Unity Technologies is a gaming company that IPO’d today. But the value they provide isn’t just about games. It’s about a new world.
Unity’s IPO is exciting because they are a dominant player in the gaming industry. Not just for its games but for its engine for creating games and 3D simulations, called Unity engine.
Before I go further, it will be helpful to zoom out and look at the gaming industry as a whole.
Unity Is in a Huge Industry—Gaming
First, gaming is big business. Some estimate it to be $200 billion annually. And that’s not the best part. It’s this: it’s growing. There are over two billion gamers worldwide. And this industry is already bigger than the movie and music industry combined. Even Reed Hastings, CEO of Netflix, doesn’t fear Disney as its competition; he fears Fortnite, a wildly popular game, developed by Epic Games, that your kids are probably playing right now in your basement. You see, even Netflix, the consummate attention king, knows that gaming is big and is getting bigger. Yet, many believe that this industry is only in its infancy.
Other big tech companies have there eyes on gaming, too; and they’re getting into the space. Amazon owns Twitch, the leading live-streaming platform for gamers; Microsoft has Xbox; Google has Stadia, it’s cloud gaming platform, and the list goes on. And they’re not stopping there. They see the growth potential, too.
It’s easy to see why big tech is jumping into games. It’s all about attention. People’s eyeballs are increasingly being pulled into gaming. And it makes sense. These games aren’t just games; they are worlds—universes, in fact. They are immersive, fluid, and magical. They are realms where people can remake themselves and transform. You see, the games don’t just grab people’s eyeballs, their lives are subsumed in them.
The pandemic has only made these universes even more relevant and valuable. People aren’t going out as much, but they still want to feel like they’re going out, like freely meandering, jaunting about, even though they haven’t moved from their couches. But these digital realities create the feeling of freedom.
And all of this is leading to a place that is beyond games, namely—life.
Gaming Isn’t Just a Game—The Metaverse
Some tech thought-leaders believe gaming is taking us toward the future of how technology will merge with all of life. We won’t just have supercomputers in our pockets (i.e. smartphones) that we have to pull out to engage a digital world; no, we will swim in technology, be immersed in it, everywhere. That’s when the confluence of augmented reality and virtual reality and other technologies will integrate seamlessly with the physical world. Think mashing up Minority Report and The Matrix, that’s the world we will get, except better. (I mean, hopefully, we won’t be slaves to the computers.) And this new world has a name. It’s called the Metaverse.
Sure, it’s years, likely decades, away. And, really, no one can be certain it will become a reality. But the inklings, whisperings of it are here. And they are in the games we play, like Fortnite, League of Legends, The Witcher, etc. We see it when people worldwide are connecting simultaneously in a created digital world where people are cooperating, communing, playing, purchasing. They are all simulations of life except gamified to the nth degree. And yet, they’re not just simulations; people are living their lives in these computer-generated places. In that, we are peering into the future with each moment played. And, if you squint, you can see the Metaverse.
Unity’s IPO Is Game Changing
And that leads us back to Unity’s IPO.
The gaming companies themselves have enormous potential. But what about the companies that help gaming companies make their games? How much more potential would they have?
And Unity is one of those companies.
It isn’t just a gaming company; it’s a company for gaming companies. One of its greatest assets is a 2D and 3D engine, called Unity, that game creators use to create their own games. Unity, the company, says that over 53% of the 1000 most popular mobile games use the Unity engine. And that is a testament to the value this company is already creating.
When a creator uses an engine, it means, instead of starting from scratch, they use software to give them a head start on developing their new game. And Unity engine a game-building software. When creators use the Unity engine, they can collaborate with their team members and create immersive experiences in real-time. They can also operate their games on Unity by growing their audience and monetizing them. And that’s very sticky. Unity’s customers would have a hard time leaving them since their platform is vital to their game and revenue.
Large companies to a single person who dream of making a hit game can do it much faster and more cheaply on Unity’s engine. That’s the point. That’s a game changer.
The Other, Bigger Simulation Engine—Unreal Engine
Now, it isn’t the only kid in town. There’s the bigger boy, Epic Games, which developed the Unreal Engine that appears to be more powerful than the Unity engine. But that doesn’t mean that Unity won’t be able to grow. In this business, there’s more than enough space for two companies to play in the playground nicely.
As an aside, it’s interesting that Epic, a privately held company, could make more money on its engine, but it chooses not to. They are lowering their fees. And it seems like they are doing it in order to empower creators. And not just that, they seem to be trying to pull forward the Metaverse. But I digress.
Unity Engine Is About More Than Just Games
The Unity engine isn’t only powering those in gaming; it’s helping companies in other sectors and industries, too. Hollywood, the automotive industry, architects, and anyone who wants to create 2D or 3D visualizations can use Unity’s engine to create for their specific industry. Manufacturers use the engine to create 3D drawings and simulate how the designs would work in real life. Architects can create virtual buildings and show them to the developers before a nail is hammered. You get the point, the engine is powerful, and it can power other businesses to generate more value. The versatility is wide, and their technology’s utility will only grow, especially now in our new, physically isolated, stay-at-home world.
Unity Isn’t Profitable, Yet
Unity, however, isn’t profitable. They’re running at a loss. Although it’s trending towards profitability, they are not yet there. Losses, however, are not unusual for high growth technology companies. Amazon and Facebook were losing money when they IPO’d; Snapchat still is; Snowflake, which went public this week and doubled its value on the first day it traded, and was invested in by Warren Buffett’s Berkshire Hathaway, is also unprofitable. So it’s not a reason avoid investing in Unity. But it is a reason to step with caution, do your homework, and know that there’s risk here, just as there is in every investment.
But I do think it’s likely that Unity will become profitable. Amazon ran at a loss for years, and now it’s the opposite, clearly. Unity may or may not succeed like Amazon, but it does have a great business model. It’s an intellectual property based model, built on software. These types of businesses can be otherworldly valuable. That’s because they are scalable. That means they can have as many users as they can find without spending much more to accommodate them. In short, they can generate more revenue without incurring much increased cost. That’s the beauty of software.
The future of gaming and the business of empowering creators in this industry presents an interesting proposal for any investor. Sure, there is no guarantee that any company will survive, especially in such a competitive sector as technology. But I do think that Unity’s engine is a moat and sets them apart.