Anyone who has doubted the depth of the crisis at Unity in recent months need only look at its consequences: it takes more than a storm in a teacup to capsize a CEO. John Riccitiello’s retirement from the company – effective immediately, no less – is indeed a vanishingly rare thing in the games business, where blame for failure and poor judgement all too often trickles down the org chart and leaves top management unscathed.
Riccitiello’s name and reputation, however, was impossible to disentangle from the unforced errors that have collapsed Unity’s relationship with so many developers. From his tenure at EA being (rather unfairly) summarised as “he’s the loot box guy” to his ill-judged but highly revealing description of developers who don’t focus on monetisation as “fucking idiots,” a significant portion of Unity’s customer base had drawn a line through Riccitiello’s career that connected directly to Unity’s grasping and ultimately disastrous attempt to change its financial terms.
There simply wasn’t any way for Unity to offer up a sacrificial scalp from further down the org chart; the buck, for once, had stopped at the top and had nowhere else to go.
Riccitiello’s departure is clearly meant to draw a line underneath the crisis, giving his eventual replacement a chance to start rebuilding trust with Unity’s customers. To some extent, it will at least show people that the company genuinely understands that it messed up – but it’s an enormous stretch to think of this as drawing a line under anything.
Riccitiello was a figurehead for the unpopular changes Unity tried to push through, but nobody thinks he was a cackling villain who drove an otherwise healthy company to make disastrous choices.
Unity is a troubled company with or without Riccitiello, and the underlying factors that pushed the firm to pursue a strategy it knew would be incredibly unpopular with its customers (even if it underestimated the strength of that backlash) have not changed. Whoever replaces Riccitiello will face the same problems; it remains to be seen whether their solutions will be any better.
Developers using Unity’s engine know that the company’s problems haven’t gone away just because its licence changes have been reversed, or because its CEO has stepped down. They haven’t been waiting for a head to roll – they’ve been waiting for the other shoe to drop, and for Unity to tell everyone what its new plan is to reach profitability now that the old plan has been abandoned.
When that other shoe does finally drop – which will now probably be some way off, as it’s unlikely the company will announce any major changes under an interim CEO – the chances are that it won’t be much more popular than the last effort at restructuring the firm’s revenue streams was.
Riccitiello was very clearly the wrong person to guide this company through its problems, and indeed, some of his decisions may have significantly added to those problems – he oversaw a lot of acquisitions, and there’s a strong argument that many of them merely added bloat to a company that already struggled to manage costs.
He has, unusually for a games industry CEO, paid for that with his job (though I’m sure the roughly $100 million of Unity stock he still holds, and the reported millions of dollars of salary still coming his way, provide him with some comfort at this difficult time – just in case anyone is wondering how late-stage capitalism’s messy divorce with the most basic tenets of meritocracy is going).
The problems themselves, however, are separate from Riccitiello; they are far more fundamental than any one person on the executive team.
To wit, Unity has never been profitable. The company has been around for almost 20 years now, and has consistently lost money. This isn’t because it doesn’t earn enough, per se, since revenues have grown very consistently, reaching almost $1.4 billion last year – but Unity has never seemed to be able to drop what amounts to a venture capital mindset, constantly pursuing growth and market share with the question of profitability being put on the long finger.
The problems themselves, however, are separate from Riccitiello; they are far more fundamental than any one person on the executive team
That’s standard thinking for early stage technology companies – build the product, build the customer base, and worry about how to make money from it later on – but Unity is not the first company to discover that this mindset can be disastrous if it continues past the early growth stages, as it creates business models and customer expectations that can be impossible to reshape when it’s time to actually start paying some bills.
Perhaps it’s because Unity’s long-term rivalry with Unreal made the company’s management feel like it was never big enough, or never had enough of a moat around its business, but at any moment where organic revenue growth might have been allowed to catch up with Unity’s cost basis and make the firm sustainable, Unity decided instead to try to grow and expand in new directions, taking on more acquisitions, more staff, and more costs.
