Unity’s stock is plunging as company says it may walk back controversial fees. Here’s why.

Unity caused a stir in the gaming world last week when it announced new fees for more established game developers, to be assessed for every download of one of their games built on Unity’s engine.

Unity then updated its blog post Sunday night to say: “We have heard you.”

“We apologize for the confusion and angst the runtime fee policy we announced on Tuesday caused,” the company said. “We are listening, talking to our team members, community, customers, and partners, and will be making changes to the policy. We will share an update in a couple of days. Thank you for your honest and critical feedback.”

While the new fees were unpopular, they also had the potential to deliver a monetization boost, analysts noted last week.

Read: New game-engine fees ‘unlocking engine for growth’ at Unity, as analyst upgrades stock to a buy

And even though Unity now appears to be backtracking on the fees, analysts said Monday that some brand damage may already be done.

Wedbush analyst Michael Pachter pointed to a Friday blog post from Adam Foroughi, the chief executive of rival AppLovin Corp.
APP,
+2.78%.

“John, There was a time when I would’ve texted you this, but the actions you’ve taken seem too targeted at us for me to do that, so I’m voicing them here,” Foroughi wrote, referencing Unity CEO John Riccitiello. “Our jobs are to help this community expand while also running our businesses. The decision you made doesn’t help the community, and the backlash you’ve seen is reflective of that.”

Pachter said that “developers may have become more likely to view AppLovin as the friend of developers and Unity as the enemy, particularly after the blog post.”

Further, he noted, “some developers likely followed through on their threat to turn off Unity’s ad services, temporarily or permanently, to the benefit of AppLovin and others.”

AppLovin shares rose as much as 3% Monday, while the S&P 500
SPX
was up 0.3% and the tech-heavy Nasdaq Composite
COMP
was up 0.2%.

Pachter doesn’t expect Unity to eliminate the new fees completely, but rather thinks that the company will reduce the 20-cent-per-download fee to something more like 5 cents, and that it will increase the threshold at which those fees will be triggered.

“We also expect Unity to encourage developers to use its ad tech product by deeply discounting Runtime Fees for ad tech customers,” Pachter said. He has an outperform rating and a $55 price target on the stock.

Jefferies analyst Andrew Uerkwitz noted that the latest episode could be just one in a string of events that hurt Unity’s standing with its developer community.

“Over the last 12 months, we have tracked a series of actions that may have resulted in decreased trust from customers,” Uerkwitz wrote, while reiterating an underperform rating and a $29 price target on the stock.

Uerkwitz cited a lack of communication with developers and the “curious” decision to tie additional fees to downloads given that it’s “extremely challenging” to track downloads effectively.

“What’s next?” he asked. “Unfortunately with high switching costs and few competitors, there isn’t much for developers to do than make a lot of noise.”

Uerkwitz pointed to Friday’s boycott of Unity by 19 mobile-game developers, which were switching off Unity’s ad monetization until the company reconsiders the new policy. The analyst estimated the group to account for “about 7% of downloads in developed markets.”

Of the 28 analysts who cover Unity, 19 have buy-grade ratings, seven have hold ratings and two have sell ratings, along with an average price target of $47.15, according to FactSet data.