Unity Software: freemium no longer helium for fallen SaaS stars

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It is never a good sign when a tech company has to explain itself on its public blog.

Last week via an internet post, Unity Software told its video game developer customers about a new regular fee. Its price could rise to 20 cents every time a successful game was downloaded by a user, above a threshold.

This news prompted a fierce online backlash from video game developers. Unity had to apologise “for the confusion and angst” prompted by the new pricing policy. Promising to listen to the feedback, however noisy, it will return with an update and presumably some pricing revisions. Unity shares have fallen by more than a tenth in the last week.

Unity’s IPO was a high profile offering in the heady days of late 2020. But in 2023, its shareholders seek profits alongside any breakneck growth. Tell that to its customer base, hooked on a cheap and snazzy product. It is a conundrum its entire industry now faces.

Unity is a typical software as a subscription (SaaS) provider. It sells “seat” subscriptions but also has free or “freemium” products. For Unity’s basic level customers, the new download fee will only apply to games which have made $200,000 and have been installed 200,000 times.

Among other reasons for the new fees, analysts have noted that AI could sharply reduce the number of software developers. This would cut demand for subscription licences. 

Designing a download fee is tricky. Apple and Google have “take rates” up to a hefty 30 per cent, for example. But game developers worry that some downloads will never attract ad revenue or in-game purchases, making even a modest levy unbearable. 

Unity’s share price has dropped 80 per cent off its high. The group still has an enterprise value of around $15bn, valued at 7 times revenue. It now has positive free cash flow.

That download fee could have added $100mn of high margin revenue next year, think analysts at Macquarie. The cost of reconciling with its customers, however, is a bigger unknown.