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The intent of this article is to explore a hypothetical merger between Unity and Meta based on the company’s strengths and financials. I have intentionally skipped quantitative analysis and focused on the business strengths and how two companies can offer synergies to each other. Before we jump too ahead, let me start by writing about Unity, its business, and operations. Then I will explore the challenges of Facebook in the metaverse space, and finally how Unity can provide synergies to Meta’s metaverse vision via a solid gaming engine that is a leader in real-time 3D.  Let’s dive in.

Unity Software  

What do BMW, Pokémon GO creator Niantic, movie director Jon Favreau, construction giant Skanska and more than 50% of the games in the world have in common? They all use the gaming platform engine built in 2004 in Copenhagen by Nicholas Francis, Joachim Ante, and David Helgason – UNITY. Some numbers before we start 

1. 3.9 billion monthly active end users who consumed content created or operated with Unity solutions 
2. The applications developed by the creators of Unity were downloaded, on average, five billion times per month in 2021 
3. Unity has a large, active global community of RT3D creators, with approximately 1.6 million monthly active creators 

Unity before Unity was known as Over the Edge Entertainment (OTEE) and was modeled after the British game development company Criterion. OTEE had the clarity to build the technology to be used by game developers. They knew game developers would not be easily swayed if some of the big gaming brands do not utilize their platform first. This platform was called UNITY. After a couple of years of coding, and many sleepless nights, the OTEE team decided to create a commercial game on their platform. This would allow them to test the strengths of their engine and fund future R&D.  

OTEE spent five months creating a game called Gooball using the new engine, which was still in beta. Gooball was published in March 2005 by Ambrosia Software. Gooball was the product-market fit and proof of concept. The Unity team used this opportunity to tear apart their engine to find bugs, remove annoyances, and fix the interface before its official release. Using the profits from Gooball, OTEE hired more developers to refine Unity before its initial 1.0 release in June 2005. This is where it becomes different from EPIC’s unreal engine which was specifically developed by EPIC for their gaming needs. It was an integrated effort, where the engine was built for the game, and the game was built for the engine. 

Unity started with IOS/Mac for version 1.1 and later extended the build to Windows and browser games. They provided a better alternative to adobe flash browser games. Browser games were emerging, and it was a good opportunity to cater to the needs of this market. 2008 was the gold rush for app developers. Apple had launched the iPhone. App Store was the gold mine that everyone wanted to exploit and make every penny they can from this tool (app store). Unity was off to the races, quickly becoming the most used engine on iOS specifically and mobile gaming broadly, a position it still holds today: 71% of the top 1000 mobile games on the market run on Unity, and over 3 billion people play games it powers. Today, Unity games can be built once and deployed and operated across more than 20 platforms, including Windows, Mac, iOS, Android, PlayStation, Xbox, Nintendo Switch, and the leading augmented and virtual reality platforms.  

Mobile gaming in 2008 was inferior to PC/Desktop gaming. But it was a perfect opportunity for Unity to disrupt and it already had IOS roots. Phones in 2008 were underpowered in terms of processors and performance compared to PC, which had dedicated graphics cards. This meant that Unity did not have to create an engine to cater to the needs of a power graphics user interface but to deliver good enough graphics to support the limited environment present in the mobile.  

Fast forward to the present, Technology now enables creators to develop immersive, interactive content in real-time. These advancements, which are raising expectations from end-users across industries, are driven by:   

1. Compute power: Interactive, real-time 3D content can now run-on low-cost PCs and mobile phones. Advances in graphics processing units, or GPUs, have unlocked a broad variety of high-fidelity real-time 3D content that was previously available only on select high-performance computers and consoles.  

2. Platforms and Devices: Today’s consumers have easy, affordable access to interactive, real-time 3D content through a variety of platforms and devices, including PCs, gaming consoles, advanced set-top boxes, tablets, and smartphones. In parallel, platform and device capabilities are increasing. More recent versions of PCs, consoles, and mobile devices enable augmented and virtual reality, which is expected to drive increased demand for real-time 3D content, and also contribute to increased expectations for new types of real-time 3D content. 

3. Distribution: With pervasive streaming and cloud-based content delivery replacing physical forms of distribution, content is now available, on-demand, and instantly, and the need to visit retail stores to acquire content is greatly reduced. 

