions, which is primarily a self-service platform.

On the Create Solutions side, when creators start to use more of the platform, increase their revenues to over $100K, or get funding for over that amount, they will upgrade to paid plans. While most of the Unity users are free accounts, those can be in the future potentially converted as paid accounts. But besides that, they work as branding, and a way for Unity to spread its platform through digital world-of-mouth.

Customer Support & Community Building

The customer support and community moves around three pillars:

  • Forums: Which his the central hub for the Unity community discussions.
  • Answers: Represented by a self-service repository relating to common questions on product and workflows.
  • Documentation: This is translated into four languages, and it covers how to use every component in Unity.

Strategic Partnerships

The partner ecosystem that Unity built over the years is a key element of its distribution and go-to-market strategy.

The partners that make up this ecosystem are:

  • Apple: iOS, AppleTV, and Mac, Mac App Store, the App Store, and Apple Arcade for customers.
  • Autodesk: This streamlines workflows and eliminates creator friction between Autodesk and Unity products.
  • ARM support and optimization across ARM’s technology ecosystem.
  • Google and DeepMind: Unity and its partnerships on the 1. Android distribution, 2. ARCore for distribution of augmented reality content, 3. AdMob that Unity creators can leverage on via the Unified auction platform, 4. Google Cloud Platform where Unity can run on Google’s infrastructure at cheaper pricing, 5. Stadia Unity developers and provides can publish games to this streaming platform. 6. And DeepMind for AI research.
  • Intel partnership to maximize the usage of Intel GPU for creators and CPU powered platforms.
  • Microsoft, whose main partnership is about Games and apps building (enabling native games and applications for Windows, Xbox One, Xbox Live, future hardware, and distribution channels).
  • Nintendo primarily for the Nintendo Switch Console, where developers can build native games with Unity. As of June 2020, over half of the games on Nintendo Switch have been made with Unity.
  • Samsung device partnership allows Unity to collaborate on gaming performance on Samsung mobile devices.
  • Sony’s partnership enables creators to build native games and VR experiences for Sony PlayStation 4, Sony PlayStation VR.
  • Tencent’s partnership will enable creators to access the Tencent Cloud service for high-performance last-mile delivery of their content within China.

Financial Model

Let’s review the Unity financial model before to dive into it in details:

  • Revenue Model: This is mainly driven by 1. Create Solutions (free until $100K of revenues, and subscription-based model afterward), 2. Operate Solutions (revenue-share on ad-serving products and usage-based revenues on cloud-based products), 3. Strategic Partnerships (mostly fixed fees royalties or revenue-share agreements) and Other (the store owned and run by Unity is called Asset Store on a revenue-share model).
  • Cost Structure: This is built mainly upon customer support and cloud-related expenses.
  • Profitability: Unity is not profitable by June 2020.
  • Cash Generation: The company still burns cash from operating and investing activities, and it leveraged from cash coming from financing activities to build its cash balance.

Revenue Model

revenue-breakdown-unity-software
Create Solutions drive the revenue model of Unity (free until $100K of revenues, and subscription-based model afterward), Operate Solutions (revenue-share on ad-serving products and usage-based revenues on cloud-based products), and Strategic Partnerships and Other (the store owned and run by Unity is called Asset Store and its revenue-share based).
(Financial figures source: Unity, S-1).

The Unity Software revenue model moves around two core set of products (running with two separate revenue models), strategic partnerships and its own marketplace:

Create Solution Revenue Model

Create Solution revenue model is primarily monetized through monthly subscriptions. This product is free until the company reaches over $100K in revenues.

Subscriptions for Create Solutions drive the adoption of Unity Operate Solutions. By June 2020, Create Solutions made about 38% of the company’s total revenues.

It’s important to highlight that also when creators accounts are not monetized through the Create Solutions (until they reach over $100K in revenues), those accounts still drive the adoption of Operate Solutions that instead are based on a revenue-share model and on usage-based.

The three subscription-based plans are Unity Plus, Unity Pro or Unity Enterprise.

Unity Software premium plans running via subscriptions.

Operate Solutions Revenue Model

Operate Solutions run at revenue-share and usage-based models.

By June 2020, those Operate Solutions made around 62% of the company’s revenues.

Most of it from revenue-share, and a minor chunk from usage-based of various cloud-based products offered by Unity. Operate Solutions can be used whether or not the content is built using Unity’s Create Solutions. Unity runs a platform for content monetization. This is a real-time Unified Auction platform.

Unity retains a share of the revenue that is generated through these auctions.

A smaller chunk of revenues in this segment is generated through the use of deltaDNA, Multiplay, and Vivox products, which are cloud-based products. For instance, the majority of revenue from deltaDNA is generated based on the number of active users in the application each month.

Strategic Partnerships Revenue Model

Unity generates Strategic Partnerships revenue from agreements with hardware, operating system, device, game console, and other technology providers. Those partnerships enable Unity creators to deploy their content on all devices and platforms, preventing them from having to readapt or re-code that content to make it compliant to those platforms.

The Unity revenue model here is mostly made of fixed-fee service arrangements, while some other partnerships are based on a revenue-share model (Unity receives royalties based on the sales of games on partner platforms incorporating its software).

Asset Store Revenue Model

A smaller chunk of revenues are also generated by the Unity marketplace, the Asset Store.

Unity Asset store, the marketplace run by Unity (Source: Unity Website).

Cost Structure

Cost of revenue consists primarily of hosting expenses, personnel costs related to product support and professional services organizations, third party license fees, and credit card fees.

Profitability

revenue-model-unity-software
Unity income statement, with over $541 million in revenues by 2019, and loss of operations of over $150 million by 2019. And with over $351 million revenues by the first six months of 2020, and over $52 millions in loss from operations. (Source of financial data: Unity S-1).

The company run at net loss as it ramped up its operations.

Cash Generation

Unity balance sheet. By June 2020 the company had over $453 million in cash, primarily driven by financing activities, (Source: Unity S-1).
free-cash-flow-unity-software
While Unity generated cash outflows from the operating and investing activities (primarily due to business acquisitions). It generated cash inflows from financing activities (primarily due to the issuance of stocks).
(Source: Unity S-1)

Putting it all together

  • Unity Software is a platform for 3D content development, born in gaming; it evolved beyond that. It now offers several use cases and a platform for developing augmented and virtual reality content.
  • The company makes money primarily through its Create and Operate Solutions. Create Solutions run on a subscription-based service. And Operate Solutions run on a revenue-share model. Other revenues come from Strategic Partnerships and Unity’s marketplace.
  • The company’s technological model is based on enabling creators to deliver 3D content quickly while having fast releases and content iteration on the platform.
  • The company’s acquisition of smaller accounts runs through its digital self-serving channels, where the salesforce is primarily used to acquire larger enterprise accounts, making over $100K per year.
  • As of June 2020, the company is not profitable, and it doesn’t generate cash from operations. Unity invests its resources to position itself as a leading 3D platform for content development and, in the future, as a leading “CMS” for AR/VR content development.

Read Also: Sumo Logic Business Model, Snowflake Business Model, Epic Games Business Model, Free-To-Play Business Model, Gaming Business Models.

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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which target is to reach over two million business students, executives, and aspiring entrepreneurs in 2020 alone | He is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate | Gennaro earned an International MBA with emphasis on Corporate Finance and Business Strategy | Visit The FourWeekMBA BizSchool | Or Get in touch with Gennaro here