Unity recently reported its 2024 financial results, confirming what many in the industry already suspected: Its ad business is underperforming.

Unity’s Grow Solutions made $1.2B in revenue last year, compared to $1.3B for the full year 2023, down 9% year-over-year. Overall, Unity remained in the red with $1.8B in revenue and a net loss of $664M.

Meanwhile, competitor AppLovin is thriving. Its advertising revenue grew 75% year-over-year to $3.2B while maintaining an impressive 76% adjusted EBITDA margin. Overall, AppLovin reported $4.7B revenue and a net income of $1.6B for 2024.

How has AppLovin risen to stand alongside ad giants like Meta and Google, while Unity — seemingly well positioned to do the same — has stumbled? Let’s break it down.

Unity and AppLovin Market Capitalization, USD Billions — *Source: Stocknear*

Unity’s Lost Focus

Unity began as a game engine, not an ad network, and it only entered adtech after acquiring Helsinki-based Applifier in 2014. As mobile advertising boomed, Unity’s ad business grew, but so did its ambitions. Over the years, the company also expanded into multiplayer networking (MLAPI), computer vision (RestAR), low-latency streaming (Parsec), and even film visual effects (Weta Digital).

Meanwhile, competition in mobile ads intensified. UnityAds had a head start in games due to its obvious connection to the number one game engine. Facebook and Google moved swiftly with their mobile ad networks FAN and AdMob, and new competitors such as IronSource, AppLovin, and Vungle arrived.

Advertising success comes down to one thing: profitable ad spend. The key to a profitable ad engine is data and an algorithm that exploits it effectively. It’s the business model that Meta and Google have famously mastered.

Both Unity and AppLovin have had their own "smart targeting" algorithm for years. Unity used to call it the Audience Pinpointer, and AppLovin branded its version Axon. As Apple rolled out App Tracking Transparency (ATT) in 2021, it leveled the playing field: Suddenly no one was able to target well on iOS, which made research and development in ad targeting more critical than ever.

In 2022, Unity revealed that its ad platform’s models had been fed flawed data, which skewed performance predictions and severely hurt Pinpointer’s effectiveness. Unity CEO John Riccitiello explained that this issue required Unity to rebuild and retrain significant parts of the algorithm — a process that would take several quarters. In effect, Unity had sabotaged itself at a crucial time.

Furthermore, by 2022, in-app ad mediation was becoming a two-horse race between AppLovin MAX and IronSource LevelPlay, with AppLovin commanding the momentum. Eventually, Unity merged with IronSource. Unity doubled its ad business overnight and gained the number two position in ad mediation, positioning itself well against a growing AppLovin.

The Troubled Merger

Unity’s merger with IronSource was meant to create a powerhouse, combining Unity’s creation platform with IronSource’s monetization expertise. In practice, the post-merger integration has been fraught with challenges.

It has led to cultural clashes, particularly between Unity’s Helsinki-based ad team and IronSource’s Tel Aviv office. Reports of a toxic atmosphere emerged, with key staff departures and internal friction slowing progress. IronSource and Unity ad units ended up being weaker and slower together than separate. Unity’s recent decision to move ad leadership to the United States will likely make it worse before it gets better, as the engineering hubs were historically in Finland and Israel.

While Unity struggled with a bloated organization, internal conflicts, and the fallout from Riccitiello’s value-destructive deal-making, AppLovin stayed laser-focused on refining its core ad product. Unity’s pursuit of profitability led to the whole runtime fee fiasco and a leadership shake-up, further disrupting its progress. Meanwhile, the effects of Apple’s ATT hit the entire industry, making advanced ad targeting capabilities the key to survival. By late 2023, it was clear that AppLovin had adapted successfully, while Unity found itself falling behind.

Unity is now effectively rebooting its ad business — bringing in new leadership, cutting ties with the IronSource old guard, and building new tech with Vector, the follow-up to Audience Pinpointer. The full payoff of these changes remains to be seen, but it’s evident Unity lost valuable time while AppLovin extended its lead.

