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8th July 2021

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Tim Sweeney is right - Epic losses on its Game Store are a good investment | Opinion

The company's crusade against Apple may look increasingly quixotic, but its spending on creating a serious competitor to Steam is rational and justified

The legal battle between Epic and Apple has created far, far more heat than light thus far, but every now and then some aspect of the case (or at least of the various bits of discovery and document filing that are currently happening) does manage to let a glimmer of illumination into an area we didn't previously know about.

This week, courtesy of Apple's digging into the financials of the Epic Games Store, we have some inkling of how much money Epic is sinking into the venture. Spoiler alert: it's a lot. More than a lot, in fact, with the company apparently set to have burned through somewhere just south of $600 million on the Epic Games Store by the end of this year. Around $330 million of that comes from money Epic guaranteed to developers or publishers in return for exclusivity on the store, and has thus far failed to recoup through sales.

Those are Apple's calculations, and obviously Apple and Epic aren't exactly on the best of terms right now -- but far from disputing these numbers, Epic is treating them as a badge of honour.

The lawsuits will likely achieve little other than buying new boats for a bunch of lawyers - but on investing hundreds of millions in the Epic Games Store, Sweeney is absolutely right

Tim Sweeney responded to reporting of the figures with a cheerful tweet describing the losses as "a fantastic investment into growing the business", attaching an infographic showing how much money has been spent on the store and how many free games have been claimed, among various other stats.

Apple's legal reasons for digging into what's happening with the Epic Games Store are pretty clear -- Epic's endgame, should it prevail in its court cases against the mobile platform operators, would be to roll out its marketplace as an alternative app store on their platform, so the nature of that store and its business model is very obviously of interest to the case.

More broadly, though, I think the winds of public opinion have become increasingly unkind to Epic as its legal struggles have stretched out into months, and the company's enormous losses on the store are being seen in some quarters as further evidence that it's going off the rails somewhat -- picking fights it can't expect to win based on ideological crusading rather than any kind of business sense, oblivious to how uncomfortable it's potentially making business partners who might be interested in using its Unreal platform.

Now, to be clear, Epic is a private company and as long as its major investors and backers are happy with how things are going, it doesn't really matter a damn whether people on Twitter or commentators on websites think Tim Sweeney is picking his crusades poorly. That's true for now, at least; one does have to wonder if part of the reason for taking up this sort-of noble but almost certainly doomed quest against Apple and Google right now is that it's something the company needs to get out of its system before it can realistically think about an IPO. Once Epic is a public company, it'll be tough to get away with wild shenanigans like deliberately getting its most profitable game pulled off the platform that provides the lion's share of its revenue just so it can enter into a potentially years-long legal battle over a point of principle with the world's biggest corporation.

Far from downplaying the money lost through the Epic Games Store so far, CEO Tim Sweeney wore it as a badge of honour

Far from downplaying the money lost through the Epic Games Store so far, CEO Tim Sweeney wore it as a badge of honour

On the specific point of the amount of money Epic is spending on the Epic Games Store -- which may well run into a price tag of billions before the platform gets into the black, even assuming that happens at some point in the coming years -- I don't think the comparison to the firm's other crusade is deserved, much less the claim that it shows the company going off the rails in any way. Yes, the chances are that the lawsuits against Apple and Google are going to achieve little other than buying nice new boats for a bunch of lawyers -- but on the question of investing hundreds of millions in the Epic Games Store, Sweeney is absolutely right. This is an investment in growing the business -- and at the scale at which we're talking, it's not even an especially gigantic investment.

Losing hundreds of millions of dollars on launching a product or platform into a hugely saturated market dominated by a major player, or players, is exactly what you need to do up front if you have an ambition to compete in that market. There's no "plucky upstart" way of Minimum Viable Product-ing your way into competition with a platform like Steam; you could potentially take a start-up style MVP approach to create a niche platform that fulfils a very specific role which Steam does poorly, but actually directly competing with Steam for market dominance is far out of reach of that kind of approach.

If the Epic Games Store has a problem, it isn't the amount of money being spent

If you have a problem with how the PC digital distribution market is structured -- as Epic does -- and you're intent on launching a competing platform to change that, it's going to cost you hundreds of millions of dollars to get to the point of even being taken seriously.

The furore about Epic losing this much money -- be it $330 million on minimum guarantees, $600 million by the end of the year or whatever multiple of that the company hits before it starts the trudge back towards black numbers on the balance sheet -- seems to miss just how big Epic itself is as a company. I think there's still, in some quarters, a sense of "Whoa, how the hell is the little developer that makes some shooting games blowing this much cash?" -- which misses the fact that Epic both publishes one of the industry's most successful games and provides the core technology that powers many others.

The company's most recent round of funding valued it at around $28 billion -- which isn't unreasonable given that the market-listed Unity Software, its main technology competitor, currently has a market cap that almost perfectly matches that -- and Fortnite alone was pulling in hundreds of millions of dollars in revenue each year, at least until it lost the large share of that which came from the iOS App Store. If Epic actually was a public company, it would be considered a large-cap corporation -- one of the big boys, by definition (even if that definition hasn't felt quite as meaningful since trillion-dollar firms became a thing a few years ago).

Spending serious money to elbow their way into tough markets is what big companies do. Nobody fretted about Microsoft's poor abused wallet when it poured cash into its efforts to become a player in the games console market. People certainly questioned Apple's sanity when it became clear that it was planning to compete in the mobile phone space, but not generally because they worried that the firm was spending too much money.

It's worth remembering that for all the millions currently lost through the Epic Games Store, Fortnite and Unreal Engine are generating billions

It's worth remembering that for all the millions currently lost through the Epic Games Store, Fortnite and Unreal Engine are generating billions

For an up-to-date example, Disney's efforts to compete with the likes of Netflix in the streaming video space have been richly rewarded with praise from the media and a share price boost from enthusiastic investors -- despite the fact that, just like Epic's battle with Steam, it's going to take years and many hundreds of millions of dollars before Disney's streaming ambitions actually get into the black.

There's no plucky upstart way to enter the console market, the mobile phone market or the streaming video market on a shoestring budget. The digital game distribution market may not be quite as high profile, but the business logic is the same.

None of this is to say that Epic is necessarily playing all of its cards right with the Epic Games Store. Some of its priorities for actually spending the huge amount of money being thrown at the store certainly seem questionable, given that complaints about the store continuing to lack fairly core social and storefront functionality continue to be commonplace even after so many months.

There's a very real danger that the company is doing the customer acquisition part of the market entry process extremely well without having first ensured that it's got a product that's good at customer retention -- which would mean in practise that it's giving away a bunch of free software as an enticement without having done the work required to turn the recipients of that software into ongoing customers.

If the Epic Games Store has a problem, though, it isn't the amount of money being spent. The scale of Steam's dominance of this market demands a gigantic financial commitment from any would-be rival, and given that commitment, this is actually the least quixotic of Epic's ongoing battles.

The Epic Games Store still has a lot of work to do if it's to be a serious rival to Steam, let alone achieve its larger goal of resetting expectations for profit shares across the industry -- but these hundreds of millions of dollars have a strong chance of turning out to be a much better investment in the long-term than Epic's profligate disbursement of cash into lawyers' yacht funds.

Celebrating employer excellence in the video games industry

8th July 2021

Submit your company

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