Unity's New Runtime Fee: A Strategic Shift with Industry Implications

By Tarek Fouad, Partner, Shorooq Partners

On the 12th of September, Unity made a significant announcement that will reshape its relationship with developers and the gaming industry as a whole. They introduced a new Runtime Fee, scheduled to take effect from January 1, 2024, impacting Unity developers of varying sizes. In this article, we will delve into the why behind this decision and explore its implications for the industry, focusing on the critical aspect of trust.

Understanding the New Business Model

The new Runtime Fee structure categorizes developers into two major groups:

1. Small Developers (Unity Personal Subscribers): Those whose games generated a minimum of $200,000 in revenue in the past year and have accumulated 200,000 or more lifetime installations will be charged $0.20 per new installation.

2. Large Developers (Unity Enterprise Clients): Developers whose games earned at least $1 million in the past year and boast a lifetime installation count of one million or more will face a fee of $0.01 per new installation.

It doesn't sound like a lot, and if a developer just had to pay the fee each time they sold a $60 game, it wouldn't be. But there are problems because these charges are based on game installs, not sales, and Unity has not done a great job communicating what's going on here.

So, here are some quick notes on the new business model:

• An "install" is defined as the installation and initialization of a project on an end user's device.

• Demos, trials, game bundles, and giveaways (e.g., Humble Bundle) do not count as installs.

• Early access, beta versions, or demos that can be upgraded to the full game will result in a Runtime Fee.

• Subscription services like Game Pass count as an install but are charged to distributors (e.g., Microsoft) rather than developers.

• Unity employs a proprietary data model to accurately determine the number of Runtime distributions for a project.

For more details, see the revised Unity fees table below:

https://unity.com/pricing-updates

Contextualizing the Decision

To comprehend the rationale behind Unity's decision, we must consider the evolving landscape of the gaming industry. According to Unity's 2023 Games Report, although daily active users increased by 8% YoY for the median game, the rate of paying active users decreased by 2% for games in the top 50th percentile. This decline steepens when extending to games in the 90th percentile, where the rate of paying active users dropped by a substantial 30%. Furthermore, the average transaction value declined by 8% and 17% for the top 50th and 90th percentile games, respectively.

There are more daily active users than in 2021, but less IAP revenue. Source: Unity Game Report 2023

Unity's introduction of a fee tied to installations, rather than revenue, aligns with these trends. This shift reflects their strategy to adapt to a changing industry landscape and secure their financial outlook, regardless of industry shifts.

Balancing Business Interests with Developer Trust

From a purely business perspective, Unity's decision to introduce the Runtime Fee seems logical. However, it raises concerns when viewed from the standpoint of Unity as a game development tool.

Eroding Trust in Unity

Unity's introduction of these new fees has not been well-received within the developer community. Several studios have responded by boycotting Unity and IronSource ads in their games, urging others to follow suit. Prominent titles like Among Us, Going Under, and Slay the Spire have expressed intentions to switch engines if these changes persist.

This outcry underscores the critical role trust plays in the relationship between developers and a commercial game engine provider. Game development projects often span several years, necessitating a commitment from Unity to support developers throughout this journey. Unity's decision to alter the agreement unilaterally, imposing additional costs on developers, has sparked concerns about the erosion of trust.

The central issue with Unity's new Runtime Fee isn't just messaging or financial impact; it's about trust. Developers question whether Unity will make further unilateral changes to their agreements, creating uncertainty and instability in their partnerships.

Possible Drivers Behind Unity's Motivation for the Runtime Fee

So, what motivated Unity to make this controversial decision? At its core, the rationale appears to be financial. Unity has accumulated a substantial lifetime deficit of $2.6 billion over 19 years of operation. While the company has recently posted modest operating profits, there are financial intricacies that need to be considered.

The emphasis on market share growth is evident, but companies exist to generate profits, not just expand market share. Unity's strategy seems to involve acquiring a dominant market position and subsequently leveraging that position to modify terms and increase fees, confident that users have limited alternatives.

Unity's decision to introduce fees diverges from the usual approach of pricing subscription services higher to accommodate inflation. Instead, it disrupts the status quo, potentially upselling developers into Unity's ecosystem by offering reduced Runtime Fees for upgraded subscription tiers or the adoption of other Unity services.

Future Implications

Unity anticipates that the Runtime Fee policy will have a more significant impact on the mobile gaming segment, especially in the context of free-to-play games. While the policy does not differentiate between monetization models, its potential benefits are more pronounced for free-to-play titles with massive user bases. This suggests Unity's strategic focus on attracting studios capable of creating mobile megahits.

In conclusion, Unity's decision to introduce the Runtime Fee represents a significant shift in its business model with far-reaching implications for both developers and the gaming industry. The outcome remains uncertain, and the key challenge is rebuilding trust among developers, who have been left questioning the stability of their partnership with Unity in light of this abrupt change.

As investors in the gaming space, investing in content and IP, software and engines, social and streaming services, we are closely monitoring the situation. We want to hear from developers and urge them to get in touch, if we can help, we will certainly do. Reach out to us!

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