AppLovin’s bid for Unity goes unrequited

For game engine maker Unity, this summer has been a roller coaster. Coming off an acquisition and growth-heavy 2021 in which the company shelled out roughly $2 billion to buy Parsec and VFX studio Weta Digital, among others, the pandemic-era gaming boom was starting to fade and Unity’s business began to look shakier in the face of external pressures.

Then in the span of two months, Unity announced layoffs, revealed its biggest ever acquisition of mobile ad firm ironSource for $4.4 billion, landed in hot water over its CEO calling indie game developers “fucking idiots” and then faced down a $17.5 billion acquisition offer from AppLovin, an ironSource competitor that thought it had a more attractive deal.

Unity rejected the offer yesterday morning, putting a quiet end to a tumultuous news cycle for the software maker. The AppLovin deal, it seems, was too bitter a pill to swallow for Unity’s board of directors.

• Though AppLovin offered an attractive premium for the company’s shareholders and was willing to let CEO John Riccitiello helm the ship, it also wanted majority voting rights of the newly combined company’s board.
• The deal also came with other strings attached: Unity would have to abandon its ironSource deal, pay a hefty $150 million termination fee and put its faith in AppLovin, an advertising and monetization platform much larger than ironSource and with more interest in controlling the company’s future.
• "The board continues to believe that the ironSource transaction is compelling and will deliver an opportunity to generate long-term value," Riccitiello said in a statement. "We remain committed to and enthusiastic about Unity’s agreement with ironSource and the substantial benefits it will create for our shareholders and Unity creators.”

AppLovin is now in a tough spot. The company is one of a handful of mobile app growth platforms that sprung up in Apple’s App Store and Google Play during the rise of smartphones over the last decade.

• Because most of the money generated by apps comes from gaming, AppLovin has become a pillar of the mobile gaming economy. The company, like ironSource, helps developers grow the user base of their apps, monetize them through ads and other means, and provides deep analytics.
• Due to Apple’s privacy changes introduced last year, the mobile game industry has struggled to monetize and grow its products.
• Apple’s App Tracking Transparency feature, which lets users opt out of being tracked across the iOS ecosystem, has made user acquisition more difficult and has also undermined the effectiveness of digital ad campaigns.
• As a result, mobile ad tech providers have begun consolidating at a rapid clip to survive the ripple effects of a more privacy-focused iOS.
• When word of the ironSource deal came out, AppLovin sensed the threat it posed and immediately put advisers to work on assembling a competing bid. But with Unity now sticking to its ironSource deal, two of AppLovin’s biggest competitors have now become a larger, and more formidable, force.

Unity’s future is increasingly focused on mobile. Though the company is often pitted against Fortnite maker Epic Games because of the latter’s Unreal Engine platform, Unity’s business — and a future toward profitability — depends on mobile.

• The premise of both the ironSource deal and the AppLovin acquisition was to bring together all the tools needed to help make a mobile game thrive, especially in the current market.
• Unity makes the engine a majority of mobile games are built upon; more than 61% of the industry uses the company’s engine, Unity reported earlier this year. Most of the biggest moneymakers on mobile, from Genshin Impact to Honor of Kings to Pokémon Go, were built using Unity.
• But Unity doesn’t make most of its money through licensing its engine, as Epic does with Unreal. Instead, Unity makes more money via its ad network, which helps developers monetize their games by connecting ad inventory with apps selling the space to display it.
• Combining Unity’s Operate business (aka its ad unit) with the ad network, growth and monetization tools of a company like ironSource or AppLovin might be necessary for Unity to weather the current storm.
• “This market dynamic … engenders a challenging environment generally on mobile but poignantly so for mobile gaming, including the advertising channels that support it,” wrote mobile analyst Eric Seufert last week.
• Seufert said the combined AppLovin and Unity company could “potentially unlock synergies across the Create (game engine) side of Unity’s business” and allow “for a more fully horizontally-integrated entity.” In many ways, the ironSource deal allows for the same, albeit on a smaller scale.

