Confirmed: Epic's big loss was a much bigger loss than they were letting on

Back in 2021, when I was posting about Epic's big gamble having turned into a big loss for them, I suspected that they could only keep the con running for so long.

Of course, even Epic Games can't sustain this kind of burn rate forever; eventually, they're going to have to make changes in order the stop the bleeding, and put in place some sort of plan to "return to profitability" (corporate code of mass layoffs). Given that their legal battle with Apple has only served to make the industry-standard 30% cut to the platform look more essential than ever, and that Epic has done almost nothing to earn back the trust and good will of the Steam community (which, at this point, includes basically all of the PC gaming community), and also given that efforts to repair their brand and rebuild their business can't even start until the Apple lawsuit, at least, is either dropped or settled, I'm starting to have serious doubts about Epic's long-term prospects. I beginning to wonder if Epic will be able to survive at all, in the medium-to-long term.

Well, it turns out that I was a fucking prophet. Epic are indeed burning through cash faster than even Fortnite can make it, and have now resorted to mass layoffs to cut their burn rate.

As reported in Yahoo! Finance:

Fortnite and Unreal Engine maker Epic Games has confirmed that it is laying off approximately 830 employees, representing roughly 16% of Epic's total workforce.

[...]

The memo sent to employees by Epic CEO Tim Sweeney was later posted on the Epic Games website.

"For a while now, we've been spending way more money than we earn, investing in the next evolution of Epic and growing Fortnite as a metaverse-inspired ecosystem for creators," Sweeney said. "I had long been optimistic that we could power through this transition without layoffs, but in retrospect I see that this was unrealistic.

"While Fortnite is starting to grow again, the growth is driven primarily by creator content with significant revenue sharing, and this is a lower margin business than we had when Fortnite Battle Royale took off and began funding our expansion. Success with the creator ecosystem is a great achievement, but it means a major structural change to our economics. [...] But we still ended up far short of financial sustainability. We concluded that layoffs are the only way, and that doing them now and on this scale will stabilize our finances."

I fucking called it. 

Sweeney's chosen verbiage is about "stabiliz[ing their] finances," rather than "returning to profitability," a subtle distinction but perhaps a meaningful one. Epic is not profitable, and Sweeney isn't promising that they're turn a profit; he's just trying to stave off bankruptcy.

Meanwhile, Sweeney's Quixotic quest to kneecap Apple and Google, and presumably also eventually Valve, will continue to bleed the company out with billable hours:

"We've been taking steps to reduce our legal expenses, but are continuing the fight against Apple and Google distribution monopolies and taxes, so the metaverse can thrive and bring opportunity to Epic and all other developers," Epic said.

The day before the layoffs were announced, Epic formally filed an appeal in its case against Apple with the US Supreme Court.

Appealing to the USSC can be enormously expensive, even if the Court doesn't deign to hear your case, which a very real possibility here - the Roberts Court is very much a far right activist Court, but the far right members of the court seem to be mainly interested in

1. waging culture war battles (abortion! free speech absolutism!);
   
2. putting a thumb on the scales of the electoral process which are intended to benefit Republicans over Democrats; and 
3. doing the bidding the the billionaires who've invested heavily in buying access to the Republican Justices on the Court;

none of which appears to be the case in Epic's case. Good luck with that appeal, Tim! I predict that the Court will likely decline to hear the case without elaborating, after cost Epic a ridiculous amount of money in billable hours.

And that's before Epic v Google goes to trial, a process with Google appear to be drawing out as long as possible. Whether this is a deliberate attempt to increase the cost of Epic's litigation to such an extent that Epic have to choose between their lawsuit and their survival, I don't know, but it's definitely a possibility, and Epic have just helpfully signaled that it's a potentially effective legal strategy. Who needs to win on the merits, when you can win a legal war of attrition instead?

Even Epic's Unreal engine, which seems to be perfectly positioned to capitalize on Unity's recent troubles, is struggling, with Epic planning to raise fees for non-game uses of the platform. Also from Yahoo! Finance:

Bad news for those using Unreal Engine for VFX or animation this week – or at least for some. Epic Games has confirmed that it will begin charging industries outside gaming to use the 3D graphics engine next year.

Until now the company has not charged directly for use of Unreal Engine. Instead it charges royalties for projects that surpass $1m in revenue – and only those that use code from the engine. That means that while the developers of big-selling games pay royalties, those who use Unreal Engine for film making and other uses pay nothing. Epic Games now plans to start charging subscription fees on a per-seat basis [...].

Speaking at Unreal Fest 2023, Epic Games CEO Tim Sweeney said Unreal Engine would become “a licensable piece of software like Maya or Photoshop” with a subscription-based pricing model. Studios using it for non-gaming work like animation, VFX and visualization will be charged through a “seat-based enterprise software licensing model”

It turns out that Epic's businesses were all being underwritten by Fortnite money, and none of them are viable on their own. Surprise!

And it turns out that Tim Sweeney's ego-driven litigation, unrealistic metaverse ambitions, and poor business instincts generally,  are not Epic's only source of money-draining liabilities. Gamer's Nexus has a pretty good rundown in this week's HW News recap.

I expect to see more cost-cutting, and more layoffs, from Epic as their situation worsens. I wouldn't be surprised to see Tencent pressure Epic to change course, or divest their share of Epic to cut their losses as Epic spirals downwards. Either way, further layoffs and closures are dead-lock certainties. Be honest: did you even know that Epic owned Bandcamp, before they spun it off? Meanwhile, Epic's self-inflicted wounds will continue to bleed, while new sources of revenue remain elusive.

I'll admit to being conflicted on this one. On one hand, it sucks to see over a thousand people suddenly out of work, through no fault of their own at all. On the other hand, I can't help but feel a certain malicious glee in watching Tim Sweeney struggling to preserve what he can of the company he founded, slowly cutting off Epic's toes and fingers, so to speak, in order to save more vital parts of the business. Either way, I expect we'll know how the story ends much sooner than most are currently expecting to.

Watch this space...