PlayVS is halfway to recruiting every state into its global esports community

Millions of high school kids play online multiplayer games, but they seldom have crosstown rivals in Fortnite or Valorant. PlayVS wants to make that happen with its platform for school-sponsored esports, and it’s growing like crazy, doubling its staff in the last year and putting thousands of schools on its platform.

PlayVS connects online games with official school administration and branding, elevating esports from hobby to school-sponsored activity.

“I think we’re building the biggest company in gaming,” founder and CEO Delane Parnell said in an interview at Disrupt  2020 this week. With around 20,000 high schools signed up currently and nearly a hundred million dollars in the bank to grow with, it’s not a totally unrealistic statement.

The company collects $64 per player per semi-yearly season, which starts to add up real quick when you have Counter-Strike teams of a dozen people with alternates, or competing League teams at the same school — multiplied by 20,000, of course. A bit of napkin math suggests income from existing customers is easily in the tens of millions.

Parnell offered the following metaphor to explain what the company aspired to.

“Imagine if there was one basketball court, and every kid who ever wanted to play basketball, whether it’s on behalf of their school, or pick up, or some sort of tournament, that’s the court that they had to play on,” he said. “That’s what we’re building.”

Sure, it sounds a little bit like a monopoly on hoops, but the problem right now is that there really isn’t a shared court at all. Esports is wildly disorganized at that level, if it’s organized at all (and let’s be honest, even at the pro level it’s a bit of a jumble). PlayVS wants to provide the connective tissue so that there’s one place that both players and administrators go to when it comes to inter-school competitive gaming.

Parnell explained that the last year has been about learning the ropes and establishing a presence in the also quite confusing world of state school systems.

“We certainly built the base of the business on the partnership with the NFHS — essentially the NCAA of high schools, they govern and write the rules for our high school sports,” he said. But then individual relationships need to be established with districts, financial programs, state leaders, and of course the game publishers themselves, which are understandably eager to connect with the younger generation of gamers.

So far schools in 23 states have signed up, and Parnell said they’re on track to get every state in the union on board by 2022.

“Those are partnerships that take a little time to form. It also takes additional time to build the technology that actually enables online esports, which most people think exists today, but it actually doesn’t,” he said. “So we’ve started to invest very deeply into hiring a team to build our product. We have a ton of capital in the bank and we intend to use that very wisely.”

The product build-out is more than buying servers — it’s attempting to create parity with the tools available in the context of sports like football and basketball.

“There’s products and services that we can bake in, things like recruiting, scouting, proven technology, highlights… these are things that would normally exist from independent companies within traditional sports,” he said. “One company does one thing, a thousand companies do ancillary things that make the sports experience better for every stakeholder, a parent, a coach, a player, etc. We’re going to be able to do all of those things within the PlayVS ecosystem, because we’re the league operator and the sole holder of that data. We will effectively have complete control of what that experience looks like and all of the revenue models associated with that.”

For comparison he suggested fantasy sports, now a huge industry but not one dominated by a single entity. “If there was one group, like CBS for example, that could have aggregated all that behavior, that’d be a $40-50 billion a year company. But they couldn’t get in with, you know, the NFL, the NBA, to give them exclusive rights to be the only fantasy provider on the market,” Parnell explained. “Game publishers are willing to do that with us, they’re willing to integrate with our product because they know we can execute. So I think that’s a big opportunity. And one could be worth hundreds of billions of dollars.”

PlayVS won’t be expanding into pro leagues, he confirmed, saying that the high school and college level work is as much as they can handle right now. But they’re overwhelmed in the best way.

“It’s almost as if the NBA existed for four years, and then they went back and said hey, we need to build high school basketball, college basketball, etc,” he said. “Obviously there’s a lot of catching up to do.”

Sony’s PlayStation 5 arrives November 12, priced at $500

If in-person events were still a thing in 2020, there’s a pretty good chance we’d know a lot more about the PlayStation 5 by now. With tech companies setting their own event schedules, however, Sony and Microsoft have offered themselves a more leisurely schedule with which to portion out news. Microsoft struck first, with aggressive pricing, two different launch models and a financing plan.

Now it’s Sony’s time to shine. Today’s big event answered some of the lingering questions about the next generation console. The company waited until the bitter end for the most important details. The PS5 will arrive in select markets on November 12 for $500, while the Digital Edition (sans-optical drive) runs $400.

On that date, the console will be available in North America, Japan, Australia, New Zealand and South Korea. The rest of the world will get their hands on the console a week later on November 19. The pricing keeps the PS5 plenty competitive with the new Xboxes. The Series X hits the same price point, while the lower-end Series S runs $299. Microsoft’s console launches a full two days earlier than Sony’s, so that should be fun.

Sony’s pricing was the source of a good deal of speculation and hand-wringing in recent months. But while Microsoft got the first salvo, the PS5 is going to be right there along with it — a fact that should be the source of a good deal of concern for Redmond’s gaming team. Pricing is going to be a big factor in decision making. While game spending has ballooned during the COVID-19 shutdown, many folks are cautious about pulling the trigger on big ticket items amid such an uncertain economic slow down.

As ever, the event leaned very heavily toward trailers and gameplay demos, showcasing the titles the PS5 will have on offer. Thing kicked off with some major franchise blockbusters including Final Fantasy XVI and the best look yet at Spider-Man: Miles Morales, which featured an extremely compelling bridge battle.

The Spider-Man expansion is due this holiday, to coincide with the console’s launch. Ditto for Call of Duty: Black Ops Cold War, which got a brand new trailer, including some RC car action.

The long-rumored Harry Potter RPG finally got a name and official trailer. Hogwarts Legacy looks like an an epic time in the Wizarding World. That’s due out at some point in 2021.

