Thread by @investing_city

Spent most of yesterday afternoon reading through @ballmatthew's impressive breakdown of Epic Games, the maker of Fortnite (and much more).

Here is a link where you can find all 6 articles: matthewball.vc/all/epicgamesp…

Quick [THREAD]

1/ Ball breaks Epic into 6 parts:

- Unreal Engine
- Epic Games Store
- Epic Publishing
- Epic Online Services
- Fortnite
- Philosophy and Aspirations

Let's take each one...

2/ Unreal Engine is a development platform.

The two most popular are Unreal (by Epic) and Unity (another private company).

Big publishers like Activision and Take-Two will use their own engines but even they have started using Unreal or Unity in some cases.

3/ Unreal Engine will be important for Epic's business. It charges a 5% licensing fee for developers once their games make money (this can be bought out upfront).

There are network effects related to this. The more developers, the more features Epic can airdrop for others.

4/ Watching this video will give you great insight into what the Unreal Engine is and how it is transforming not only video games but media as a whole:

5/ Ok, moving onto Epic Games Store (EGS). The most popular store has been Steam for years. It had 75% market share at one point and still has a lot.

The background for game stores is really interesting. For consoles and mobile, the device companies usually took about 30%.

6/ For example, if you make an iPhone app, generally you have to pay Apple a 30% take-rate. Similarly, Activision would have to pay Sony 30% back in the day as well.

But with PC, it was different since Microsoft only owned the operating system, not the device.

7/ So in 2003, Steam launched. It bootstrapped adoption by making players use Steam to download its anticipated game -- Half Life 2.

Steam acted as the "Apple" or "Sony" for independent publishers to sell their games through.

With the same take-rate too, 30%.

8/ Epic launched its own version of Steam in late 2019. The take-rate was much more generous to developers though (that will be a recurring theme).

Instead of 30%, it's fee was 12%. And if developers used Unreal Engine, the 5% fee was waived, resulting in a 7% real cost.

9/ While Steam is still more popular due to its superior social graph and critical mass, Epic's developer-centric model is making waves.

Next, we'll cover Epic Publishing. Publishers like Activision, EA, & Take Two have historically controlled a good chunk of the profit pool.

10/ They were/are responsible for the marketing and distribution of games and would leverage their scale against independent development studios.

Epic is allowing developers to maintain their IP for a 50/50 split of the profits. This will allow Epic to improve Unreal Engine.

11/ Fourth, let's touch on Epic Online Services (EOS). A big trend in today's gaming ecosystem is free-to-play but then the money is made through micro-transactions.

This lowers barriers to playing and increases the potential LTV of a player (rather than capped at $60).

12/ The nature of these massive multi-player games and in-game transactions, means that developers need help with a variety of services like account management, leaderboards, and social engagement.

Epic offers these services for free and it doesn't force developers to use EGS.

13/ This approach is different from Steamworks (created by the same company that created Steam).

While Steamworks is free to developers, it was created as a way to lock them into the Steam ecosystem.

It's no surprise then that Steamworks is the most used services provider.

15/ Moving onto what everyone knows Epic for -- Fortnite.

The game's mass appeal led it to have more playtime than Roblox or Minecraft, with about half the users.

This success, and the fact that it's doing more than $2 billion in annual sales, enabled Epic's strategy.

16/ Using Fortnite as a catalyst, Epic has doubled down on Unreal Engine and invested in EGS, EOS, and publishing.

This is a similar approach to Valve's Steam but with much more developer-friendly terms (and a focus on the engine).

17/ This developer-centric model is key to Epic's strategy. It's CEO, @TimSweeneyEpic, believes that it's Epic's job to create an open gaming ecosystem to expand the TAM of games as a whole.

This mindset is very important for what we'll finish up with...

18/ and that is the metaverse!

If you're not familiar, think of it as a virtual world. It might seem crazy, but many teens these days hang-out with their friends inside of Fortnite.

There's a good article here: latimes.com/entertainment-…

Check out this quote from Sweeney:

19/ Fortnite is the leader in the possible creation of the metaverse. Sweeney believes that everybody needs to work together to make that vision a reality and that's where the developer-centric model stems from.

Matthew Ball has a post on the metaverse: matthewball.vc/all/themetaver…

20/ All in all, Epic is pursuing a grand strategy, while lowering the barriers to gaming development.

It will be fascinating following this. Thanks for reading! [PS if you're wondering how you can benefit from this, Tencent owns a 40% stake]

Have a good Memorial Day everyone!

Also, I lied. This was not quick. 😅