Notes on Epic Games
These are my notes from Matthew Ball & Jacob Navok’s 6-part primer on Epic Games. It was one of the best pieces of writing I ever read on digital platforms. The 16,000+ word primer consists of five essays (II & III are one essay):
Part I: The Unreal Engine
Epic has the potential to be one of the most influential tech companies in the world.
Epic is the creator of Fortnite: Battle Royale, one of the most popular video games in the world.
Epic's core business is really the Unreal Engine.
The success of Fortnite has allowed Epic to scale its business into new areas
Epic Games Store (EGS)
Epic Online Services (EOS)
Epic Games Publishing (EGP)
Epic is one of the largest and fastest-growing social networks with 350MM+ users and 2.3B social connections.
Epic's growth has forced revolutionary changes to the video game industry and Hollywood.
Epic’s business strategy can be summed up by the “Flywheel” which is shown above.
Video game developers primarily rely on two game-engines, Epic’s Unreal Engine and Unity.
Developers use their own engine so they can focus on creative process
A movie production company doesn’t build their own camera, why should a video game developer, built their own engine?
Unity is primarily used by mobile developers while Unreal is for console/PC games.
Unity is a subscription model while Unreal is rev share.
Legacy game developers use their own game engines, but it’s not the norm.
For example, Acitivision uses it’s own engine for Call of Duty.
Riot Games, creator of League of Legends, just started using the Unreal Engine which was a huge signal to the industry about third-party game engines.
The more people who use a game engine, the more powerful it becomes (network effects).
Game engines are expanding beyond gaming.
For example, the Mandalorian was made using Unreal.
Other industries that use Unreal are music, architecture and urban planning.
Eventually, digital goods will easily be transferable from one world to another.
Unreal has three modes
Unreal: For complex games. Requires coding
TwinMotion: For professional applications like auto design.
Fortnite Creative Mode: Anyone can build.
The more people that can build games, the larger the industry grows.
The decisions that Epic makes about Unreal has large ramifications throughout the industry.
For example, if Unreal decides to invest in VR, more developers will make VR games and more people will buy them
High switching costs for game developers
Amazon offers a free game engine and it has yet to gain traction showing how influential Unreal and Unity are in the industry.
Part II: The Epic Games Store (EGS)
Game consoles were historically closed platforms.
Publishers needed permission to build a game and had to share 30% of their revenue with platform owners.
Today, more than 50% of game sales occur digitally
Mobile and console games are bought through the proprietary stores of the platform and typically charge a 30% fee.
PC is different. So many different types of hardware.
Tons of problems with downloading PC game so in 2003 Valve launched a store called Steam
People liked that Steam was easy to use, but most importantly would automatically patch downloads.
Valve also launched an online service called Steamworks
It was free for consumer and publishers
Acted as a social network to connect players
Even games not sold on Steam could still use Steamworks
30% fee, but you could also sell your games through other means such as another store or physical retail
In 2015, Steam generated $2B in profit per year
Other companies tried to launch a competitor, but failed
For example, EA launched EA Origin
Steam had 75% market share by the time other companies launched
High switching costs for developers and consumers
It’s impossible to launch a competing online store for console or mobile
Tim Sweeney, CEO of Epic Games, believed Valve’s fee was too high. Unlike, Apple or Sony, Valve didn’t sell hardware or maintain an OS
Epic launched EGS and charged 12%
7% fee if you used the Unreal Engine
They piggybacked off of the folks who had Fortnite installed and were on millions of devices the day it launched
EGS offered exclusive distribution deals to publishers to boost the traction of the store, but it lacked many core features like a shopping cart (this was intentional).
Most PC games were happy with Steam and resistant to switch
Epic had two goals for EGS:
Change the fee structure of the industry
Steal market share from Steam
EGS was valuable to Epic
More user data
Another revenue stream
Epic would gain a new set of customers: game developers
Increase Epic’s influence across ecosystem
Part III: Epic Games Publishing (EGP)
Games are made by developers for players.
Basics of game publishing:
Publishers typically finance the development of a game
In return for funding a developer gives up a large portion of future revenue and in most cases IP
The developer will get marketing and distribution in addition to financing
Physical media distribution is going away and developers are less reliant on financing and switching to self-publishing
VCs and companies are funding game development
Eg, Epic Games and Microsoft
EGP’s model
The terms are the best in the business
100% of development costs, including employee salaries
Split profits 50/50 following cost recoupment
Developers would control 100% of IP
Expect Epic to sign talent in the same way Netflix’s signs top content creators
Why is EGP valuable to Epic?