What’s this? A non-franchise game? Yes, it’s Bethesda’s Deathloop. The time-looping adventure game is due out in mid-2021. The sufficiently creepy trailer for zombie favorite Resident Evil: Village answered more questions than it answered. The title is also slated for next year.

Other titles include Devil May Cry 5 Special Edition (due at launch), Oddworld: Soulstorm and the Demon Souls remaster. Also a little time for Fornite, which is set to be available for the console at launch.

The Oculus Quest is getting its own Fortnite ripoff

Fortnite may not be available in VR (or on iOS), but Oculus Quest users will soon be getting their own Fortnite clone for virtual reality.

Nearly two years after its funding and initial launch announcement, BigBox VR is finally ready to roll out its battle royale game, “POPULATION: ONE” to players on the Quest (and the sunsetting Rift hardware).

Co-founders Chia Chin Lee and Gabe Brown started their game development for virtual reality with a shooter called Smashbox Arena, but “POPULATION: ONE” is the big gambit for the game studio.

The COVID-19 pandemic has managed to boost the sales of the Quest, turning it into more of a genuine consumer device instead of just something for the technorati and digital power users. If this new audience for virtual reality can take to the battle royale game in the same way that they’ve taken to Epic Games’ Fortnite title, it could go a long way toward giving Facebook’s platform a wedge to gain market share in what’s become the newest social network.

A lot has been written about how Fortnite has become the social forum for Gen Z and the cohort that’s coming up after them. As these users gravitate to TikTok and Fortnite, Facebook is becoming an afterthought for a new consumer demographic that the social network needs.

And as we wrote earlier, BigBox VR’s title shares more than a passing similarity to Fortnite.

To say the game shares some similarities with Fortnite is an understatement. Not only is it a battle royale title with a shrinking environment, but certain mechanics like gliding in at the beginning to scrounge for weapons and even Fortnite’s building feature are central to the gameplay. That being said, battle royale titles have exploded in the wake of PUBG and they seem to all share a lot among each other. For BigBox, VR is the distinguishing feature, with motion controls and the general feeling that everything is life-sized and in your control.

If the game can replicate Fortnite’s popularity in virtual reality, that could be a coup for Facebook and BigBox VR in a space where the social networking giant has traditionally been pwned.

User-generated e-learning site Kahoot acquires Actimo for up to $33M to double down on corporate sector

Norwegian company Kahoot originally made its name with a platform the lets educators and students create and share game-based online learning lessons, in the process building up a huge public catalogue of gamified lessons created by its community. Today the startup — now valued at over $2 billion — is announcing an acquisition to give a boost to another segment of its business: corporate customers.

Kahoot has acquired Danish startup Actimo, which provides a platform for businesses to train and engage with employees. Kahoot said that the purchase is being made with a combination of cash and shares, and works to to a total enterprise value of between $26 million and $33 million for the smaller company, with the sale expected to be completed in October 2020.

It may sound like a modest sum in a tech market where companies are currently and regularly seeing paper valuations in the hundreds of millions at Series A stage, but it also presents a different kind of trajectory both for founders and their investors.

This is actually a strong exit for Actimo, which had raised less than $500,000, according to data from PitchBook. And it puts Actimo under the wing of a company that has been scaling globally fast, finding — like others in the areas of online education and remote working — that the current state of social distancing due to Covid-19 is resulting in a boost to its business.

To give you an idea of the scale and growth of Kahoot, the company says that currently it has over 1 billion active users, on top of some 4.4 billion users in aggregate since first launching the platform in 2013. In the last 12 months, some 200 games have been played on its platform. In June, when Kahoot announced that it had raised $28 million in funding, it told us that 100 million games had been played.

In light of its growth and the future opportunity — even putting aside the progression of the coronavirus, it looks like remote work and remote learning will at the least become a lot more common as a longer-term option — the company has also seen a rise in its valuation. With some of its shares traded on the Merkur Market in Norway, the company currently has a market cap of 18.716 billion Norwegian Krone, which at today’s rates is about $2.08 billion. That figure was $1.4 billion in June.

Kahoot’s targeting of the corporate sector is not new. The company has been building a business in this space for years. It says that in the last 12 months, it logged 2 million sessions across 20 million participating “players” of its corporate training “games”, with some 97% of the Fortune 500 among those users. Customers include the likes of Facebook (for sales training), Oyo (hospitality training and onboarding) and Qualys (for taking polls during a conference), among others.

Critically, while a lot of Kahoot’s audience is in education, its corporate most of the revenues come in, one reason why it’s keen to grow that segment with more services and users.

The aim with Actimo, Kahoot says, is to build out a product set aimed at helping organisations with company culture — which, with many organisations now going on eight months and counting of entire teams working regularly outside of their physical offices, has grown as a priority.

Keeping a team feeling like a team, and an individual feeling more than a transactional regard for an employer, is not a simple thing in the best of times. Now, as we continue to work physically away from each other, it will take even more tools and efforts to get the balance right.

In that context, Actimo’s solution is just one aspect, but potentially an interesting one: it has built a platform where employees can track the training that they have done or need to do, engage with other co-workers, and provide feedback, and employers can use it to generally track and encourage how employees are engaging across the company and its various efforts. It counts some 200 enterprises, including Circle K, Hi3G, and Compass Group, among its customers, and has current ARR of $5 million.

For comparison, Kahoot, in its Q2 financials published in August, reported ARR of $25 million, with invoiced revenue for the quarter at $9.6 million, growing some 317% on the same quarter a year before. The company has also raised some $110 million in private funding from the likes of Microsoft and Disney.

As Kahoot looks to find more than just a transient place in a company’s IT and software fabric — transience of attention always being a risk with anything gaming-based — it makes a lot of sense to pick up Actimo and work on ways of coupling the platform with its other corporate work. You can also imagine a time when it might create a similar kind of dashboard for the educational sector.

