The Response to Unity's Engine Monetization Changes Is a Lesson About Metaverse Competition

Unity, a company best known for making a popular game engine that developers use to create video games, revealed on September 12 that it plans to revamp its monetization policy. Game engines have become ubiquitous in video game development and will also be crucial in the development of immersive applications in the metaverse, providing developers with a software framework that streamlines their production process.

Under the changes Unity proposed, developer studios would be charged a fee every time a user installed an app that used Unity’s engine after a certain revenue and lifetime install threshold is surpassed. The announcement was met with significant pushback from developer studios, who claimed the new policy was too costly. Ultimately, Unity backtracked and announced that it would further revise and modify its engine monetization policy. Unity launched a revised policy on September 22 that increased the qualifying revenue and install thresholds and allowed developers to choose between different monetization schemes.

As most virtual reality (VR) experiences will require 3D media and renderings similar to what is seen in today’s video games, game engines will be vital infrastructure for the metaverse. The crucial role of game engines in VR app development prompted the VR industry’s quick reaction to Unity’s announcement. Despite being the most popular engine in the VR industry, some VR developers publicly announced that they would look for alternatives following Unity’s announcement.

While standard business disputes between suppliers trying to increase their prices and customers complaining about those prices are nothing new, this case sheds light on a competition policy issue that will shape the development of the metaverse. For example, game developers associations in the European Union and the United Kingdom argued that the Unity situation calls for competition authorities to intervene in the game engine market. They claim that Unity’s position as a market leader—over 60 percent of all game developers use Unity’s engine—is not healthy for the game engine market, as it positions the company as the “de facto standard” for game development, leaving developers with no choice but to use Unity’s engine despite the higher costs.

Unfortunately, regulators—both in the United States and abroad—seem primed to accept these arguments because they believe a lack of competition and concentration in the tech sector at large allows incumbents to be less innovative, raise prices, and offer worse products with little or no repercussions. Regulators eager to intervene could use Unity’s policy changes as an example of a lack of competition in the metaverse. The Federal Trade Commission (FTC) and the European Parliament have already pushed for aggressive antitrust intervention in the metaverse using the argument that it could become a highly concentrated market where incumbents face little competitive pressure.

In the United States, the FTC has already taken actions to intervene in the relatively nascent VR market. Reports from January 2022 indicated that the FTC had launched an investigation against Meta for alleged anticompetitive behavior in its pricing strategy of their Quest headsets. It filed a complaint in federal district court on July 22, 2022 seeking to block Meta’s acquisition of the VR development studio Within Unlimited. While a federal judge ultimately declined the FTC’s injunction against the acquisition, the lawsuit provided additional evidence that the FTC will pursue aggressive antitrust action in the metaverse.

In the EU, the draft report by the European Parliament’s Committee on the Internal Market and Consumer Protection claims that virtual worlds and the metaverse “entail significant risks affecting consumer protection and issues related to competition law” and expresses concern over the “challenges posed by the accumulation of power by foreign digital giants.” In this report, the Parliament emphasizes a need for a “clear and comprehensive regulatory framework” and celebrates the passing of regulations like the Digital Services Act and the Digital Markets Act as a step in building that framework.

But policymakers should look at the quick market response to Unity’s changes and reevaluate their core assumptions about the competitiveness and dynamism of the metaverse. Before this announcement, Unity’s share as the main engine behind VR experiences had eroded for years. In 2015, Unity reported that 95 percent of all VR content was developed on the Unity Engine. That number went down to 65 percent by 2019.

It is also evident in the aftermath of Unity’s announcement. As developers looked at alternatives to Unity’s engine, many highlighted the existence of Epic Games’s Unreal Engine or the free, open-source Godot engine. While Unity is the market leader in a crucial product of the technology stack, its success is far from guaranteed in the long run. In other cases, developers might turn to developing proprietary engines, a practice usually adopted by bigger studios due to its high costs. Ultimately, the fact that Unity had to revise and restructure its pricing scheme suggests that it does not have monopoly pricing power.

Regulators should view this situation as a cautionary tale: Today’s market leaders are still responsive to market forces, and if they ignore their customers’ demands, they may not hold the same position in the future. Market leaders are in an even more vulnerable position in nascent markets—such as the VR market—where circumstances are constantly changing and new companies continue to emerge and compete for newly-discovered profit opportunities.