Another revenue stream
Access to a pipeline of future games from other developers
EGP is a collaborative R&D process for Epic Games
The more developers that use EGP, the more feedback loops for Epic to make Unreal better
Part IV: The Epic Online Services (EOS)
Historically video game revenue was pay-per use (arcade) or pay-per game (Mario Kart 64)
Model has shifted to majority of revenue coming from ongoing operations
Eg, season passes, downloadable content or micro-transactions like buying an outfit for a character
Online services require many features such as account management, payment processing and security
Most games use a third-party online service
The best example is Valve Steamworks which supports millions of PC gamers
Steamworks is free to use for players and developers
Steamworks had high switching costs for developers
Players would lose their friends list and digital items they purchased
Xbox Live was launched which was the first mainstream console multiplayer platform
Now has 90MM users that pay $5-$10/mo
Console online services are disincentivized to allow cross-platform play (reduced network effect)
“If your network is weaker, there’s more to gain and less to lose from partnering with other ones; the stronger the leader was, the less they’d want things to change.”
Mobile gaming spurred changes in cross-platform play
Nearly every mobile titled support cross-platform game
Fortnite was first mainstream AAA game that you could play on any device
Every platform had to embrace it or risk out on losing millions of dollars
Cross-platform gaming still need an online service to support it
Thus, Epic built it. Their online service now has 350MM users with 2.3B total connections.
EOS is “Fortnite services in a box”
EOS is available for all games regardless of engine and store
EOS is in line with Epic’s open strategy of connecting ecosystems rather than walling them off.
Why is EOS valuable to Epic?
EOS’s success will create a more vibrant ecosystem
More accounts and more data on players
EOS will improve the Unreal Engine
Aligns with Epic’s strategy of, “a world-class, end-to-end shop… and the cheapest in the market.”
Part V: Fortnite
Fortnite is one of the most popular video games in the world
Fortnite is most likely the most played game of any kind outside China
Fortnite is becoming a social network
Instead of talking on the phone or hanging out at the mall, kids hang out on Fortnite
Kids aren’t talking about Fortnite, but about topics like sports, movies, music etc.
Fortnite is the new version of loitering at the mall
There are 3 game modes
Fortnite: Battle Royale - Last man standing
Party Island - A place to relax with friends
Creative Mode - Create your own version of Fortnite
It’s business model is not unique. There were many successful free to play games before Fortnite.
For example, Candy Crush
Why is Fortnite valuable to Epic?
$2B in revenue per year
Success helps fund other initiatives
Great way to acquire customers
R&D platform for Unreal
Partnerships allow it to promote itself to third parties
Epic is in the game engine business and is reducing the amount of games it makes
For example, it sold it’s highly successful game, Gears of War, to Microsoft because they couldn’t figure out synergy with Epic
Unity doesn’t produce games
Part VI: Epic's Philosophy and Unprecedented Aspirations
Epic has an unusual strategy, instead of capturing value in many of its businesses, it has shifted value away from many of the categories they compete.
For example, Epic could charge 30% for EOS like most stores, but chooses not to. This drives down industry revenue captured by game stores.
Most of the companies in the industry have gone away because their features have been absorbed by game engines or tied to infrastructure like AWS and Azure
Epic has no plans to sell user data
Epic is giving everything away for free to increase the total addressable market value of video game industry.
Tim Sweeney’s goal is to increase topline revenue of the industry.
Tim Swenney believes that one day the metaverse will be created that will integrate the physical and digital world,
“Just as every company a few decades ago created a webpage, and then at some point every company created a Facebook page, I think we’re approaching the point where every company will have a real-time live 3D presence, through partnerships with game companies or through games like Fortnite and Minecraft and Roblox... That’s starting to happen now. It’s going to be a much bigger thing than these previous generational shifts. Not only will it be a boon for game developers, but it will be the beginning of tearing down the barriers not just between platforms but between games.” - Tim Sweeney
New services and products will arise because of the metaverse.
The biggest challenges to the metaverse is technical limitations and the disincentives for big tech companies to embrace interoperability.
No company will own the metaverse and even Unreal’s competitors like Unity will be a part of it.
“Which is to say Sweeney hopes to produce not just a world where developers can make games more easily, or make greater profits from doing so, but one where technology continues to be a force for good.”