“We are excited to welcome the Actimo team to be part of the fast-growing Kahoot! family,” said Kahoot! CEO, Eilert Hanoa, in a statement. “This acquisition will further extend Kahoot!’s corporate learning offerings, by providing solutions tailored for the frontline segment, as well as to solidify company culture and engagement among remote and distributed teams in companies of all types and sizes. This continues our expressed ambition to also grow through M&A by adding strategic capabilities that we can leverage across our global platform.”

“We are thrilled to join forces with Kahoot! in our mission to develop next-level solutions that connect remote employees and boost employee engagement and productivity,” said Eske Gunge, CEO at Actimo, in a statement. “Being part of Kahoot! and with our experience from working with innovative and ambitious enterprises across industries, we can together set a new standard for corporate learning and engagement.”

Zwift, maker of a popular indoor training app, just landed a whopping $450 million in funding led by KKR

Zwift, a 350-person, Long Beach, Calif.-based online fitness platform that immerses cyclists and runners in 3D generated worlds, just raised a hefty $450 million in funding led by the investment firm KKR in exchange for a minority stake in its business.

Permira and Specialized Bicycle’s venture capital fund, Zone 5 Ventures, also joined the round alongside earlier backers True, Highland Europe, Novator and Causeway Media.

Zwift has now raised $620 million altogether and is valued at north of $1 billion.

Why such a big round? Right now, the company just makes an app, albeit a popular one.

Since its 2015 founding, 2.5 million people have signed up to enter a world that, as Outside magazine once described it, is “part social-media platform, part personal trainer, part computer game.” That particular combination makes Zwift’s app appealing to both recreational riders and pros looking to train no matter the conditions outside.

The company declined to share its active subscriber numbers with us — Zwift charges $15 per month for its service — but it seemingly has a loyal base of users. For example, 117,000 of them competed in a virtual version of the Tour de France that Zwift hosted in July after it was chosen by the official race organizer of the real tour as its partner on the event.

Which leads us back to this giant round and what it will be used for. Today, in order to use the app, Zwift’s biking adherents need to buy their own smart trainers, which can cost anywhere from $300 to $700 and are made by brands like Elite and Wahoo. Meanwhile, runners use Zwift’s app with their own treadmills.

Now, Zwift is jumping headfirst into the hardware business itself. Though a spokesman for the company said it can’t discuss any particulars — “It takes time to develop hardware properly, and COVID has placed increased pressure on production” — it is hoping to bring its first product to market “as soon as possible.”

He added that the hardware will make Zwift a “more immersive and seamless experience for users.”

Either way, the direction isn’t a surprising one for the company, and we don’t say that merely because Specialized participated in this round as a strategic backer. Cofounder and CEO Eric Min has told us in the past that the company hoped to produce its own trainers some day.

Given the runaway success of the in-home fitness company Peloton, it wouldn’t be surprising to see a treadmill follow, or even a different product entirely. Said the Zwift spokesman, “In the future, it’s possible that we could bring in other disciplines or a more gamified experience.” (It will have expert advice in this area if it does, given that Swift just brought aboard Ilkka Paananen, the co-founder and CEO of Finnish gaming company Supercell, as an investor and board member.)

In the meantime, the company tells us not to expect the kind of classes that have proven so successful for Peloton, tempting as it may be to draw parallels.

While Zwift prides itself on users’ ability to organize group rides and runs and workouts, classes, says its spokesman, are “not in the offing.”

In 2020, Warsaw’s startup ecosystem is ‘a place to observe carefully’

If you listed the trends that have captured the attention of 20 Warsaw-focused investors who replied to our recent surveys, automation/AI, enterprise SaaS, cleantech, health, remote work and the sharing economy would top the list. These VCs said they are seeking opportunities in the “digital twin” space, proptech and expanded blockchain tokenization inside industries.

Investors in Central and Eastern Europe are generally looking for the same things as VCs based elsewhere: startups that have a unique value proposition, capital efficiency, motivated teams, post-revenue and a well-defined market niche.

Out of the cohort we interviewed, several told us that COVID-19 had not yet substantially transformed how they do business. As Michał Papuga, a partner at Flashpoint VC put it, “the situation since March hasn’t changed a lot, but we went from extreme panic to extreme bullishness. Neither of these is good and I would recommend to stick to the long-term goals and not to be pressured.”

Said Pawel Lipkowski of RBL_VC, “Warsaw is at its pivotal point — think Berlin in the ‘90s. It’s a place to observe carefully.”

Here’s who we interviewed for part one:

For the conclusion, we spoke to the following investors:

Karol Szubstarski, partner, OTB Ventures

What trends are you most excited about investing in, generally?
Gradual shift of enterprises toward increased use of automation and AI, that enables dramatic improvement of efficiency, cost reduction and transfer of enterprise resources from tedious, repeatable and mundane tasks to more exciting, value added opportunities.

What’s your latest, most exciting investment?
One of the most exciting opportunities is ICEYE. The company is a leader and first mover in synthetic-aperture radar (SAR) technology for microsatellites. It is building and operating its own commercial constellation of SAR microsatellites capable of providing satellite imagery regardless of the cloud cover, weather conditions and time of the day and night (comparable resolution to traditional SAR satellites with 100x lower cost factor), which is disrupting the multibillion dollar satellite imagery market.

Are there startups that you wish you would see in the industry but don’t? What are some overlooked opportunities right now?
I would love to see more startups in the digital twin space; technology that enables creation of an exact digital replica/copy of something in physical space — a product, process or even the whole ecosystem. This kind of solution enables experiments and [the implementation of] changes that otherwise could be extremely costly or risky – it can provide immense value added for customers.

