FOMO (fear of missing out) is a hell of a drug when buying software

Most film buffs know Weta Digital as the company created by Sir Peter Jackson in 1987 which came to prominence for its amazing visual effects in The Lord Of The Rings, Avatar and other Oscar-winning movies.

On the other side, Unity is a relatively niche American company that nevertheless produces the most used engine on iOS and mobile gaming. About 71% of the top 1000 mobile games on the market run on Unity, and over 3 billion people play games it powers.

In other words, we have a company with a large customer base of game developers (Unity) while the other has an incredible suite of award-winning special effects software (Weta).

You could say it was a match made in Silicon Valley.

So, Unity’s decision to buy the visual effects tools owned by New Zealand company Weta Digital (part of Sir Peter Jackson’s Weta Workshop) was a great idea at the time.

In 2021, a $US1.63 billion deal ($US1b in cash and $US625 million in stock) was signed between the two whereby Unity would buy the intellectual property behind the software – along with the engineers who built it – while allowing Sir Peter’s company (Weta FX) to retain full rights to use the tools and improve on them.

Unity’s big plan was to make the visual effects tools available to game developers and small film studios under a licensing model. But Unity also had its sights on breaking into the major Hollywood studios.

The reason Unity wanted to woo Hollywood is that it was (and still is) lagging behind its rival Epic Games in both classic game development and the nascent gaming-tech-used-for-movie-VFX business. Epic has a huge presence in video special effects (VFX) and its Unreal engine has already been used on The Mandalorian TV show. Weta was also using the engine, as well.

Hence Unity’s FOMO.

Unity wanted desperately to catch up with Epic and saw its purchase of Weta’s intangible asset as a strategic move to a) obtain more technology to ensure it did not lose the “high ground,” b) obtain software engineers who knew all about high-end rendering engines and c) make sure Weta stayed away from Epic.

But, apparently, the strategy never quite worked out the way Unity hoped it would and the San Fransico-based company decided at the end of last year to roll back the deal with Sir Peter.

Unity would still own the software tools and the IP, but shuttered the subsidiary set up to control the software and also let go the 200+ highly-talented engineers. Bizarrely, Sir Peter gets to keep all the money and shares and his company is allowed to continue using the visual effects software.

Said differently, Sir Peter got $US1.6 billion pretty much for free and the only thing that changed at Weta FX over the last three years was that the payroll cheques said “Unity” one day instead of “Weta,” and now this will switch back again since Sir Peter re-hires the engineers who a just few months ago were employed at Unity.

Sir Peter must be scratching his head all the way to the bank. So, why didn’t Unity’s plan work out?

Unity is a listed company so the reasons for its divestment will be revealed in its next shareholder announcement. Until then, the exact cause of its misstep is unclear. But reading between the lines it’s possible that Unity simply overestimated the market for Weta’s software.

For a start, buying a bag of in-house tools that had been tailored over many years for the precise needs of movie studios, and then hoping to commercialise those tools as new products for a wider audience, was always going to take a lot of time and money. Even if it was successful, those tools could only ever be sold to a very small group of game developers.

The second problem was that the market for specialised tools among professional VFX companies already working in Hollywood was also extremely tiny.

There are a handful of companies (such as Autodesk, ILM or Adobe) that could or would buy such tools from Unity and these firms all have their own in-house tools. So, they don’t need Weta’s software. Furthermore, the biggest customer of Weta’s high-end VFX tools was, ironically, Sir Peter’s WetaFX company, which already got a big discount.

That’s not exactly what most people would call a “large and willing market.”

Because Unity was so excited to catch up with rivals, it likely never paused long enough to wonder if anyone was asking for the business model it was proposing. Sure, the software was highly lucrative for Weta and movie studios were lining up to use it. That’s why Unity wanted the intangible asset in the first place. But those studios don’t want to license the Weta software, they only want to pay a VFX company to make their movies with it. Big difference.

Another error was more technical than strategic.

Movie-making tools are designed to allow for pre-rendering all the scenes offline using powerful computers, before shipping the final movie off to theatres in one go. But video games are rendered in real-time as a player moves through a level. Weta’s tools weren’t meant for real-time rendering and most gamers don’t have access to movie-quality computers anyway. Weta’s tools were always going to be too powerful for game developers to use effectively.

In hindsight, Unity should have bought the entire VFX company from Sir Peter, rather than just the tools. That would at least give it a direct line to the major Hollywood studios while letting those studios continue with business as usual, which was what they wanted all along.

The lesson of this strange story is that high-end intangible assets – especially software – are not easily fiddled with. The more niche the software, the fewer use cases it will have. It is always risky to repackage the software for a new market that isn’t accustomed to using it.

Even if repackaging is possible, it’s critical to check if the target market actually wants the package at all!

Perhaps if it wasn’t so nervous about losing ground to its rivals, Unity would have checked that the software was conducive to its strategy and potentially saved itself billions.