Unity Software Inc (NYSE:U) shares are down another 2.6% Thursday after falling more than 5% the day before as backlash to its new monetization model continued.
On Wednesday, the maker of a widely used video game engine announced what it called the Unity Runtime Fee (URF) that would charge developers each time a game is downloaded, once it hits certain revenue and download thresholds. The URF is expected to go into effect in 2024.
Developers who make games using Unity’s engine fumed at the decision, arguing that it limits flexibility, raises costs and forces developers to upgrade Unity’s premium services to access higher download thresholds.
“Unity raised prices and introduced a new monetization model that better captures the value its game engine provides game developers,” analysts at Jeffries wrote. “ It also should help fortify its ads business as there is ‘synergy’ pricing available. Lastly, we see little incremental cost associated with the new model, thus it should make hitting 2024 EBITDA targets easier to achieve.”
Jeffries issued a price target of $29, about 20% below its $25.91 price as of Thursday afternoon.
Because it charges per download, developers will be charged twice if a user downloads a game once on their PC and again on their Steam Deck. In fact, Unity already stepped in to assuage fears of “install-bombing” in which a user theoretically repeatedly reinstalled a game as a way of punishing a developer.
The move indicates Unity is struggling to grow its market share, the analysts noted.
“We see it as further confirmation of Unity’s struggle to gain share outside of mobile,” analysts wrote. “Moreover, with slower growing segments elsewhere in Create, Unity is being more aggressive in its pricing on mobile gaming.
In terms of revenue, Jeffries estimates the revenue impact could be $50 million to $200 million in 2024, with roughly $100M as the base case.
“It’s a PR headache, and Unity has to repair its customer relationships,” the analysts concluded. “The economic impact looks favorable, but one does have to ask why the hasty rollout, and why does the bulk of its growth continue to come from video games when the narrative is supposed to place the value elsewhere.”
“Despite the short term gain, the negative reaction, the haste in roll out, lack of clarity, and what appear to be defensive measures, further validates our negative fundamental view.”
Contact Andrew Kessel at andrew.kessel@proactiveinvestors.com
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