What are you looking for in your next investment, in general?
A company with unique value proposition to its customers, deep tech component that provides competitive edge over other players in the market and a founder with global vision and focus on execution of that vision.

Which areas are either oversaturated or would be too hard to compete in at this point for a new startup? What other types of products/services are you wary or concerned about?
No market/sector is too saturated and has no room for innovation. Some markets seem to be more challenging than others due to immense competitive landscape (e.g., food delivery, language-learning apps) but still can be the subject of disruption due to a unique value proposition of a new entrant.

How much are you focused on investing in your local ecosystem versus other startup hubs (or everywhere) in general? More than 50%? Less?
OTB is focused on opportunities with links to Central Eastern European talent (with no bias toward any hub in the region), meaning companies that leverage local engineering/entrepreneurial talent in order to build world-class products to compete globally (usually HQ outside CEE).

Which industries in your city and region seem well-positioned to thrive, or not, long term? What are companies you are excited about (your portfolio or not), which founders?
CEE region is recognized for its sizable and highly skilled talent pool in the fields of engineering and software development. The region is well-positioned to build up solutions that leverage deep, unique tech regardless of vertical (especially B2B). Historically, the region was especially strong in AI/ML, voice/speech/NLP technologies, cybersecurity, data analytics, etc.

How should investors in other cities think about the overall investment climate and opportunities in your city?
CEE (including Poland and Warsaw) has always been recognized as an exceptionally strong region in terms of engineering/IT talent. Inherent risk aversion of entrepreneurs has driven, for a number of years, a more “copycat”/local market approach, while holding back more ambitious, deep tech opportunities. In recent years we are witnessing a paradigm shift with a new generation of entrepreneurs tackling problems with unique, deep tech solutions, putting emphasis on global expansion, neglecting shallow local markets. As such, the quality of deals has been steadily growing and currently reflects top quality on global scale, especially on tech level. CEE market demonstrates also a growing number of startups (in total), which is mostly driven by an abundance of early-stage capital and success stories in the region (e.g., DataRobot, Bolt, UiPath) that are successfully evangelizing entrepreneurship among corporates/engineers.

Do you expect to see a surge in more founders coming from geographies outside major cities in the years to come, with startup hubs losing people due to the pandemic and lingering concerns, plus the attraction of remote work?
I believe that local hubs will hold their dominant position in the ecosystem. The remote/digital workforce will grow in numbers but proximity to capital, human resources and markets still will remain the prevalent force in shaping local startup communities.

Which industry segments that you invest in look weaker or more exposed to potential shifts in consumer and business behavior because of COVID-19? What are the opportunities startups may be able to tap into during these unprecedented times?
OTB invests in general in companies with clearly defined technological advantage, making quantifiable and near-term difference to their customers (usually in the B2B sector), which is a value-add regardless of the market cycle. The economic downturn works generally in favor of technological solutions enabling enterprise clients to increase efficiency, cut costs, bring optimization and replace manual labour with automation — and the vast majority of OTB portfolio fits that description. As such, the majority of the OTB portfolio has not been heavily impacted by the COVID pandemic.

How has COVID-19 impacted your investment strategy? What are the biggest worries of the founders in your portfolio? What is your advice to startups in your portfolio right now?
The COVID pandemic has not impacted our investment strategy in any way. OTB still pursues unique tech opportunities that can provide its customers with immediate value added. This kind of approach provides a relatively high level of resilience against economic downturns (obviously, sales cycles are extending but in general sales pipeline/prospects/retention remains intact). Liquidity in portfolio is always the number one concern in uncertain, challenging times. Lean approach needs to be reintroduced, companies need to preserve cash and keep optimizing — that’s the only way to get through the crisis.

Are you seeing “green shoots” regarding revenue growth, retention or other momentum in your portfolio as they adapt to the pandemic?
A good example in our portfolio is Segron, a provider of an automated testing platform for applications, databases and enterprise network infrastructure. Software development, deployment and maintenance in enterprise IT ecosystem requires continuous and rigorous testing protocols and as such a lot of manual heavy lifting with highly skilled engineering talent being involved (which can be used in a more productive way elsewhere). The COVID pandemic has kept engineers home (with no ability for remote testing) while driving demand for digital services (and as such demand for a reliable IT ecosystem). The Segron automated framework enables full automation of enterprise testing leading to increased efficiency, cutting operating costs and giving enterprise customers peace of mind and a good night’s sleep regarding their IT infrastructure in the challenging economic environment.

What is a moment that has given you hope in the last month or so? This can be professional, personal or a mix of the two.
I remain impressed by the unshakeable determination of multiple founders and their teams to overcome all the challenges of the unfavorable economic ecosystem.

Apple lays out its messy vision for how xCloud and Stadia will work with its App Store rules

Apple laid out some interesting updates to its App Store rules this morning, the most headline-grabbing of which was a section dedicated to cloud gaming platforms like Microsoft’s xCloud and Google’s Stadia.

This comes after very public complaints from Microsoft regarding xCloud’s rejection from the App Store, which Apple denied because its App Store rules fundamentally did not allow game-streaming platforms on it. The outcry from gamers was notable given how hyped this launch is to the future of the Xbox platform. This saga was also timed alongside Epic Games’ broader complaints about in-app purchases on the games store.

It was clear that Apple’s antiquated App Store rules needed an update, but now that we see their solution, it’s clear that things are going to be very messy for platform operators and game developers that were hoping for an easy solution.

The gist is that Apple will allow game-streaming platforms like xCloud and Stadia to operate, but each game in their library will need to have its own separate App Store listing and each title will have to be “downloaded” from the Store. Each of these games will be discoverable inside the App Store, potentially meaning that the same game will exist inside multiple pages for multiple streaming platforms. In addition, xCloud and Stadia will be able to house their own “catalog” apps, but they will still have to kick users to the App Store when they want to score a new title.