4. Connectivity: The proliferation of broadband wireless access is enabling end-users to interact with content and with one another from more locations and on more platforms, significantly increasing access to content. 

Mobile is one of the biggest markets for gamers. Smaller and faster chips have made it possible to bring in extensive graphics that can be as high as PC. I recently published the blog on the Metaverse and Numbers where I had published about gaming being one of the best business use cases for Metaverse. Smartphones in 2021 account for 45% of the overall gaming market. Unity has grown its capabilities and performance; the company has made increasing inroads into console and PC gaming (albeit mostly with casual games) and has invested significantly in virtual reality. What remains a constant, though, is Unity’s position as a developer’s partner, not a competitor.  

Unity’s business model 

Mobile through its ever-connected nature is the future of the gaming economy. Unity found itself perfectly placed to support both: first, all mobile game developers had the same problem that Unity could solve once and make available to all its customers, and second, advertising requires far more scale than anyone game developer could build on its own. Unity, though, could build an advertising market across all the games it supported — which again, was most of them — and its customers could rely on Unity knowing that their interests were aligned: if developers made money, Unity made money.  

Unity has two value propositions currently. One is it “create solution” which is used by content creators—developers, artists, designers, engineers, and architects—to create high-definition, real-time 2D and 3D content. Create solution is offered on a subscription basis. Another is it the operate solution described above helps creators reach the audience and builds on the advertising revenue for them. It is an advertising revenue share and consumption-based model. They drive approximately 65% of the revenue from the operate solution. Conversion of customers from Create to Operate is done effectively by Unity. More than 60% of the customers who built games or services using the Unity platform earned more than $100k in revenue which formed Operate revenue stream for the company. During the earning call Unity CEO – John Riccitiello stated:  

In simple terms the problem Unity is solving is “Creators Need New Ways to Develop, Run and Monetize Their Content.”  Traditionally, the creation of high-fidelity graphic experiences required the development or use of custom, disparate point solutions. To build real-time 3D applications, large teams with many engineers would need to invest considerable time and resources in the development of tools and technology to make even the most basic applications. Building these tools from scratch is both awfully expensive and time-consuming for creators. Today, to serve the increasing demand for real-time 3D content, creators need a comprehensive solution that allows them to efficiently build, run and monetize new applications to satisfy that demand. As gaming industry overall evolves around free-to-play but monetizes via advertisements and in-app purchases. Games have also increasingly migrated to live services models, hosted in the cloud, and regularly updated for content and new features. These new business and monetization models require innovative technologies and novel solutions. Traditional content development is done on a per-platform basis, often requiring creators to recreate and recode content for each individual platform. This problem is exacerbated by the diversification and explosion in the number of devices and form factors. Creators require solutions that enable them to create content once and deploy it to multiple platforms seamlessly, without having to develop and test code specific to each platform or having to maintain highly specialized teams.  

Their Operate solution as I said above is responsible for 65% of their revenues at this time and allows creators to lead the revenue generation for their products. Unity’s ad network is one of the big three ad networks along with Meta and Google. And unity only takes the cut when creators generate more than 100k in revenue from their platform. This has created an ecosystem that creators don’t want to leave. Their retention rate is a staggering 99%. This has resulted in a net expansion rate of 142%; which means that Unity has negative churn because its existing customers increase their spending with Unity so substantially. I love a good cohort analysis and Unity had a great one in their S-1 (pg. 102) 

This shows just how important it is that Unity’s tools attract customers: the company can grow revenue from its existing customers indefinitely; the primary limiting factor to the company’s growth rate is how many new customers it can bring on board.  

Unity and its Metaverse dream 

Metaverse is the term of the decade. You can read my three-part series on Metaverse here: Part I, Part II, and Part III. Can unity be the glue that links millions of players across thousands of games? Well, it really depends on how we define metaverse. Currently, there are three propositions in the market of what metaverse might be: Proposition 1 – an emerging digital world that’s ambiently available everywhere, Proposition 2 – Ready Player One, the Oasis kind of an interconnected universe of digital experiences, Proposition 3 – just the internet at varying degrees of immersion. Fortnite creator Epic – is in the Ready player one category, if that is the case then Unity is very well positioned because 71% of all the mobile games today are built on the Unity platform. Unity SVP of Create systems, Julie Shumaker, states that Unity’s definition is of the next internet. It’s where the real-time 3D (RT3D) meets the internet.  