AppLovin’s Secret Sauce

AppLovin’s execution allowed it to capitalize on the post-ATT environment far better than its competitors. The rapid improvement in its ad product boils down to a few key factors.

Focus: Unlike Unity, which was juggling multiple acquisitions and projects, AppLovin focused almost entirely on its core ad business. Recently, AppLovin announced the sale of its games portfolio — reportedly to Tripledot — in a $900M deal, further signaling its commitment to the ad platform.

Data moat: In 2021, AppLovin did two major acquisitions: Adjust, a marketing measurement company, and MoPub, an ad exchange and mediation provider. AppLovin was quick to realize that the path to building the best ad targeting product included attribution capability (Adjust) and aggregating advertising supply (MoPub).

Algorithm: As privacy regulations tightened, AppLovin leaned on its own data to predict user behavior more accurately. Meanwhile, other ad networks, including Unity, struggled, causing advertisers to move their budgets to AppLovin.

Vertical integration: It wasn’t just Adjust and MoPub — between 2021 and 2022 AppLovin was also aggressively gathering market share for its MAX mediation product. With MAX mediation and Adjust analytics, AppLovin could easily share data across its ad system, making targeting more accurate and boosting returns for advertisers.

AppLovin remains focused on maintaining its lead in mobile advertising. Recently, it has been expanding its reach beyond gaming to include e-commerce and direct-to-consumer brands. However, its real advantage lies in flawless execution. To stay ahead, AppLovin must continue excelling at the countless details that drive advertising success, including data advantage, algorithms that drive targeting, continuously improving ad templates, and dashboards and tools that enhance advertiser productivity.

AppLovin has firmly established itself as the top SDK network, but the next challenge is taking on industry giants like Meta, Google, and TikTok. To reach the next level, AppLovin will need to compete directly with these heavyweights. The playbook for that fight isn’t clear yet, but AppLovin’s track record suggests it won’t shy away.

The Decision that Cost Unity Shareholders $60B

It’s a thought exercise, but an interesting one: What would have happened if Unity and AppLovin had merged?

In August 2022, AppLovin made an unsolicited proposal to merge with Unity, offering an all-stock deal that valued Unity at about $17.5B ($58.85 per share). Unity shareholders would have owned 55% of the combined entity. Unity’s board rejected the offer in favor of the IronSource merger. In hindsight, that decision looks costly.

Since then, Unity’s stock has plummeted, now trading around $26 per share — less than half the value of AppLovin’s offer. Meanwhile, AppLovin’s stock has skyrocketed, rising over 600% since the rejected deal. Had Unity's shareholders accepted, they would have ridden AppLovin’s massive growth instead of struggling with a merger that has yet to pay off. Unity’s market cap today sits at $10.7B. Just a 55% stake in AppLovin would now be worth roughly $62B.

Notably, AppLovin’s offer would have kept John Riccitiello in charge, casting doubt on whether the same growth would have been possible. AppLovin may have dodged a bullet: The IronSource-Unity merger turned out to be less of a threat than expected. With Unity struggling, AppLovin is now in a stronger position — and if it so wishes, capable of making another takeover bid today.

What Needs to Happen for Unity to Rebound

Unity operates two core businesses: game engine (Create) and ads (Grow). With near-total mobile market share, Unity’s game engine is unlikely to see significant subscription growth, especially amid widespread industry layoffs. Plus, having already strained its goodwill, Unity cannot risk another price hike.

Thus, the only long-term play is advertising. The company is now betting everything on Vector, the next iteration of Audience Pinpointer.

However, it doesn’t matter how great the algorithm is if there’s no data to feed it. Considering how dominant Unity is in the mobile game engine space, it is staggering how little it has been able to leverage that to gain a data advantage. Theoretically, Vector could benefit from Unity’s engine data, but no one knows exactly how. Unless Unity figures that out in the upcoming months, it will face an uphill battle.

AppLovin has a clear data advantage that comes from MAX’s large mediation share, first-party data from its games, and the wholly owned measurement company Adjust. For Unity — and others — execution will be crucial, but bridging the gap won’t be easy. As it stands, AppLovin remains well ahead and is set to stay there.

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