Not all business models are created equal and Unity software (NYSE: U) has a pretty interesting one. Simply put, the business allows creators to start their journey and then only profits if those creators are successful. It costs Unity little to do so, but allows it to take advantage of the uplift.
In this video by Motley Fool Behind-the-Scenes Pass, recorded on October 11, Fool contributors Jon Quast and Jose Najarro as well as analyst Sanmeet Deo explain in more detail how this business model works in Unity’s favor.
Jon Quest: It’s a company that I don’t know much about and I was eagerly waiting for someone like you to break it down like this. I really appreciate this.
One thing I wanted to point out, I did a bit of homework before I came on the show today, and I just wanted to point out, you pointed out the different revenue segments for Unity. And the operating segment, so that’s after a game or whatever has been released, they provide that service to those developers on an ongoing basis from there, that’s actually the biggest part. of activity in the second quarter of 2021. I just did the math, 67% of almost all of their revenue came from the operating segment.
What I also found very interesting is that operating solutions, according to the S-1, generate revenue primarily through usage-based models. While the creative segment of the business is a subscription, the operations segment is a usage-based model, which I find very interesting when you think about it from a potential perspective. We spoke on the show before about how mobile gaming is the only part of the video game industry that is actually growing. So, by being a usage-based model, Unity empowers these game developers, and once one of them becomes successful, that’s a pure benefit to Unity. They are not limited by the defined subscription that they integrated them with, they can integrate many game developers and potentially benefit from one of those that ends up being a successful mobile game.
I just thought it was an interesting aspect. I don’t know if this is the right take or not. It was my point of view.
José Najarro: Definitely, Jon, and I think that’s something the CEO mentioned. He creates this one, which the designer, the creator of the game and Unity have the same goal. If their game performs well, Unity will benefit, as will the game developer. That’s what drives Unity to, “Hey, make sure we have the best products for you, make sure we are able to provide the best services to your customers because if your game is working well then we are going to do well, you are going to come back, you are going to make another hit game, this hit game is going to do well and we are going to see that kind of growth. ” That’s a good point you brought up there, Jon.
Deo Sanmeet: Unity is definitely the one I watched and I really like it too. This is the one I own personally, the one I followed.
One of the things that really excites me about this company is the optionality in terms of, right now it’s primarily a game engine and it makes most of its money and business from mobile games and solutions. creative and also what Jon was saying was, the use-based model, which gives them so many benefits as they grow older.
But they burst into these other verticals of architecture, the automobile, the cinema. I like to compare Unity because it’s almost the software, the operating system for AR, VR, and the Metaverse. That’s all you want to create based on those things. Right now, it’s almost a duopoly between Unity and Unreal. For people who may not know, Unreal Engine is made by Epic Games, who are the creators of Fortnite.
One thing I came across in my research in terms of competition … this advantage of Unity is that it is low code and easy to learn and is used a lot in smaller, mobile games. , while Unreal is a bit harder to learn, it’s a bit more complicated. It’s also been used for a lot of what they call AAA game titles, which are the big titles we think of.
What’s interesting about Unity is that they offer their software subscription plan for free to anyone with less than $ 100,000 in income, so students and young people or young creators, or developers are looking for. to learn software like Udemy where you can learn how to use it and then you can just get the software yourself and start creating. Unity really wants to capture this developer from the moment they get interested and start, until the moment they could potentially become their own developer or team of developers or start their own development company.
It’s very focused on the content economy and empowering content, or should I say more in that sense, the developer community, allowing them to learn their software, use their software, grow with their software, and they both develop together. Very interesting there in terms of structure compared to Unreal and how their strategy differs a bit about that.
It’s a huge market. I think Dave said it’s a $ 29 billion TAM [total addressable market] and growing. As we said, mobile gaming is the fastest growing gaming segment.
One thing I also love about this company is that we’ve talked about it a lot, again I keep saying the convergence of movies and games and everything in between. Everything is going to come together, what are you going to use to make it come together? Something like Unity is like the operating system for all of these things.
I don’t know if you also know that Zuckerberg, from Facebook Fame, [laughs] wanted to buy Unity, I think it was in 2015. Because he saw it as a key platform or core technology for the metaverse. He actually wrote a recently released memo explaining why he wanted to buy Unity and where he was going. If I can find this, I will definitely pass it on. But that says a lot when Mark Zuckerberg was interested in buying from you and now given that Facebook is monitoring its own initiative and metaverse goal. It’s a really exciting business. Thank you for presenting this. Other questions about Unity or?
Quarter: I just wanted to point out something you just said Sanmeet, and that’s how they get new developers onboard. There is no charge below a certain amount of income. It is a company with 79% gross margin. I talked about it on The grade earlier today, the optionality is better when the asymmetries are large. What I mean by that is when there is little downside to doing something, but great upside potential, it’s an asymmetry of optionality that is in favor of investors. With 79% gross margin, it’s a low cost thing to offer this to someone. But since this is a usage-based model, the upward asymmetry is very favorable to investors. I really like that about the business model.
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