Going back to the start of the internet, we did not even have enough pixels for one line of text. It was always an imagination what if the video would be available via the internet. And today, of course, the internet is a large video experience. And so, they believe that the next internet 3.0 from text to video to real-time 3D is in essence what the metaverse will be. The computing power available today in billions of pockets can experience real-time 3D.  

Outside of Compute power and infrastructure which are a must for architecting the metaverse, another important pillar is content creators. Unity is spending big on a creator universe and building a platform where anyone can be a creator. It would be somewhat identical to creators on Facebook, Instagram, or Tik-Tok but similar to Unity’s vision. Simply speaking, it would be a Roblox model with Unity’s platform.  

The ultimate manifestation of that is the metaverse, and here Unity is particularly well-placed; Nvidia CEO Jenson Huang described today’s web as being 2D, and the future as being 3D, and now Unity owns the best 3D tools in the world. Unity has the big aspiration to clone the world and create a digital twin. Unity customers across all industries are leaning on the output of virtual replication and simulation to better understand business initiatives, products, and even market trends. Known as “digital twins” (source Unity 10-k. 2022, pg 11), Unity is focused on bringing the power of RT3D into these customers’ digital strategies to provide a more robust, 360-view of what is possible in a virtual landscape. To date, Unity is working with Hyundai Motors to connect a physical factory with its digital twin to enhance plant management, drive productivity and innovate in the manufacturing process. And eBay has partnered with Unity to enable sellers to highlight the actual item they are selling in Unity’s proprietary, interactive 360-view. More importantly, unlike Metaverse aspirants like Facebook or Microsoft, Unity is not competing for end-users, which means it can partner with everyone to build those new experiences — including Facebook, Microsoft, and Apple.  

Where does Unity fall on 7 layers of metaverse: (to understand the 7 layers of metaverse please read my part II of the metaverse series here) 

Here is the summary of the 7 layers:  

• Experience is what we actually engage with: games, social experiences, live music, etc. 
• Discovery is how people learn that an experience exists. 
• The Creator Economy is everything that helps creators make and monetize things for the metaverse: design tools, animation systems, graphics tools, monetization technologies, etc. Read The Evolution of the Creator Economy for more insights on how these markets evolve. 
• Spatial Computing refers to the software that brings objects into 3D, computing into objects in the world, and allows us to interact with them. It includes 3D engines, gesture recognition, spatial mapping, and AI to support it. 
• Decentralization is everything that is moving more of the ecosystem to a permissionless, distributed, and more democratized structure. 
• Human Interface refers to the hardware that helps us access the metaverse — everything from mobile devices to VR headsets to future technologies like advanced haptics and smartglasses. 
• Infrastructure is the semiconductors, material science, cloud computing and telecommunications networks that make it possible to construct any of the higher layers. 

Meta and its Metaverse vision 

Facebook CEO Mark Zuckerberg last year in November announced the decision to rename Facebook Meta. He made it explicit that Meta will focus on becoming the metaverse company.  

Meta (FB) (f.k.a Facebook) parent company that owns social network sites Facebook and Instagram, messaging platform WhatsApp and AR/VR product Oculus spent around $17B on reality labs to continue building on the metaverse. Meta which has ~2B DAU is representative of the fact of deep roots the company has in the daily lives of more than 50% of the population that has access to the internet. Leaving aside the Greater China region (~1B Population with access to the internet), meta has reached the pinnacle of user acquisition.  

Another heavy blow to Meta’s top line was given by Apple’s privacy settings which now allow the users to opt-out of sharing information with multiple apps. Per Meta, they lost ~$10B in advertising revenue due to this setting change. Meta realizes these challenges with the DAU and Privacy setting, and I am fairly sure there is a team in Meta looking to build a solution around privacy settings to again encapsulate the user data to affect the in-person advertising. But Meta also realizes getting ~$10B back will not put them on the growth strategy. For that, they need to build on the metaverse vision that Mark Zuckerberg has set. 