The end result is that this solution is incredibly less plug-and-play for game developers, and developers will have to integrate their payment systems with Apple’s in-app purchase frameworks. It also means that developers are going to have to balance the in-app purchases cut for Apple with whatever deals they have worked out with the streaming platforms. It’s complicated, but iOS is such a massive platform that these developers don’t have much choice but to comply, especially given how heavily Microsoft is pushing xCloud.

It’s far from the ideal solution for the cloud gaming platforms also, but this is likely as good as it was going to get. This will likely strengthen the popularity of these platforms by having multiple entry-points to buying a subscription, something Apple will assuredly highlight amid any complaints, but it will also increase the likelihood that a consumer purchasing a subscription may be doing so from Apple, thus paying the Apple tax on said subscription. It seems like users will likely be downloading the app for free and then being prompted to either subscribe or enter their login info for their streaming platform of choice.

Let’s get to the letter of the law, as Apple is a stickler for precision when it comes to these rules:

4.92 Streaming Games
Streaming games are permitted so long as they adhere to all guidelines — for example, each game update must be submitted for review, developers must provide appropriate metadata for search, games must use in-app purchase to unlock features or functionality, etc. Of course, there is always the open Internet and web browser apps to reach all users outside of the App Store.
4.9.1
Each streaming game must be submitted to the App Store as an individual app so that it has an App Store product page, appears in charts and search, has user ratings and review, can be managed with ScreenTime and other parental control apps, appears on the userʼs device, etc.
4.9.2
Streaming game services may offer a catalog app on the App Store to help users sign up for the service and find the games on the App Store, provided that the app adheres to all guidelines, including offering users the option to pay for a subscription with in-app purchase and use Sign in with Apple. All the games included in the catalog app must link to an individual App Store product page.

Bear and bull cases for Unity’s IPO

In the first part of my outline on Unity ahead of its IPO, I explained the scope of the company’s multidimensional business, its R&D efforts and competitive positioning, and its grand vision for interactive 3D content across every industry.

In the conclusion, I’ll dig into Unity’s financials and how it is marketing its public listing before turning to discuss the bear and bull cases for its future.

Key data points from Unity’s S-1 filing

  • Revenue grew 42% year-over-year from $381 million in 2018 to $542 million in 2019 with operating losses of $130 million and $150 million respectively. It hit $351 million in revenue by June 30 this year. That pace suggests a 2020 total around $700-$750 million (+30% year-over-year).
  • The company has gross margins of about 79%, although costs are overwhelmingly centered in R&D and sales and marketing, which account for 47% and 32% of revenue, respectively.
  • The company has cumulatively lost $569 million up to this point, including a $163 million net loss in 2019.

The geographical source of Unity’s revenue in 2019 was:

  • 34% EMEA
  • 28% U.S.
  • 21% APAC — excluding China
  • 12% China
  • 5% Americas — excluding U.S.

Unlike many other Western tech companies, Unity operates freely in China.

In Part 1, I explained each of Unity’s seven main revenue streams. During the first half of 2020, revenue by segment broke down to:

  • $216.9 million (62%) from Operate Solutions (products for managing and monetizing content), the “substantial majority” of which is from the ads business.
  • $101.8 million (29%) from Create Solutions (products and consulting for content creation), two-thirds of which is from Unity Pro subscriptions.
  • $32.7 million (9%) from Strategic Partnerships and Other (Unity Asset Store and Verified Solutions Partners).

The S-1 discloses that less than 10% of overall revenue is from “newer products and services, such as Vivox and deltaDNA” (referencing key 2019 acquisitions for its Operate segment).

Some takeaways from this data:

Unity IPO aims to fuel growth across gaming and beyond

Unity Software Inc. is set to list on the New York Stock Exchange this month, following its S-1 filing two weeks ago. The 16-year-old tech company is universally known within the gaming industry and largely unknown outside of it. But Unity has been expanding beyond gaming, pouring hundreds of millions of dollars into a massive bet to be an underlying platform for humanity’s future in a world where interactive 3D media stretches from our entertainment experiences and consumer applications to office and manufacturing workflows. 

Much of the press about Unity’s S-1 filing mischaracterizes the business. Unity is easily misunderstood because most people who aren’t (game) developers don’t know what a game engine actually does, because Unity has numerous revenue streams, and because Unity and the competitor it is most compared to — Epic Games — only partially overlap in their businesses.

Last year, I wrote an in-depth guide to Unity’s founding and rise in popularity, interviewing more than 20 top executives in San Francisco and Copenhagen, plus many other professionals in the industry. In this two-part guide to get up to speed on the company, I’ll explain Unity’s business, where it is positioned in the market, what its R&D is focused on and how game engines are eating the world as they gain adoption across other industries.

In part two, I’ll analyze Unity’s financials, explain how the company has positioned itself in the S-1 to earn a higher valuation and outline both the bear and bull cases for its future.

For those in the gaming industry who are familiar with Unity, the S-1 might surprise you in a few regards. The Asset Store is a much smaller business that you might think, Unity is more of an enterprise software company than a self-service platform for indie devs and advertising solutions appear to make up the largest segment of Unity’s revenue.

What is a game engine?

Unity’s origin is as a game engine, software that is similar to Adobe Photoshop, but used instead for editing games and creating interactive 3D content. Users import digital assets (often from Autodesk’s Maya) and add logic to guide each asset’s behavior, character interactions, physics, lighting and countless other factors that create fully interactive games. Creators then export the final product to one or more of the 20 platforms Unity supports, such as Apple iOS and Google Android, Xbox and Playstation, Oculus Quest and Microsoft HoloLens, etc.

In this regard, Unity is more comparable to Adobe and Autodesk than to game studios or publishers like Electronic Arts and Zynga.

