Last week, on Sept. 12, Unity (NYSE:U) announced significant changes to its royalty fees. And its customer base, mostly small- and medium-sized independent game developers, have been in full revolt. Since then, U stock has slipped by about 15% and will likely continue to suffer as game developers ditch Unity’s engine.
New Runtime Fees Have Indie Developers Running
For the past 15 years, Unity has been the go-to game engine for independent developers, colloquially known as “indie” developers. Most of these companies and single-developer projects will never release a hit game, much less turn a significant profit. Almost all are passion projects. But these indie game-makers comprise the company’s bread-and-butter customer base.
Unity became synonymous with “democratizing” game development due to its accessibility and lack of royalty fees. The firm’s primary revenue streams were its subscription services and digital asset store. This all changed last week when Unity announced a surprise change to its fee structure by introducing a “runtime fee.”
This new fee structure is based on the number of installs after a revenue threshold of $200,000 is reached. It would include downloads from almost every type of installation, from demos to subscription services like Microsoft’s (NASDAQ:MSFT) Game Pass.
The backlash from developers was immediate. While there was plenty of confusion about how exactly Unity would track and count installs and how retroactive the fees would be, it quickly became clear that another sentiment dominated the community’s response: betrayal.
Damage Control and Evaporated Trust
As one might expect, Unity quickly apologized for “the confusion” its initial announcement caused. The company has since tried to do damage control and has reportedly worked on modifying the terms of its new fee structure.
Yet the damage had already been done. An endless stream of developers have taken to X, the platform formerly known as Twitter, to express their displeasure with the fee changes. Some developers who spoke to 404 Media called it “a disaster” due to the sudden and unplanned financial burden.
Re-Logic, the creator of the extremely successful Terraria game, put its money where its mouth was. In its post protesting the changes, the company, despite not even using Unity, offered financial support to two free game engine alternatives: Godot and FNA.
Godot, in particular, has been touted as a suitable Unity replacement, and a growing number of developers have openly advocated for migrating to that free and open-source engine. Therefore, there are alternative engines out there, and Unity’s recent actions are pushing developers to them.
In about a week, the game development community’s 15 years of trust in Unity has seemingly evaporated.
U Stock Will Continue to Suffer as Devs Flee
On paper, Unity was on top of the world, at least with developers. Per their own data, the company came out of the pandemic’s production slump roaring, with “93% more games made on the Unity platform in 2021 than in 2020.” Last year, over 750,000 games were made by 230,00 developers using Unity.
U stock, however, has been disappointing investors since about May of last year. Unity went public almost exactly three years ago, in September 2020. In 2021, U stock consistently hit new highs, reaching nearly $200 in November. But 2022 was a different story. Following the overall market’s slide downward and some very poor revenue guidance for the first half of 2022, shares have averaged around $20-$40.
In what seems like a presumptuous move, Bank of America Securities analysts upgraded U stock from “neutral” to “buy” on Sept. 15. The new price target implied 27% upside. The analysts praised the company’s monetization strategy.
That’s a skin-deep and shortsighted reading of Unity’s situation. This new fee structure might help the company in the short term; switching game engines is not quite as simple as flipping a switch, and some developers will likely just eat the new fees. However, in the long run, the game development community will not forget this “betrayal” and will encourage up-and-coming game developers to use a different engine.
Fewer developers, particularly indie developers, means fewer customers. Thus, as Unity’s customers migrate away, it looks like it’s game over for U stock.
On the date of publication, Andrew Bush held a LONG position in MSFT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.