Unity vs AppLovin: Which One Is Actually Winning?

All right, so let's move on to our first story is AppLovin. They had their earnings report. The CFO confirmed that on the Q2 call that the SEC closed its year-long inquiry into AppLovin's data collection practices with no action taken. This was in regards to all of the bots that they might have used or using information that they shouldn't have used. So, there is no action taken there. Shares still fell as much as 29% after hours and closed near 336. And this is down from the 417, erasing nearly 27 billion in market value this week. That is even worse than the Roblox. I think Roblox was down 10 billion last week when we talked about their hit. Revenue hit 1.9 billion, up 53% year-on-year, but guidance for the next quarter landed below consensus. So, we

brought in the expert, the resident growth guru and nerd, Josh Chanley. Take us through it, my friend.
AppLovin it it posted its softest quarter in years. Last Q2, you know, the year-over-year growth was was 77%. This year, it's 53%. You know, sequentially only grew 4.2% I think, down from 8.6 last year. And and Q3 is pointing towards that year-over-year growth con- continuing to to slow down. What we heard was management call it timing. So, they had their AI models improve less than usual in Q2, where a model update that may have shipped in Q2 just barely fell into Q3. But here's what concerns me. Their own guidance is kind of the counter argument to that. If they're telling us a fix just shipped in Q3, why no rebound? They're guiding to 8% sequentially Q over Q growth. But they

did 12% last year. And they're guiding to the year-over-year number continuing to slow down. That doesn't seem like a bounce back yet. So, what's going on? I think that what's happening here is AppLovin's growth from gaming is almost certainly slower than the headline growth number. The the fastest growing pieces are consumer segments, so e-commerce. But the CEO said that new advertisers aren't driving that growth yet. It's scale from existing e-commerce advertisers. And that's that's not enough. And so for AppLovin, there's this race happening right now. Can they build a consumer business faster than its gaming business matures? That's the question. I still believe they can build a a huge consumer business, but timing is a Gaming people specifically from mobile gaming

pubs, you know, here's what matters. You know, product people watch ad revenue. AppLovin disclosed, I think for the first time, how fast publishers max earnings were growing. And they said they disclosed in Q2 max pubs, their earnings, it grew double digits quarter over quarter. So, AppLovin's telling us ad revenue is up to games over 10% in a single quarter, while IAP was falling.
Hm.
Ads growing double digits Q over Q, IAP shrinking. And so for product people, you know, make sure your games are exposed to where there's growth. For UA people, I mean, keep perspective. You know, our our partner had a weak quarter, and it still grew over 50%. It's still structurally key to mobile gaming. And they added more revenue in the last year than Unity's entire

business does. Like engine and all. Like AppLovin is still your most important in-app ad network. That's not even close.
It's interesting what you said about consumer or e-commerce, whatever you know, brand, whatever we want to call it. So I listen to other podcasts a lot and in podcasts that are not gaming podcasts at all, one of them is one that Chris likes, that All In podcast, I hear ads for AppLovin. I have never heard ads for an ad platform in my life and then I've been hearing ads for them on platforms that are attracting brands. So I think what you're saying is absolutely true is they are trying to seek out and diversify from just pure gaming and go into different places. But it's just so crazy that they can have this level of growth and get dinged this bad for not maintaining like 80% year-on-year growth. Like it's What do we expect these days? It's crazy.
Yeah, it's tough. And just as a

answer that.
[laughter]
Okay, go for it.
This is Oh my god, I'm so happy Chris is not here because I can tell you about hedge fund hotels, which is the the one that we like to stay. So basically it means that you have large number of hedge funds that are overcrowded at the same time because of momentum of popular thesis. So everybody kind of jump in on AppLovin and once you get a couple of good hedge funds, more come in and suddenly, you know, everybody in your hotel is a hedge fund. And then when that momentum changes, and it might be a small thing, Jen, as you said, fundamentals seem right, like the company's doing really well.
Amazing.
minor There's like a minor change in the trajectory and suddenly the stock price falls. It's because these hedge funds are checking out. The momentum changed, the thesis is a little bit different and they all leave at the same time. And that is why the price fluctuation of their stock is much more violent than the fundamentals of the company.
I would also add that it's a more volatile stock. AppLovin doesn't own its

inventory. Game studios own the inventory. Apps own the inventory. When you look at Meta, if they don't compete, they might have their CPMs flatten. If AppLovin doesn't compete, it loses the impression entirely. And so the floor is lower for them. They are on like a treadmill right now where they're stuck in this constant war with every other ad network to outbid. And so the fear is there, too. And that's another factor.
Last week we were talking about the Sensor Tower advertising report that showed that basically AppLovin and AdMob own all of IAA in gaming. What was it? Like 70% or some crazy number.
Google and AppLovin.
And I think we should be asking for competition. So what's going on with Unity?
Yeah. Show the stock price, baby. Another substantial [laughter] drop.