What are Unity’s lines of business?

Since John Riccitiello took over as CEO from co-founder David Helgason in 2014, Unity has expanded beyond its game engine and has organized activities into two divisions: Create Solutions (i.e., tools for content creation) and Operate Solutions (i.e., tools for managing and monetizing content). There are seven noteworthy revenue streams overall:

Create Solutions (29% of H1 2020 revenue)

  • The Unity platform: The core game engine, which operates on a freemium subscription model. Individuals, small teams and students use it for free, whereas more established game studios and enterprises in other industries pay (via the Unity Plus, Unity Pro and Unity Enterprise premium tiers).
  • Engine extensions: A growing portfolio of tools and extensions of the core engine purpose-built for specific industries and use cases. These include MARS for VR development, Reflect for architecture and construction use with BIM assets, Pixyz for importing CAD data, Cinemachine for virtual production of films and ArtEngine for automated art creation.
  • Professional services: Hands-on, specialized consulting for enterprise customers using Unity’s engine and other products. Unity expanded its consulting capacity further in April with a $55 million acquisition of Finger Food Studios, a 200-person team in Vancouver that builds interactive media projects for corporate clients using Unity.

Aside from these three product categories, Unity is reporting another group of content creation offerings separately in the S-1 as “Strategic Partnerships & Other” (which accounts for further 9% of revenue):

  • Strategic Partnerships: Major tech companies pay Unity via a mix of structures (flat-fee, revenue-share and royalties) for Unity to create and maintain integrations with their software and/or hardware. Since Unity is the most popular platform to build games with, ensuring Unity integrates well with Oculus or with the Play Store is very important to Facebook and Google, respectively, for example.
  • Unity Asset Store: Unity’s marketplace for artists and developers to buy and sell digital assets like a spooky forest or the physics to guide characters’ joint movements for use in their content so they don’t each have to design and code1 every single thing from scratch. It is commonly used, though larger game studios often use Asset Store assets just for initial prototyping of game ideas.

Operate Solutions (62% of H1 2020 revenue)

  • Advertising: Via the 2014 acquisition of Applifier, Unity launched an in-game advertising network for mobile games. This expanded substantially with the Unified Auction, a simultaneous auction that helps games get the highest bid from among potential advertisers. Unity is now one of the world’s largest mobile ad networks, serving 23 billion ads per month. Unity also has a dynamic monetization tool that makes real-time assessments of whether it is optimal to serve an ad, prompt an in-app purchase or do nothing to maximize each player’s lifetime value. While the Unity IAP feature enables developers to manage in-app purchases (IAP), Unity does not take a cut of IAP revenue at this time.
  • Live Services: A portfolio of cloud-based solutions for game developers to better manage and optimize their user acquisition, player matchmaking, server hosting and identification of bugs. This portfolio has primarily been assembled through acquisitions like Multiplay (cloud game server hosting and matchmaking), Vivox (cloud-hosted system for voice and text chat between players in games), and deltaDNA (player segmentation for campaigns to improve engagement, monetization and retention). There is also Unity Simulate for training AI models in virtual recreations of the real world (or testing games for bugs). Live Services products have usage-based pricing, with an initial amount of usage free.

Unity versus Unreal, versus others

Unity is compared most frequently to Epic Games, the company behind the other leading game engine, Unreal. Below is a quick overview of the products and services that differentiate each company. The cost of switching game engines is meaningful in that developers are typically specialized in one or the other and can take months to gain high proficiency in another, but some teams do vary the engine they use for different projects. Moving an existing game (or other project) over to a new game engine is a major undertaking that requires extensive rebuilding.

Epic Games

Epic has three main businesses: game development, the Epic Games Store, and the Unreal Engine. Epic’s core is in developing its own games and the vast majority of Epic’s $4.2 billion in 2019 revenue came from that (principally, from Fortnite). The Epic Games Store is a consumer-facing marketplace for gamers to purchase and download games; game developers pay Epic a 12.5% cut of their sales.

In those two areas of business, Unity and Epic don’t compete. While much of the press about Unity’s IPO frames Epic’s current conflict with Apple as an opportunity for Unity, it is largely irrelevant. A court order prevented Apple from blocking iOS apps made with Unreal in retaliation for Epic trying to skirt Apple’s 30% cut of in-app purchases in Fortnite. Unity doesn’t have any of its own apps in the App Store and doesn’t have a consumer-facing store for games. It’s already the default choice of game engine for anyone building a game for iOS or Android, and it’s not feasible to switch the engine of an existing game, so Epic’s conflict does not create much of a new market opening.

Let’s compare the Unity and Unreal engines:

Origins: Unreal was Epic’s proprietary engine for the 1998 game Unreal and was licensed to other PC and console studios and became its own business as a result of its popularity. Unity launched as an engine for indie developers building Mac games, an underserved niche, and expanded to other emerging market segments considered irrelevant by the core gaming industry: small indie studios, mobile developers, AR & VR games. Unity exploded in global popularity as the main engine for mobile games.

Programming Language: Based in the C++ programming language, Unreal requires more extensive programming than Unity (which requires programming in C#) but enables more customization, which in turn enables higher performance.

Core Markets: Unreal is much more popular among PC and console game developers; it is oriented toward bigger, high-performance projects by professionals. That said, it is establishing itself firmly in AR and VR and proved with Fortnite it can take a console and PC game cross-platform to mobile. Unity dominates in mobile games — now the largest (and fastest growing) segment of the gaming industry — where it has over 50% market share and where Unreal is not a common alternative. Unity has kept the largest market share in AR and VR content, at over 60%.

