Publishers cut off Unity for price hikes that spurred upgrade

Shares of Unity Software (U) are in focus on Friday morning in the wake of the company’s recent decision to introduce runtime fees based on game installations and game publishers’ subsequent plan to turn off ads. While BofA upgraded the stock following the pricing and plan changes, Oppenheimer sees “substantial reputational damage” from the moves.

NEW FEES OVERVIEW: On Tuesday, Unity announced new “Runtime Fee” tied to a player’s installations of a game, an action that previously didn’t cost developers anything. Under Unity’s new plan, developers who use Unity’s free tier of development services would owe Unity 20c per installation once their game hit thresholds of 200,000 downloads and earn $200,000 in revenue. Developers paying over $2,000 a year for a Unity Pro plan would have to hit higher thresholds and would be charged with lower fees. The new fee system will begin at the start of 2024.

At the time, the company said: “We chose this because each time a game is downloaded, the Unity Runtime is also installed. Also we believe that an initial install-based fee allows creators to keep the ongoing financial gains from player engagement, unlike a revenue share.”

On Thursday, Unity canceled a planned town hall and shuttered two offices after the company received what it said was a credible death threat in the wake of the company’s recent decision to introduce runtime fees based on game installs, Bloomberg’s Jason Schreier reported, citing people familiar with the matter, A spokesperson for Unity confirmed to Bloomberg that a “potential threat” was registered earlier this week and that “immediate and proactive measures to ensure the safety of our employees” were enacted. This included closing offices on September 14 and September 15 as well as total cooperation with law enforcement. A statement supplied from the San Francisco Police Department to Polygon reporter Nicole Carpenter said that the threat originated within the company itself. Once police officers arrived on the scene, the “reporting party informed (them) that an employee made a threat towards his employer using social media.”

GAME STUDIOS TO TURN OFF ADS: “Among Us” developer Innersloth said in a tweet dated September 12 that the fee model proposed by Unity “would harm not only us, but fellow game studios of all budgets and sizes.”

Meanwhile on Friday, a collective of mobile game studios issued an open letter to protest the pricing changes. While the studios acknowledge that Unity has been an “instrumental force” in the industry, Tuesday’s announcement “hits us hard,” the studios say. As a course of immediate action, the collective of game development companies “is forced to turn off all IronSource and Unity Ads monetization across our projects until these changes are reconsidered.” The group adds that the “rules have changed, and the stakes are simply too high. The Runtime Fee is an unacceptable shift in our partnership with Unity that needs to be immediately canceled.”

The letter was signed by Azur Games, Voodoo, Homa, Century Games, SayGames, CrazyLabs, Original Games, Ducky, Burny Games, Inspired Square, Geisha Tokyo, tatsumaki games, New Story, Playgendary, Supercent, KAYAC, and TapNation.

IMPROVED MONETIZATION VS. ‘REPUTATIONAL DAMAGE’: On Friday morning, BofA upgraded Unity to Buy from Neutral with a price target of $56, up from $46, after Unity announced pricing and plan changes for Unity Runtime and Unity Plus customers. The firm’s analysis points to improved monetization of the company’s “industry leading” mobile game creation engine and it believes that known risks and execution issues are “more than priced into the stock,” the analyst told investors in a research note. BofA also sees potential upside to FY24 and FY25 estimates for Unity.

At the same time, Oppenheimer kept a Perform rating on Unity after the collective of 17 game publishers and developers said they would turn off all ironSource and Unity Ads monetization across their projects until these changes are reconsidered. If Unity does not take immediate actions to alleviate the concern of its mobile customer base, AppLovin (APP) could gain incremental mediation customers as some publishers further distance themselves from Unity, argues Oppenheimer. It says Unity’s pricing change has already “caused substantial reputational damage to the company.” With an immediate boycott by some mobile publishers, it seems likely the changes will lead to negative revenue in the near term, Opco contended.

PRICE ACTION: Shares of Unity are down 0.4% to $35.58 in Friday morning trading.