Look at that sweet green line. Just don't zoom out too far. Don't zoom out too far.
Yeah, exactly. I think there's been a lot of a lot of competitors to AppLovin where like the key phrase is that don't zoom out too far. AppLovin's taken up so much of the market cap in this space. I mean, what Unity has been doing it is pure sustained execution. I think everybody I've worked with on the ad mon side, on the UA side, it is has always been suspect of Vector, and it's for a really good reason. You know, I've worked with Unity as a network since 2016 and as a engine since I think 2014. They've always had execution problems. And Vector's whole play was them executing against the chain of like what I call if statements. There are a series of hard things they have to do to succeed. And if they fail at any of them, that they they really don't have much of a play. And so a year ago, a year and a

half ago when Vector launched, the natural assumption is like well this company doesn't do this. This company can't sustain execution. And now a year and a half later, they've they've done everything. They have launched the core model Vector. They modernized a lot of how their campaigns work and their infrastructure works. They've rolled out day 28. It's been under reported on, but they've rolled out things like the ability to take training in one country like the US and use that to run UA everywhere. And what that all of a sudden means is you can go from testing one little geo cuz you want to be safe to just spending everywhere straight away. These are great ways to come back that the AppLovin's had those forever. And so Unity has been just executing consistently. And I think even now, people are surprised at the consistency. The D28 campaigns that they launched have been legit.

As we get into Q3, that's becoming more and more obvious.
Mhm.
The reason is fairly simple. They launched them in the middle of early to mid Q Q2. It takes a month of user acquisition for those models to see a a user hit the 28 day and start to really train and scale. And then it takes at least a month after that for a UA team to see it mature and hit that goal. And so naturally, you're going to be waiting a little bit before you really hit the gas on those campaigns, especially when it might cannibalize a profitable AppLovin campaign that you're spending in.
I'm super curious because everyone is trained on D7, you know, ROAS. Are you talking IAP or IAA campaigns when you talk about these?
Both.
Both.
So, it doesn't matter. So, you're you're doing Everyone's like, "Oh, day seven, day seven." I I I can't tell you how many companies
Day seven is dead, baby. Day seven is fading away. It's super simple. It's super simple. What percent of whales convert in seven days or less? Okay,

that's an impossible question to answer, but it's it's it's substantially less than 100%.
But by 28 days you get most you get most of the conversion. 28 days you get most of the conversion. You capture the vast majority. And there are genre differences in terms of conversion which is important, too.
Yeah, but it didn't mean anything probably week two, anyway. Or maybe late until week
I mean, if you're staying to 28 days and you're retaining, the chance of you becoming a payer, I mean, in my past, I've I've seen that conversion mark typically is around day 10.
Yeah. 10 to 14.
Yeah, 10 to 14. It It depends on the genre and the game and I I I totally get all of those different arguments.
And well, it's because AppLovin launched it and it kicked everybody's ass. And the reason it worked, I'll try to make it simple as possible. So, say every the whole world running on day seven. And that means you're you're roughly you're buying two kinds of users. People that hit the day seven ROAS goal and go on to mature really well and hit your long-term goal. And then players that hit your day seven goal and don't. And so, if you're the

only ad network that launches a day 28 campaign, what you can now do is say, "Hey, Unity, Liftoff, Moloco, Mintgral, everybody, those users that hit your day seven goal and don't mature, you can have them.
Mhm.
The users that mature really well, we're going to bid a penny more. Additionally, there are these users that you guys don't even know about because they don't hit the day seven goal, but they mature really well cuz they're considered buyers or they're retentive, and we're going to buy those users that you weren't even bidding on. And so, what it does is it enables much higher LTV players to be captured, but it also, in a weird way, kind of takes the cream off of the top of day seven campaigns in a way that's really, really hard to compete against if you don't have that optimization. Like, it's almost like on product side, if you were only allowed to run AB tests looking at day seven ARPU,

