AppLovin offers to merge with Unity: it’s musical chairs on mobile

This morning, AppLovin announced that it has made a non-binding proposal to merge with Unity. Some headline details from the announcement:

  • This would be an all-stock transaction valuing Unity at $58.85 per share for a $20 billion enterprise value, at a nearly 50% premium to Unity’s share price on July 12th (the day that Unity announced it will pursue a merger with ironSource) and a nearly 20% premium to yesterday’s closing price;
  • AppLovin estimates that the combined company could target a $7BN revenue run-rate by the end of 2024, with an Adjusted EBITDA run-rate of over $3 billion;
  • In announcing the proposal, AppLovin revealed that it is lowering 2022 guidance for its Apps business unit (ie. games) to $1.70 to $1.85 billion, while re-affirming revenue guidance for its Software Platform business;
  • Unity’s CEO, John Riccitiello, would become the CEO of the combined company, with AppLovin’s CEO, Adam Foroughi, becoming COO;
  • Unity shareholders would own 55% of the outstanding shares of the combined company but hold 49% of voting rights, with 45% of outstanding shares and 51% of voting rights going to AppLovin shareholders. The members of the Board of Directors would mostly be appointed by Unity.

Notably, this offer is contingent on the termination of the proposed and ongoing merger agreement between Unity and ironSource, which was announced just last month. The logical support that I posited for that merger applies here, too: the size of the mobile game app install market is shrinking as a result of various privacy and ad policy changes being implemented by mobile platforms and through impending legislation, and consolidation is a natural result of that. Furthermore, other factors — such as macroeconomic softness and a contraction in baseline mobile gaming and other forms of digital media engagement relative to COVID highs — are combining with the headwinds of ATT to wreak havoc on the mobile gaming ecosystem.

Updating the stock price decline chart from my piece on the proposed Unity and ironSource merger, it’s clear that all three publicly-traded mobile gaming ad networks have been punished in the current environment, benchmarked from just before ATT was introduced to July 12th (note that I use July 12th as the comparison date because this was when the Unity and ironSource merger was announced). In the period:

  • Unity’s stock was down 61%;
  • ironSource’s stock was down 80%;
  • AppLovin’s stock was down 44%.

And there is no good news on the horizon for this category: Google has announced the eventual deprecation of its mobile advertising identifier on Android, the GAID, as well as an impending crackdown on various advertising formats on that platform that are primarily employed by these mobile gaming ad networks. And Apple’s upcoming SKAdNetwork 4.0 measurement framework — which represents a fundamental improvement over the mostly dysfunctional version that is available to advertisers today — likely disproportionately benefits large “walled garden” ad platforms like Google, Meta, and Snap relative to the mobile gaming ad networks, since the walled gardens have more leverage over advertisers with the implementation of conversion values and can almost certainly derive more value from them.

My hypothesis around the motivation for the Unity / ironSource merger was that it provides Unity with a scaled mediation platform, with access to supply being the primary competitive front for in-game advertising given the rise of in-app bidding. If that support was valid for that proposed merger, then its doubly valid for this one, given that AppLovin’s SSP, MAX, has grown appreciably following AppLovin’s acquisition of MoPub (which it quickly shuttered, paying out hundreds of millions of dollars in publisher bonuses to transition those developers to MAX).

Google recently announced that it has entered into agreements with various SSPs (MAX, Fyber, and Chartboost) to bid its demand into SSP supply (previously, Google demand was limited to its own mediation platform, AdMob, for in-app bidding). Google was one of the last holdouts for universal in-app bidding demand availability: the ecosystem’s shift to in-app bidding generally will further cause network demand to consolidate. As I wrote in In-app header bidding and the road to programmatic in 2018:

In-app header bidding will provide better yields to publishers (and, if the market operates efficiently, that increase in yield should generate some cost savings for advertisers). But that feels like less of a substantive evolutional moment than a broader shift towards programmatic buying on the part of advertisers, which would likely lead to many ad networks outside of the top tier to become extinct. That’s the real, fundamental market shift that has perennially been “next”: the collapsing of the participant chain on the demand side.

This market dynamic, combined with the factors that have wrought the conditions that I describe in the Mobile Marketing Winter series (see parts one, two, and three), engenders a challenging environment generally on mobile but poignantly so for mobile gaming, including the advertising channels that support it.

The combined AppLovin and Unity company could potentially unlock synergies across the Create (game engine) side of Unity’s business, allowing for a more fully horizontally-integrated entity to emerge in ways that seemed unlikely in a Unity / ironSource merger. The press release for the proposal briefly touches on this: “The cash flow benefits of running a large, scaled combined Growth business can be reinvested in the Create Solutions business, which AppLovin views as a cornerstone of its joint strategic advantage.”

But primarily, this merger would marry two scaled ad networks with a formidable source of in-app games advertising supply in ways that are necessary for this new operating environment. It’s musical chairs on mobile.