According to last year’s filings, Unity employed 7,700 people around the world and across its various subsidiaries – twice as many as rival Epic Games, even before Epic’s recent massive round of layoffs (and it’s worth noting that Epic’s headcount also includes several actual game development studios).
In the background of the company’s broad issue with profitability is a more specific and painful problem – not only is it not profitable overall, it is wildly unprofitable in the one area that people really care about, which is its game engine. Most of Unity’s revenue actually comes from its monetisation solutions – tools and platforms for in-game ads, in-app purchases, and so on – with revenue from the engine being a relatively small slice of the pie by comparison.
In an ideal world, what that would mean is that the various monetisation products were subsidising work on the engine, and I imagine that’s exactly the intention the company had when it pushed into those business fields. By having a healthy monetisation business pumping out money, it could afford to keep subsidising work on the engine product, the jewel in the crown that would never be directly profitable but whose continued success would bring more and more developers to the platform and grant a “halo effect” to Unity’s other businesses in turn.
In reality, with the whole enterprise being unprofitable, the balance of power within Unity has instead, somewhat inevitably, shifted to the side of the firm that makes most of the money.
With the whole enterprise being unprofitable, the balance of power within Unity has shifted to the side of the firm that makes most of the money
When Riccitiello famously said that developers not focused on their monetisation strategy were “fucking idiots” last year, he was ill-advisedly releasing some pent-up frustration with the countless developers who used Unity’s low-revenue engine product, without engaging with their significantly higher-revenue monetisation services.
From his perspective (though this is not a defence of the unquestionably stupid statement), those developers are essentially a drain on Unity and a counterweight to the company’s push for profitability.
Of course, the developers’ perspective is very different. They’re good, loyal customers – they’re using Unity, the game engine, which they consider (and which the company itself still insists) to be the beating heart of the company.
Unity, the game engine, however, is not going to support a company with 7,700 employees, billion-dollar acquisitions, and executives with eight-digit compensation packages.
One arguably sensible option would be to try to slim the company down, trimming back to a scale that’s more suited to its actual revenues and their growth trajectory – but this is almost impossible for a listed company like Unity to do, since while investors do like to see costs being controlled, the notion of a company pulling back from a growth strategy to consolidate its market position is damned-near anathema for the stock market.
Meanwhile, the actual structure that would make most sense for Unity – a trust designed to protect and oversee the engine development, which operates peripheral businesses like monetisation with a charter that sees the profits from those businesses put back into supporting the engine – was an impossibility the moment the decision was made that Unity should be a publicly traded company.
Trusting a core part of your livelihood to a product from a company that loses money hand over fist is a disaster waiting to happen
Consequently, it doesn’t really matter who replaces Riccitiello in the short to medium term. The pressures to make the game engine business pay its way, and to support a terribly unfocused growth strategy that’s resulted in a sprawling mess of a company, are not going to go anywhere – and as long as that’s the reality, we’re on an inevitable path back to the same issues that arose a few weeks ago.
It’s been pointed out many times in the intervening weeks that Unity’s disastrous policy change had undermined trust among developers in a way that could not be repaired simply by walking it back; it had shown that the company is willing to unilaterally change licence terms that game creators had been relying upon as a fixed arrangement over months if not years of development.
To some extent, that broken trust is a moral concern – but on a practical level, developers have also been forced to take a clear-eyed look at what Unity is as a company, not just as a product, and what they see there really should give them cause for concern. Trusting a core part of your livelihood to a product from a company that loses money hand over fist is a disaster waiting to happen.
If Unity’s next CEO is going to restore trust among developers (if such a thing is even possible any more), their first task is going to have to be putting the company onto a stable enough financial footing to actually be able to make any kind of credible long-term promises – but that in itself will be a painful process. Riccitiello’s departure draws a line under nothing; Unity’s crisis is still just beginning.
Sign up for the GI Daily here to get the biggest news straight to your inbox