Ultimately, Unity wanted more control over its destiny than AppLovin was willing to give. With ironSource, Unity gets to stay in the driver's seat, while AppLovin is left with an unrequited offer and two fewer allies in the mobile industry it can turn to during an uncertain moment for mobile.

— Nick Statt

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Overheard

“The worst part is that people are buying real estate in these places [metaverse]. That’s just the dumbest shit ever. The dumbest, dumbest. Did I say it was dumb? No that’s not strong enough — super, meta, immaculately dumb.” — Investor Mark Cuban didn’t mince words when discussing virtual real estate speculation on an episode of Altcoin Daily, though Cuban is now dabbling in NFTs and invested in BAYC parent company Yuga Labs.

In other news

Digital media turns to mobile gaming for marketing. A report last week from Marketing Brew shed light on a new form of paid promotion for media publications: in-game currency ads nested inside the hugely popular endless runner mobile game Subway Surfers.

HBO Max lays off 70. The streaming service is restructuring following the merger with Discovery. 14% of staffers are affected, and apparently HBO Max is giving up on kids content.

Bungie’s war on cheaters is getting messier. The Destiny developer was named alongside Steam owner Valve in subpoenas from cheat distributor AimJunkies, which is trying to counter Bungie’s recent legal offensive on the grounds its software is in fact legal.

Google’s cloud gaming experiences continue. Despite a rather quiet year from Stadia, Google is still continuing to tinker with new features, including the option to launch some cloud games right from Google Search. The feature, apparently still in the test phase, works even with competing service providers.

The streaming wars are over. Or at least the days of spending just to grow one’s subscriber base at all costs, if recent news from Disney, Netflix and Warner Bros. Discovery are any indication.

Weta Workshop returns to Middle-earth. The New Zealand company famous for its work on “The Lord of the Rings” trilogy (not to be confused with the similar but separate Weta Digital now owned by Unity) is working with Take-Two Interactive’s Private Division label to make a new Middle-earth game.

Hogwarts Legacy says sayonara to 2022. This year has been full of game delays, and Warner Bros.’ Hogwarts Legacy was added to the list last week. The open-world Harry Potter title will now launch in February.

TwitchCon’s reversal sparks a sensitive controversy

Twitch had high hopes for the return of TwitchCon, the company’s gathering of streamers and industry professionals who work in and orbit the largely gaming-dominated platform. But a last-minute change to the event’s health and safety guidelines has divided the Twitch community along lines familiar to anyone who’s been trying to navigate live events or travel throughout the pandemic.

Twitch originally said it would not require masks or proof of vaccination,leading to criticism that organizers weren’t taking the ongoing threat of COVID-19 seriously enough.

• Critics said such policies endangered immunocompromised individuals and those still concerned about potentially contracting and transmitting the virus to others.
• “Definitely not going,” streamer Pamela L. Gay wrote on Twitter. “I’m not going to die for you. Us immunocompromised streamers are just staying home.”
• After mounting backlash, Twitch reversed course last week, saying it would now require masks indoors and proof of vaccination or a negative COVID-19 test result within 72 hours.

That didn’t sit well with some creators, most prominently Nicholas “Nickmercs” Kolcheff, a popular streamer signed to gaming lifestyle and esports company Faze Clan.

• Kolcheff said he would be hosting his own events in San Diego with no mask or vaccination requirements.
• The response has divided large swaths of the Twitch community, especially so in the wake of new CDC guidelines loosening quarantine, safe distance and masking recommendations.
• Kolcheff was defiant, responding to one critic on Twitter, “It’s time to get back to it. We’re here & we’re gone. It goes by quick. If you wanna live in fear of a virus, be my guest. The CDC backed off. We’re following all the rules & state guidelines.”

As is the case in so many other parts of pandemic life, where one falls in this debate largely depends on personal risk tolerance and your outlook on civic responsibility. But Twitch isn’t budging. With TwitchCon less than two months away, the masks are staying on.

— Nick Statt

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