Just to be clear, Meta’s vision for metaverse is that one ought to be accessible from anywhere using your phones, PCs, gaming, or AR/VR. Facebook Reality Labs is a collection of efforts, from virtual reality to augmented reality to electromyography systems, all in service to a singular vision where instead of looking at the Internet, we live in it. From Meta blog: 

Where does Facebook fall with 7 layers of Metaverse 

Unity + Meta 

In 2015 Meta (then Facebook) acquired Oculus citing the theory that AR/VR will be the major computing platform after mobile in about 10 years. Mark goes on to explain that Facebook is at a disadvantage and at mercy of Google and Apple play stores. He understood that Facebook is late to the mobile platform business. He goes through various pieces of architecture that Facebook will have to either build or acquire strategically. They would require the next computing platform. In the 2015 letter which Zuck wrote to the Facebook employees (available here at TechCrunch, or below, all 2500 words), he builds the case for the Unity acquisition. Facebook understood the importance of being in the gaming platform business or at least in the “avatar creation” business of 2015.  

Facebook did not only wants to win the AR/VR business but also to dominate it. Domination in that business required a platform that could create content specifically for AR/VR users in 3D and Unity fits that portfolio perfectly. Now that we understand Meta’s metaverse vision, which is to build a truly social community (which has no widely available use case, except for e-commerce and gaming) they need a platform that can accelerate that growth.  

Unity not only provides this platform, but its biggest asset is the number of developers on its platform and integration with all of the other components a developer needs to build a business. Unity aligns with Meta’s vision of a creator economy which is critical in bringing people together. Unity has an Operate platform that makes money by promoting ads, bringing ad publishers to their platform, and allowing gamers to scale on any platform. Facebook’s ad engine would be a huge boost to billions of users who are already on Unity’s platform. If the data of the gamers from game habits are combined with their habits on the social platforms were to be integrated, the amount of information at the individual level could further up advertising revenues. Unity has demonstrated it can make money by selling avatars, virtual items, and game coins (game cryptos) outside of advertising.  

Outside of gaming, Unity is a huge player in other industries which are pushing real-time 3D to build factories, manufacturing centers, restaurants, etc., in the digital world to create real-time simulations that can create a more efficient process. Unity’s vision of building a twin world will further this ambition by building and iterating real-world scenarios in a virtual twin world. Meta can certainly gain an advantage by powering twin worlds via AR/VR headsets and bring in movers’ advantage. Meta will immediately gain benefit from these customers and Meta’s scaling power can easily 10X this investment in no time.

Unity after the Weta acquisition is more powerful. Weta acquisition was completed in Late 2021. Weta’s software is increasingly mature and ready to be productized and leveraged across as many customers who wish to use it. Unity’s developer offering is increasingly full-featured and only limited by its ability to acquire new customers. Weta increases Unity’s market from not just developers but to artists, who can be plugged into Unity’s land-and-expand model.

Today, though, phones and computers are increasingly comparable in power, to the benefit of Unity; from Weta’s perspective, that power makes it possible to use its tools iteratively, lowering the learning curve and increasing the market of artists who can figure them out on their own.

That’s why Unity leaped at this opportunity; CEO John Riccitiello told Stratechary’s Ben Thompson in an interview:

Meta’s market capitalization as of April 6^th, 2022, is $631B, Tech companies routinely make acquisitions equal to 10% or more of their total value. Well, 10% of Meta’s market capitalization is $63B. Meta has current cash and investments of around $53B. At a market price of ~$94 on April 6^th, 2022, Unity has a market capitalization of $29B. Analysts forecast the fair value of Unity at ~$110. Assuming the deal closes at ~$110/share bringing the market capitalization of Unity to ~32.5B. The fair share value indicated is based on ~20% growth in the coming years and the company has a net cash position of ~$1.8B. Unity is currently a positive FCF company, meaning generating positive cash flow from its operations.  

Both in terms of valuation and future revenue that Unity can bring to Facebook it makes sense to merge the two forces. Today, Unity is more than a gaming platform and has reached across the industry, and with Metaverse as the future, they are playing the right cards in building the technology. Unity understands they also need a partner to help them scale to a 2.5B globally who can visit their platforms. Scaling by themselves will be challenging and will require a lot of resources and capital which could slow down their growth. It is a Win-Win.