Ease of Authoring: Neither engine is easy for a complete novice, but both are fairly straightforward to navigate if you have basic coding abilities and put the time into experimenting and watching tutorials. Unity has prioritized ease of use since its early days, with a mission of democratizing game development that was so concentrated among large studios with large budgets, and ease of authoring remains a key R&D focus. This is why Unity is the common choice in educational environments and by individuals and small teams creating casual mobile games. Unity lets you see but not edit the engine’s source code unless you pay for an enterprise subscription; this protects developers from catastrophic mistakes but limits customization. Unreal isn’t dramatically more complex but, as a generalization, it requires more lines of code and technical skill. It is open source code so can be completely customized. Unreal has a visual scripting tool called Blueprint to conduct some development without needing to code; it’s respected and often used by designers though not a no-code solution to developing a complex, high-performance game (no one offers that). Unity recently rolled out its own visual scripting solution for free called Bolt.

Pricing: While Unity’s engine operates on a freemium subscription model (then has a portfolio of other product offerings), Unreal operates on a revenue-share, taking 5% of a game’s revenue. Both have separately negotiated pricing for companies outside of gaming that aren’t publicly disclosed.

Proprietary engines

Many large gaming companies, especially in the PC and console categories, continue to use their own proprietary game engines built in-house. It is a large, ongoing investment to maintain a proprietary engine, which is why a growing number of these companies are switching to Unreal or Unity so they can focus more resources on content creation and tap into the large talent pools that already have mastery in each one.

Other Engines

Other game engines to note are Cocos2D (an open source framework by Chukong Technologies that has a particular following among mobile developers in China, Japan, and South Korea), CryEngine by Crytek (popular for first-person shooters with high visual fidelity), and Amazon’s Lumberyard (which was built off CryEngine and doesn’t seem to have widespread adoption, or command much respect, among the many developers and executives I’ve spoken to).

For amateur game developers without programming skills, YoYo Games’ GameMaker Studio and Scirra’s Construct are both commonly used to build simple 2D games (Construct is used for HTML5 games in particular); users typically move on to Unity or Unreal as they gain more skill.

There remain a long list of niche game engines in the market since every studio needs to use one and those who build their own often license it if their games aren’t commercial successes or they see an underserved niche among studios creating similar games. That said, it’s become very tough to compete with the robust offerings of the industry standards — Unity and Unreal — and tough to recruit developers to work with a niche engine.

UGC Platforms

User-generated content platforms for creating and playing games like Roblox (or new entrants like Manticore’s Core and Facebook Horizon) don’t compete with Unity — at least for the foreseeable future — because they are dramatically simplified platforms for creating games within a closed ecosystem with dramatically more limited monetization opportunity. The only game developers these will pull away from Unity are hobbyists on Unity’s free tier.

I’ve written extensively on how UGC-based game platforms are central to the next paradigm of social media, anchored within gaming-centric virtual worlds. But based on the overall gaming market growth and the diversity of game types, these platforms can continue to soar in popularity without being a competitive threat to the traditional studios who pay Unity for its engine, ad network, or cloud products.

What’s at the forefront of Unity’s technical innovation?

DOTS

For the last three years, Unity has been creating its “data oriented technology stack,” or DOTS, and gradually rolling it out in modules across the engine.

Unity’s engine centers on programming in C# code which is easier to learn and more time-saving than C++ since it is a slightly higher level programming language. Simplification comes with the trade off of less ability to customize instruction by directly interacting with memory. C++, which is the standard for Unreal, enables that level of customization to achieve better performance but requires writing a lot more code and having more technical skill.

DOTS is an effort to not just resolve that discrepancy but achieve dramatically faster performance. Many of the most popular programming languages in use today are “object-oriented,” a paradigm that groups characteristics of an object together so, for example, an object of the type “human” has weight and height attached. This is easier for the way humans think and solve problems. Unity takes advantage of the ability to add annotations to C# code and claims a proprietary breakthrough in understanding how to recompile object-oriented code into “data-oriented” code, which is optimized for how computers work (in this example, say all heights together and all weights together). This is orders of magnitude faster in processing the request at the lowest level languages that provide 1s-and-0s instructions to the processor.

This level of efficiency should, on one hand, allow highly-complex games and simulations with cutting-edge graphics to run quickly on GPU-enabled devices, while, on the other hand, allowing simpler games to be so small in file size they can run within messenger apps on the lowest quality smartphones and even on the screens of smart fridges.

Unity is bringing DOTS to different components of its engine one step at a time and users can opt whether or not to use DOTS for each component of their project. The company’s Megacity demo (below) shows DOTS enabling a sci-fi city with hundreds of thousands of assets rendered in real-time, from the blades spinning on the air conditioners in every apartment building to flying car traffic responding to the player’s movements.

Graphics

The forefront of graphics technology is in enabling ray tracing (a lighting effect mimicking the real-life behavior of light reflecting off different surfaces) at a fast enough rendering speed so games and other interactive content can be photorealistic (i.e. you can’t tell it’s not the real world). It’s already possible to achieve this in certain contexts but takes substantial processing power to render. Its initial use is for content that is not rendered in real-time, like films. Here are videos by both Unity and Unreal demonstrating ray tracing used to make a digital version of a BMW look nearly identical to video of a real car:

To support ray-tracing and other cutting-edge graphics, Unity released its High Definition Render Pipeline in 2018. It gives developers more powerful graphics rendering for GPU devices to achieve high visual fidelity in console and PC games plus non-gaming uses like industrial simulations. (By comparison, its Universal Render Pipeline optimizes content for lower-end hardware like mobile phones.)

Next-gen authoring

Unity’s Research Labs team is focused on the next generation of authoring tools, particularly in an era of AR or VR headsets being widely adopted. One component of this is the vision for a future where nontechnical people could develop 3D content with Unity solely through hand gestures and voice commands. In 2016, Unity released an early concept video for this project (something I demo-ed at Unity headquarters in SF last year):

Game engines are eating the world

The term “game engine” limits the scope of what Unity and Unreal are already used for. They are interactive 3D engines used for practically any type of digital content you can imagine. The core engine is used for virtual production of films to autonomous vehicle training simulations to car configurators on auto websites to interactive renderings of buildings.