not like seeing long-term maturation. You have to make a lot more blind guesses.
That should reduce early monetization pressure, too. Hopefully we'll get Yeah, this would hopefully get a like a more pleasurable experience. Like, when you're hyper casual, you have to optimize on 10 second ARPU. You know, 10 [laughter] 10 second ARPU. So, like, you have I mean, this was always like the Google SEO problem, right? That's why the web is a mess. Like, yeah, I got to get people on SEO landing, man. But I feel like if this If we pulled down the windows, this is like in everyone's interest. Like, we always want the free accurate prediction out in the long run. And what you should be seeing when you move from day seven to day 28 campaigns is like the Some people call it the day seven to day 28 multiple, but like the percent your ARPU increases from day seven to day 28 should go up because you're targeting deeper funnel.
Yep.
I want to know one thing. Last time we discussed this, and Kress really berated me about the fact that they would use their engine business Hold on, I'm going to read the quote. "Unity also began incorporating signals

from its runtime into Vectors AI models near the end of the second quarter." So, what Kress was berating me before is like they would use the I was saying that they have the engine that has so many users, and like, what is it? 3 billion or whatnot, and 3 million devices, etc. Not more. And he says that's not true. But Unity is saying yes, they are bringing those two data points together. Josh, what's this?
Yeah, they are bringing them together. The question is an if statement. Can they use that to improve targeting? They have not proven that yet. They should be proving that this year. Months ago, they enabled developers to start sending those postbacks. They elevated Felix Thea from SVP of product for just vector and AI to his C-suite now. So, I would expect he's having more broad. In fact, I have no idea. They It It seems like they're really internalizing the idea that a lot of the incremental EBITDA they're going to get from that engine

is by supercharging the ad business.
So, all you're saying is Matthew Bromberg is executing like a mofo over there.
Yes. [laughter]
Okay.
Absolutely. There's nothing you can really point at as like a major failure on the vector side over the last year. You can complain that they haven't grown faster, I suppose. But, in an environment like they have, it's so hard. Like, AppLovin's competing ridiculously well. They have more data. They get a discount. So, for Unity to win an impression against AppLovin, they have to pay AppLovin a 5% fee to bid into MAX and then still beat AppLovin.
Oh, that's rough.
Axon 2 is a phenomenal engine and they have all this scale. That's just like a ridiculously hard ask. So, it's interesting to see them growing so much before the engine data is being deployed. Cuz what it means is if they can execute, if they can execute against

that really hard thing that no one's done before, then there's a lot of upside.
Yeah, I think we're all cheering them on though. We want competition. We don't want, you know, one giant gorilla. But, let's go into some other Unity news. So, they just actually sold Supersonic. So, the deal closed on August 4th. Supersonic continues as a standalone brand in Tel Aviv with Unity providing roughly 3 months of transition support. In Unity's second major mobile publishing divestiture this year, following ironSource ads network sunset that drove 279 million in half one impairment charges alongside the sale. tripledot now reports roughly 2 billion in annual gross revenue across 12 studios and gains its first foothold in Israel's mobile talent market. So, Josh, give me your take on this one, too. This kind of big news for Unity on the other side.
Up until today, whenever we had a studio with a lot of ad revenue and it was acquired, we had to look at the IAP

revenue and then look at the download revenue of downloads and kind of squint and guess.
Yeah.
And so, when you look at that now, like Supersonic in Q2 downloads were were down 57% year-over-year, but then IAP was up like 3,000%. And so, you just have these two different numbers pointing in opposite directions. So, you you don't really know how the business is really doing because it's totally possible that they're doing poorly and it's totally possible that they're now targeting the players that matter and revenue is exploding. Sensor Tower has now started to release ad revenue data. And so, with this new ability, they're able to estimate Supersonic revenue as a whole and we can see how it looks. And what we actually see is that Supersonic cratered 36% year-over-year in that same industry that AppLovin said grew 10% just from Q1 to Q2.

And that's because their ad revenue dropped by almost half. And so, what we're seeing now is that Supersonic has stabilized to around 10 million a month, so you can call it 120 a year in revenue. And when you look at that, the 40 million purchase price is a lot easier to judge. The real take though is it's another amazing acquisition by triple bot who now own Lion and Supersonic. It comes across as fairly cheap. But Lior I forget his last name, but Lior was quoted as saying, "Together with Lion Studios, we can now partner with more studios and more markets with better tech behind it." There's a hidden like thing there in plain view. With Lion and Supersonic, every dev pitching a publisher is now pitching the same company twice. That changes like your leverage on terms, and that's part of the deal like no one's talking about. That gives them a lot more negotiating power.
What do you mean by that? You're pitching a company twice.

