At the beginning of a video announcing Unity’s acquisition of Weta Digital, Peter Jackson, filmmaker extraordinaire and the founder of Weta, and Prem Akkaraju, the CEO of Weta Digital, explained why they were excited to hand Weta Digital over (beyond, of course, the $1.63 billion):
Peter Jackson: We knew that digital effects offered so much possibility for us to be able to create the worlds and the creatures that we were imagining.
Prem Akkaraju: Now we’re taking those tools that we have created and are handing them over the Unity to market them for the entire world.
Peter Jackson: Together Unity and Weta Digital can create a pathway for any artist in any industry who will now be able to leverage these incredible creative tools.
The creation, development, and now sale of Weta Digital is a great example of how the ideal approach to innovation in an emerging field changes over time; understanding that journey also explains why Unity is a great home for Weta.
Weta’s Integrated History
Peter Jackson has said that he was inspired to start Weta Digital after seeing Jurassic Park and realizing that CGI was the future of movies; the first movie Weta worked on was Heavenly Creature, which Jackson says didn’t even need CGI. From an oral history of Weta Digital:
We used the film as an excuse to buy one computer, just to put our toe in the water. And we had a guy, one guy, who could figure out how to work it, and we got a couple of bits of software, and we did the effects in Heavenly Creatures really just for the sake of doing some CGI effects so we’d actually just start to figure it out. And then on The Frighteners, which was the next movie we [did], we went from one computer to 30 computers. It was a pretty big jump.”
Weta, as you would expect given how nascent computer graphics were, was integrated from top-to-bottom: Jackson’s team didn’t make software to make graphics for Jackson’s films; Jackson actually made a scene in a film that needed graphics to give his team a reason to get started on making software. That bet paid off a few years later when Weta played a pivotal role in the Lord of the Rings trilogy. The feedback loop between movie-making and software-development was tight in a way that is only possible with a fully integrated approach, resulting in dramatic improvements from film to film. Jackson said of Gollum:
Now the first Lord of the Rings film, Fellowship of the Ring, which has Gollum in about two shots, he’s just a little glimpse, and it’s completely different to the Gollum that’s in the next film, The Two Towers. [That first] version of Gollum was pretty gnarly, pretty crude. It was as good as we could do at that time, and we had to have something in the movie, but we put a very deep shadow, and you know that was on purpose because he didn’t look very good. But, nonetheless, we ran out of time, and that was what we had to have in the movie. We still had another year to get him really good for the Two Towers, where he was half the film, so the Two Towers Gollum was a complete overhaul of the one from the first film. It finally got to the place that we wanted to go.”
Over the intervening years, though, Weta gradually branched out, working on films beyond Jackson’s personal projects, including Avatar and Avengers. This too makes sense: developing software is both incredibly capital intensive and benefits from high rates of iteration; that means there is both an economic motive to serve more customers, increasing the return on the initial investment, and a product motive, since every time the software is used there is the potential for improvement. Still, software development and software application were still integrated, because there was so much more improvement to be had; Jackson again:
Over the years, we’ve written about a hundred pieces of code for a wide variety of different things, and it drives me a little bit crazy because we keep writing code for the same things every time. Like, we do Avatar a few years ago, and we wrote software to create grass, and trees, leaves, that can blow with the wind, that sort of stuff. And then I come along with The Hobbit, and I want some grass or some shrubs or some trees, so I [ask], Why can’t we use the stuff that we wrote [already]? I mean it was fine for the [prior] film, but we wanted to be better. I mean there was some kind of code, unspoken code – and it’s not anything to do with the ownership of the software, because it belongs to us – but the guys themselves, wanna do everything better than they did the last time. So they don’t want the Avatar grass, or the leaves; they want to do grass and leaves better than last time. They set about writing a whole new grass software, whole new leaf software, and it happens over and over again, all the time. It sort of drives me crazy.
What is interesting, though, is that in that same oral history Jackson starts to signal that the plane of improvement was starting to shift; he says at the end:
We live in in an age where everything is possible, really, with CGI. There’s nothing that you cannot imagine in your head or read on a script, or whatever, that you can’t actually do now. What you’ve got now is you’ve simply got faster – faster and cheaper. In terms of computers, you know, every year they get cheaper, and they get twice as fast. It is important because when you’re doing visual effects, it’s like any form of filmmaking, you often want a take two, take three, take four. You do the fire shot with a little flame once and you know you’re not necessarily gonna get it looking great on the first time, so it’s good to have a second go, and maybe a third go, maybe a fourth go. So when you’ve actually got computers that are getting quicker and faster, it gives you more goes at doing this stuff. Ultimately you get a better looking result.
Notice the transition here; at the beginning everything was integrated from the movie shot to the development process to the software to the individual computer:
Over the ensuing 28 years, though, each of these pieces has been broken off and modularized, increasing the leverage that can be gained from the software itself; Unity’s approach of selling tools to the world is the logical endpoint.
Unity’s Modular History
When 3D games first became possible in the 1990s 3D game engines were developed for a specific game; the most famous developer was id Software, which was founded in 1991, and id’s most famous engine was built for its Quake series of games; id’s rival was Epic, which built the Unreal engine for Unreal Tournament. These were integrated efforts: the engine was built for the game, and the game was built for the engine; once development was completed then the engine was made available to other developers to build their own games, without having to recreate all of the work that id or Epic had already done.
Unity, though was different: its founders started with the express goal of “democratizing game development”; the company’s only game, GooBall, was intended as a proof of concept. It also, like Unity, only ran on the Mac, which wasn’t a great recipe for commercial success in the games business. That all flipped in 2008, though, with the opening of the iPhone App Store: that was one of the greatest gold rushes of all time, and a tool at home on Apple’s technologies was particularly well-placed to profit. 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.
