Unity Software, a provider of real-time 3D content creation software, will hand in its first financial report since it went public next Wednesday, US Eastern time. As the game industry is optimistic about performance growth due to health events as a whole, superimposed by the recent rally in US technology stocks, Unity broke through its highest price on Nov. 5 US Eastern time, closing at US $110.96, doubling its share price less than two months after listing.

Basic information of the company and its main products

Regular gamers must be familiar with Unity, whose game engines support more than half of the world's games (mobile, PC and console combined).

So what is a game engine? Wikipedia is defined as the core components of editable computer game systems or interactive real-time graphics applications that have been written. These systems provide game designers with a variety of tools needed to write games, and the aim is to enable game designers to make game programs easily and quickly, rather than starting from scratch.

To put it simply, the game engine is to provide a series of toolkits for game developers to quickly build games, and the more complex the game is, the higher the type and fineness of the tools are.

Unity launched its first game engine in 2004 and has been working in the field for a decade to achieve full compatibility with mainstream platforms. It was not until 2014 that Unity Ads was commercialized after the acquisition of game analysis company Applifier, and the game engine was standardized as a subscription product in 2016. The subsequent development can be roughly divided into two directions:

One is to continuously develop game engines to meet more complex game development requirements, and extend GM's 2D/3D creation capabilities to serve other industries, such as construction, automobile, film and television content creation, etc.

The second is to make an in-depth layout around the entire game industry chain to provide more basic services, such as analysis and cloud deployment services.

According to these two directions, Unity creates a diversified product matrix for different application scenarios, and divides revenue into creative solutions (Create Solution), operational solutions (Operate Solution), strategic partnerships and others (Strategic Partnerships and Other) and strategic partnerships and others (Strategic Partnerships and Other). The following is a summary of the main products:

Financial performance

Although it helped more than half of the game's development, Unity's revenue performance was mediocre, with a net loss of $163 million compared to the scale and speed of the game's printing presses. According to Nielsen, its competitor, Epic Game, which owns the Unreal engine, earned $1.8 billion in 2019 with a single game called Fortnite.

In terms of revenue contribution, creative solutions (Create Solution) account for about 30%, operational solutions (Operate Solution) account for 60%, and the rest are strategic cooperation and other (Strategic Partnerships and Other) revenue. In the first half of 2020, creative solutions increased by 31% compared with the same period last year, operational solutions increased by 58%, and strategic cooperation and others decreased by-14%.Under the influence of this year's health events, this growth rate is only average in terms of both the gaming industry and the SaaS industry, and is not attractive.

On the other hand, due to the heavy research and development of the game engine and the high early marketing expenses of the SaaS industry, the Unity expense rate is relatively high, with a net loss of $54.1 million and a revenue of $351 million in the first half of 2020, which is smaller than the $67.1 million in the same period last year.

In terms of user acquisition, the deep ploughing game engine has established a good brand reputation among game developers for 15 years, so the focus is on game key customers and other industry customers. Serving large customers needs stronger professionalism, and generally large customers have stronger payment ability and stickiness. From the index, Unity's key customer expansion has been effective. In terms of customer retention, Q3 has improved steadily since 18 years, and Q2 has performed well this year.

After reading the core data, let's take apart the business model and development direction of Create Solution and Operate Solution.

Create Solution: expand from games to multi-industries

Game engines can share limited profits in the game industry chain. Large game companies have the ability to develop their own game engines, while small factories and independent game studios have poor ability to pay, and tend to use free and open source engines.Good engines can sometimes become a big selling point of games. Yao Xian, a famous game producer in 2015, said in an interview that if "Chinese Paladin 5" sold more than 1.5 million sets, it would use Unreal engine 3 in "Chinese Paladin 6".

In recent years, in order to speed up the game development process, quickly compatible with other platforms and focus on the design of game core elements, large companies will still use commercial game engines and other R & D and deployment solutions. According to the prospectus, Electronic Arts, Nintendo and Zygna all have products, as well as Tencent's game "Arena of Valor" and its overseas version all use Unity engine.

As the out-of-game industry also generates more and more demand for real-time 3D content creation, Unity begins to expand into other industry opportunities.As of June 30, 2020, it had more than 750 customers outside the gaming industry, and 60 of the 16 customers who contributed more than $100000 in the past 12 months were from outside the gaming industry. However, the expansion of the non-game industry still needs to invest a lot of resources in product and technology research and development to meet the demand, as well as professional marketing teams to acquire users in different industries. All of these will put a burden on profits in the short term, and profit margins are expected to improve in the long run as more mature out-of-industry solutions iterate and revenue increases.

Operate Solution: the advertising business is a cash cow, and the game ecology continues to build.

Although there is a rich product matrix, operational solutions (Operate Solution) revenue is mainly contributed by the advertising business, a small portion is contributed by Multiplay, and the rest of the solutions contribute less to revenue due to their late launch and free phase.

From the perspective of existing products, Unity's operation solution basically revolves around the whole industry chain of game R & D-distribution-operation, and is further divided into more fine-grained professional links and targeted services.Unlike Epic Game, which its competitors develop Unreal engines, which mainly cuts directly into the main part of the game industry chain (cashing out games and setting up game stores to make money), Unity is more like "infrastructure" for game developers to help them improve efficiency, save costs or increase revenue.