What I mean by that is Lion and Supersonic don't actually really develop games. They have indie studios Yeah, they publish for those games. And an amazing publishing contracts might be 50 60% goes to the publisher. A strong contract where they have lots of negotiating power could be 70 plus percent goes to them. And so if you start to buy up all the publishers you're taking away other options from indie game developers, and you can negotiate stronger terms because you own all the publishing houses.
Okay, so it's a little bit more difficult for these smaller
little guys.
Yeah.
Yeah, I mean that's I think a trend we've been talking about is there's not there's not that many publishers out there in mobile anymore. They're all kind of getting scooped up and it's it's harder to find a place to land, I think so to speak.
It is This is another example of that. Yeah.
Yeah, I mean there are still few like the Voodoos and the Say Games and the Tap Nations and so forth.

They're kind of fishing now in Vietnam and in Pakistan. They're kind of looking for fresh meat. But what also happens a lot with these publishers is as they find somebody who's really good at creating the core game experiences, they tend to just be working with them. Like Castle Crashers, done, I forgot the name of the studio that we will never talk about, but they they kick tend up working with like about, you know, handful of studios and then the rest of them is just pitching these core games and then the publishers, when we talk about Supersonic, like it's not just that there are these ad monetization and UA people, it's actually there's plenty of live ops people and all the added resources, the PMs. They're essentially making your game that you made with your really tiny studio live ops able and actually live ops in it. So, so yes, they take the majority revenue, but they also launch the game and operate it. So, that's the part. But um but talking about this deal as its own, like this is the dot on top of the eye that was the iron source versus AppLovin drama and

saga. Because if you remember at one point, they were competing is who is Unity going to take on at their prom date? Is it going to be iron source? Is it going to be AppLovin? I think that that ended up well. Like AppLovin essentially owned the prom after that. They became the king and the queen of the prom. Anyways, iron source is dead. Supersonic was iron source's hyper casual publisher. It's the same as Lion Studios was for AppLovin and essentially now it's under AppLovin, both of them. Uh but the saddest price of all of this is the sale price. When I read that it was $40 million, I was like, "Josh, your graphs, if they're correct, this is horrific. Because when you're showing the revenue graphs, we're talking about a what? 0.26 multiple? Maybe 24? Maybe 25? Like, I don't know how Lior is closing these deals, but he must have some crazy handshake. He grabbed the whole AppLovin portfolio

for 800 million and the terms were open. They were like, "Ah, you know what, Lior, just pay what you want and we'll just put in this is tiny number. Meanwhile, AppLovin was selling it around for 2.4 billion. And now, a studio or a publisher that generates $150 million a year has over 5 billion downloads, 460 million downloads a year. Ad monetization is clearly on the rise, and he picks it up at 40. Like, Jesus, I think where are the private equity Did Did anybody like was this the sort of like a tender that that, you know, like Greeks would do where like you have to have a specific way to tender into this to buy this property? And like everybody sent their offers, but they never arrived cuz they were not in the formal way. Like, I don't know what's happening here, but uh but if anybody's ever negotiating with Lior, even if they're selling, they better know that they will be paying as well. That's the moral of this story.
Damn. Yeah, fire sale.
What?
All right.
Fire sale with one buyer? What is this?

[laughter]
Yeah, that's that's true. I mean, didn't we say that though like when all of this was going down? Like, there were not a lot of buyers for these things. Nobody Nobody is looking to have a declining IAA-driven game developer. Maybe
Yeah, that's true. I mean, we've seen like Brainium sell for high multiples and that's ad monetized. There's something about the AppLovin and Unity portfolios that just didn't get
Toxic. Yeah, no one's really wanted them.
Yeah.
And I have no idea why.
I know this team really well, too. We did the whole interview series with uh with Supersonic on hybrid casual. They're really good. Like, this is a separate, lean, mean executing team, and probably like cut off from Unity, they will be even better. So, I just don't understand how you can buy this asset for 0.2 Like, you can't buy a kiosk with this multiple.
Yeah, under one. Way under one.

[laughter]
Like, for to restaurant sale I don't know. Like what are we talking about? Anyways.
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