Mobile was a perfect opportunity for Unity for reasons that went beyond its Apple roots. Phones, particularly back then, were dramatically underpowered relative to PCs with dedicated graphics cards; that meant that the primary goal for an engine was not to produce cutting edge graphics, but to deliver good enough graphics in a power-constrained environment. Moreover, most of the developers taking advantage of the mobile opportunity were small teams and independents; they couldn’t afford the big PC engines even if they could fit in an iPhone’s power envelope. Unity, though, wasn’t just Apple friendly, but also built from the ground-up for independent developers, both in terms of usability and also pricing.
Over time, as mobile gaming has become the largest part of the market, and as the power of mobile phones has grown, Unity has grown its capabilities and performance; the company has made increasing in-roads 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
This has opened up further opportunities for Unity: it turned out that mobile gaming had a completely different business model than PC or console gaming as well, which traditionally sold a game for a fixed price. Mobile, though, thanks to its always connected nature and massive market size, moved towards a combination of advertising and in-app purchases. 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 of its customers, and second, advertising in particular requires far more scale than any one game developer could build on its own. Unity, though, could build an advertising market across all of 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.
Today it is actually Unity’s Operate Solutions, including its advertising network and in-app purchase support, plus other services like hosting and multiplayer support, that makes up 65% of Unity’s revenue; Create Solutions, which is primarily monetized via a SaaS-subscription to Unity’s development tools, is only 29%. The latter, though, is an on-ramp to the former; CEO John Riccitiello said on Unity’s most recent earnings call:
We can hook [creators] at the artist level when they’re just building out their first visual representation of what they want to do. We can hook them lots of different ways. And at Unity, it almost always seems the same. They start as some sort of a experimental customer doing not a lot. And then we get inside and they do a lot more and then they do a lot more, then they write bigger contracts, they start moving more of our services. I would hate to say this in front our customers although they know it, land and expand is like endemic to Unity. It’s exactly what we’re doing.
This has resulted in a net expansion rate of 142%; that 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:
This shows just how important it is that Unity’s tools attract customers: the company has the ability to 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.
Enter Weta.
Unity + Weta
It is striking how the fundamental strengths and weaknesses of Weta and Unity are mirror images of each other: Weta has cutting edge technology, but it’s only available to Weta; Unity’s technology, meanwhile, continues to improve, 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.
What you see in this acquisition, then, is the intersection of these two paths:
- 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.
The logic should be obvious: Weta increases Unity’s market from not just developers but to artists, who can be plugged into Unity’s land-and-expand model. Weta, meanwhile, immediately gains leverage on all of the investment it has made in its software tools.
There is also a third path flowing through this intersection: the convergence and increase of computing power across devices of all sizes. Unity benefited at the beginning from serving an underpowered mobile market; Weta, in contrast, was so limited by underpowered computers that its developers had to be tightly integrated with artists to make things that were never before possible.
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 me in an interview:
It’s an incredible opportunity for the world’s artist to get to something that this incredible collection of tools that they’re going to want to use, and they’re going to want to use it in the film industry. But we’ve got thousands of engineers inside of Unity and we’re going to work at making these tools. Some of them already are real time and usable in video games, make most all of them real time so they can be used in video games, but they can be used in many vertical industry circumstances, whether it’s the auto industry for car configurators or design or architecture, engineering construction, or in digital twins.
These tools are pretty darned amazing, I’m proud that we were able to come to an agreement with Peter and the team around him. I’m also excited about the prospect of bringing these tools to a global marketplace…But what I would tell you is this is one of those things where you write down the strategy and then there’s something that accelerates you multiple years, and this is exactly that. We’re thrilled.
It’s going to take time to see all of this come to fruition, and there are obvious challenges in bringing together two companies that are so different; it is precisely those differences, though, that make this acquisition so compelling.
Faceless Platforms
One additional point: to me the most analogous company to Unity is not Epic, its biggest competitor in the game engine business, but TSMC. TSMC, like Unity, was built from the beginning to be a partner to chip designers, not a competitor, in large part because the company had no other route to market. In the process, though, TSMC democratized chip development and then, with the rise of smartphones, gained the volume necessary to overtake integrated competitors like Intel.
By 2019 it was TSMC that was the first to bring chips to market based on Extreme Ultraviolet (EUV) lithography technology; EUV was devilishly difficult and exceptionally expensive, requiring not just years of development by ASML, but also customers like Apple willing to pay for the absolute most cutting edge chips at massive volume. Now TSMC is the most advanced fab in the industry and the 10th most valuable company in the world, and, absent geopolitical risk, a clear winner in a world increasingly experienced via technology.
The ultimate manifestation of that is the metaverse, and here Unity is particularly well-placed; Nvidia CEO Jenson Huang at last week’s GTC keynote described today’s web as being 2D, and the future as being 3D, and now Unity owns the best 3D tools in the world. More importantly, unlike Metaverse aspirants like Facebook or Microsoft, Unity isn’t competing for end users, which means it can partner with everyone building those new experiences — including Facebook and Microsoft and Apple — just as TSMC can build chips for everyone, even Intel.
It is companies like Unity and TSMC — other examples include Stripe or Shopify or the public clouds — that are the most important to the future. The most valuable prize in technology has always been platforms, but in the beginning era of technology the most important platforms were those that interfaced directly with users; in technology’s middle era the most important platforms will be faceless, empowering developers and artists and creators of all types to create completely new experiences on top of the best technology in the world, created and maintained and improved on by companies that aren’t competing with them, but partnering to achieve the scale necessary to accelerate the future.
via https://AiUpNow.com November 18, 2021 at 04:11AM by Ben Thompson, Khareem Sudlow,