Both of these engines have long been used outside gaming by people repurposing them and over the last five years Unity and Unreal have made expanding use of their engines in other industries a top priority. They are primarily focused on large- and mid-size companies in 1) architecture, engineering, and construction, 2) automotive and heavy manufacturing, and 3) cinematic video.

In films and TV commercials, game engines are used for virtual production. The settings, whether animated or scanned from real-world environments, are set up as virtual environments (like those of a video game) where virtual characters interact and the camera view can be changed instantaneously. Human actors are captured through sets that are surrounded by the virtual environment on screens. The director and VFX team can change the surroundings, the time of day, etc. in real-time to find the perfect shot.

There are a vast scope of commercial uses for Unity since assets can be imported from CAD, BIM, and other formats and since Unity gives you the ability to build a whole world and simulate changes in real-time. There are four main use cases for Unity’s engine beyond entertainment experiences:

  1. Design & Planning: have teams work on interactive 3D models of their product simultaneously (in VR, AR, or on screens) from offices around the world and attach metadata to every component about its materials, pricing, etc. The Hong Kong International airport used Unity to create a digital twin of the terminals connected to Internet of Things (IoT) data, informing them of passenger flow, maintenance issues, and more in real-time.
  2. Training, Sales & Marketing: use interactive 3D content so staff or customers can engage with: a) photorealistic renderings of industrial products; b) VR trainings for risky construction situations; c) online car configurators that render custom designs in real-time; or d) an architect’s plan for new office space with every asset within the project filled with metadata and responsive to interaction, changes in lighting, etc. 
  3. Simulation: generate training data for machine learning algorithms using virtual recreations of real-world environments (like for autonomous vehicles in San Francisco) and running thousands of instances in each batch. Unity Simulation customers include Google’s DeepMind and Unity teamed up with LG to create a simulation module specific to autonomous vehicles.
  4. Human Machine Interfaces (interactive screens): create interactive displays for in-vehicle infotainment systems and AR heads up displays, as showcased by Unity’s 2018 collaboration with electric car startup Byton.

Unity’s ambitions beyond gaming ultimately touch every facet of life. In his 2015 internal memo in favor of acquiring Unity, Facebook CEO Mark Zuckerberg wrote “VR / AR will be the next major computing platform after mobile.” Unity is currently in a powerful position as the key platform for developing VR / AR content and distributing it across different operating systems and devices. Zuckerberg saw Unity as the natural platform off which to build “key platform services” in the mixed reality ecosystem like an “avatar / content marketplace and app distribution store”.

If Unity maintains its position as the leading platform for building all types of mixed reality applications into the era when mixed reality is our main digital medium, it stands to be one of the most important technology companies in the world. It would be the engine everyone across industries turns to for creating applications, with dramatically larger TAM and monetization potential for the core engine than is currently the case. It could expand up the stack, per Zuckerberg’s argument, into consumer-facing functions that exist across apps, like identify, app distribution, and payments. Its advertising product is already in position to extend into augmented reality ads within apps built with Unity. This could make it the largest ad network in the AR era.

This grand vision is still far away though. First, the company’s expansion beyond gaming is still early in gaining traction and customers generally need a lot of consulting support. You’ll notice other coverage of Unity over the last few years all tends to mention the same case studies of use outside gaming; there just aren’t that many than have been rolled out by large companies. Unity is still in the stage of gaining name recognition and educating these markets about what its engine can do. There are promising proof points of its value but market penetration is small.

Second, the era of AR as “the next major computing platform after mobile” seems easily a decade away, during which time existing and yet-to-be-founded tech giants will also advance their positions in different parts of the AR tech, authoring, and services stack. Apple, Facebook, Google, and Microsoft are collaborators with Unity right now but any of them could decide to compete with their own AR-focused engine (and if any of them acquire Unity, the others will almost certainly do so because of the loss of Unity’s neutral position between them).

Read Part 2 to break down Unity’s current financial position, how its positioning itself in the S-1 to achieve a higher valuation, and what both the bear and bull cases are for its future.

Microsoft introduces monthly financing plan for its new Xbox consoles

Monthly financing isn’t an entirely new concept in the world of Xbox. Microsoft offered a similar plan for the Xbox One S a few years ago. The idea is pretty simple: pay a monthly fee for hardware and software for two years until you outright own the device. What’s new here, however, is that the company is introducing the plan for its brand new consoles due out later this year.

Along with its Series S announcement, Microsoft detailed two new plans designed to get the consoles in the hands of those unwilling or unable to shell out $299 or $499 for a new system up front. It’s a move that greatly expands the accessibility of the system, even beyond the recent announcement of the low-cost model.

The move is in line with a recent rekindled interest in a hardware as a service model. We’ve seen a number of companies like Zoom embrace this to varying degrees. Though really, the rent to own model shares a lot with smartphone contracts — even as those have begun to fall out of favor in the U.S. to some degree in recent years.

Here, $25 a month will get a Series S console, bundled with Game Pass Ultimate. For $35 a month, meanwhile, you get Game Pass Ultimate plus the Series X. There’s nothing to pay up front. Given how central the Game Pass streaming service is to the next-gen console, it’s a pretty solid deal. After all, Game Pass Ultimate will run you $15 a month without hardware access thrown in.

With estimates around PlayStation 5 pricing ranging from around $450-$550, Sony’s got a tough act to follow in terms of aggressive pricing. Even though the PS5 has arguably drummed up considerably more excitement thus far than the next generation Xbox, a $25/month entry point is tough to compete with.