Although there are two paths, the core logic is based on the large enough and continuous growth of the overall market of the game.According to Newzoo, global game users' spending on games (including console games) (excluding hardware purchases and advertising revenue) will reach $159.3 billion in 2020, an increase of 9.3% year-on-year.

• Advertising business

The Unity game engine serves many game developers and contributes to the development of more than half of the world's games, thus creating a natural traffic pool for advertising.In recent years, the global popularity of light games has promoted the development of the effect advertising industry. Light games have a wide audience, fragmented time entertainment, and the relatively low willingness of users to pay makes advertising the most important realization mode. the growing demand, the rapid change of market preference and the fierce homogenization competition make the distribution of light games very dependent on buying volume, which promotes the increasing number of results-paid advertising plates.

In the "Advertising platform Comprehensive strength list" released by Appsflyer, a leading mobile advertising monitoring and attribution platform, with the retention rate as the core evaluation index, Unity Ads ranked third in the global game category IOS& Android dual platform, second only to advertising giants Google and Facebook Inc, and basically ranked in the top five in indicators such as IAP/IAA.

In the field of effect advertising, the advertising platform usually charges the advertiser with the advertising effect (such as click, installation, etc.), and pays the flow side according to the display volume, so the transformation effect determines the gross profit space. The transformation effect is actually the effectiveness of matching, and the key lies in the volume of traffic available for selection and the accuracy of the matching algorithm.

Under the influence of health events, due to longer time at home and less offline entertainment, the game industry ushered in positive results, thus promoting the growth of advertising business. But Apple Inc's policy on IDFA when he announced IOS14 in June (developers need to obtain user permission in advance if they need to track advertising through IDFA) is expected to have a big impact on the mobile marketing industry. This is mainly because the previous advertising platform is mainly based on IDFA to locate and track the audience at the user level, while the mobile attribution platform is based on IDFA to attribute the advertising effect of users' download behavior.

Although Apple Inc subsequently launched SKAd Network as an alternative to attribution, the limitation of access to IDFA will still affect the accuracy of advertising and thus the willingness of advertisers.Subsequently, this policy change was postponed until next year, and it is expected that the implementation of the policy will have a greater impact on the company's advertising business. The guidance given by the company when it goes public is that "this part of the impact cannot be assessed for the time being." a large portion of the company's revenue is contributed by the advertising business, which should be closely watched next.

• Analytics and cloud collaboration business

Around the game ecology, in addition to the advertising business, Unity has expanded its product line through endogenous or mergers and acquisitions in recent years, such as the acquisition of Multiplay in 2017 to launch cloud hosting services to help developers quickly solve multiplayer online game problems; for example, the launch of Simulation in 2019 to help developers simulate the game process in the cloud, reduce their testing costs and optimize the testing process.

These products have helped Unity expand its business boundaries, but its current commercial performance is not good in terms of financial contribution.This is because originally in the game industry chain, game research and development is farthest from the user side (generally speaking, it is farthest from the money), generally can share the income is about 2-30%, the willingness to pay is naturally relatively low. On the other hand, the head effect of competition in game development is obvious, the head game developers have a high market concentration and generally have the ability to develop and deploy their own games and self-built data analysis systems.

With the fierce competition in the game market, developers' demand for other standardized cloud solutions in the game development and operation phase is also on the rise in order to be fast and cost-effective. For example, its in-game communication product Vivox already has a relatively mature benchmarking product Discord, and the company's valuation in 2018 has reached 2 billion US dollars. In May 2019, the Discord team announced that its terminal MAU reached 56 million.

Analytics and cloud collaboration solutions are still in a relatively early stage. Most products are in the free testing stage to continuously accumulate customer pool, which is expected to be difficult to reflect in the report in the short term. The follow-up depends on the cross-selling of customers using game engines and the conversion of users' Free-to-Pay.Since its inception, Unity has made more than 10 acquisitions, mainly as service and technology providers in game R & D and operation, further strengthening the building of an one-stop service platform for game developers. In addition to maintaining the company's operations, Unity is expected to make further investments in mergers and acquisitions after raising a large amount of money in IPO to continue to build a game "infrastructure" platform.

As for strategic cooperation, due to the lack of direct access to channels or distribution links, Unity maintains a good relationship with many platforms and channels and supports the rapid integration of more than 20 platforms. Although revenue directly from partners decreased by 14% in the first half of 2020 compared with the same period last year, these partnerships provide channels for Unity to gain customers and feed back the creation and operation of solutions.

At the GDC Game Conference in 2019, Unity announced that it would cooperate with Tencent to provide support for Tencent Cloud. In June this year, Unity partnered with Tencent Cloud to launch Unity Game Cloud to create an one-stop online game development platform from three levels: online game services, multiplayer networking services and developer services.There is no doubt that China's game market is huge enough that Unity's revenue in Greater China grew 75% in the first half of this year compared with the same period last year, and partnering with China's largest game manufacturers and service providers will further help it expand into the Chinese market.

Summary

At present, Unity has a clear path around the two development directions of real-time content creation and game infrastructure platform construction, and has formed a corresponding product matrix. However, because it is far away from the user side of the game industry chain and provides relatively basic services upstream, the financial performance is general in the short term, but the gradual increase in the contribution rate of major customers and the strengthening of customer stickiness are conducive to the healthy and sustainable development of the business. Pay attention to the impact of Apple Inc's IDFA policy change on advertising business in the short term, and be optimistic about the construction of game infrastructure ecology in the long run.