Confirmed: Epic's big gamble is actually a loss

Or, as Kotaku put it, "Epic CEO Tim Sweeney Is Very Excited About The Epic Games Store Losing A Ton Of Money." This revelation apparently comes to us by way of Epic's own court filings in their ongoing war of legal attrition against Apple, which the eagle-eyed and awesomely-named Tyler Wilde spotted, and wrote about for PC Gamer.

Epic Games has spent the past two years shoveling Fortnite money into the Epic Games Store, making over 100 exclusivity deals and giving away free games every week. We knew Epic was spending a lot of cash to get customers onto its store, but didn't have many specifics until [...] we learned this week that Epic committed around $444 million to Epic Game Store exclusivity deals in 2020 alone.

[...] A "minimum guarantee" is just another way to refer to an advance: It means that Epic guarantees the publisher a certain amount of money whether or not their game actually sells enough to cover it. For example, Epic put down $10.45 million for Control.

[...] Some of those deals must be for exclusives releasing in the future, but according to Apple's learnings, Epic is going to eat "at least $330 million in unrecouped costs from minimum guarantees alone" if you also consider 2019's deals.

I'd posted about Epic's big gamble back in 2018, and have opined before about how Tim Sweeney's arrogant approach was likely doomed to fail; for more, check out "Metro:Exodus proves several of my points about Epic's new marketplace," "PR Communications 101: Sarcasm = Mockery," or "Why platforms aren't your friends" (although that last one was basically an excuse to embed Folding Ideas excellent video on essentially the same subject).

Suffice it to say that I am not at all surprised to learn that Epic are losing money on the EGS; given how much money they were spending to basically bribe both developers and consumers into adopting it, I would have been far more surprised to learn that they were turning a profit. Interestingly, Epic's exclusivity agreements appear to work exactly the way I always thought they did: like the royalty advances of book publishing and other, similar industries, but even I did not predict losses on this scale; apparently even Fortnite's huge haul isn't enough to keep pace. 

I'm also a little surprised that we're learning about these losses at all; I was expecting this information to remain well-buried for a long, long time. I suppose I shouldn't have been surprised, though, given the broad extent of Apple's document pulls from all and sundry in the matter of their legal battle with Epic Games; the California judge overseeing the proceedings described it as Apple having "salted the Earth with subpoenas" from a variety of industry players, including Valve Software. This likely means that Friday's bombshell is likely only the first of many; there are a lot of previously confidential, behind-the-scenes dealings which are about to become part of the public record. That's very exciting. Consumers could be on the verge of learning a lot about the workings of an industry that we previously could only guess at.

For now, though, we can only shake our heads in mock disbelief at the extent to which Epic's Game Store has flopped. Given that the service launched in 2018, and is still hemorrhaging money with no end in sight, I have doubts as to whether Epic can actually turn this around. The brand damage here may just be too deep, and the stench of flop sweat and failure is unlikely to attract new business partners eager to associate their valuable brands with Epic's radioactive one. 

Even worse for Epic: the Fortnite revenue which has been funding the EGS to this point is also down, from $1.8 billion in 2019 to less than $500 million in 2020:

[...] Epic said that players spent $700 million on the Epic Store in 2020, but third-party game sales only accounted for $265 million of that spending.

No wonder Sweeney has resorted to litigation! At this point, the EGS's only hope may be to find a sympathetic judge who'd be willing to "flip the board," disruptive the game of the entire video games business on their behalf. Given how much room to run Judge Hixon is affording to Apple, though, I would recommend that Sweeney not count too heavily on the tree of that particular lawsuit bearing the sort of lucrative fruit that the EGS needs in order to stave of death by starvation, especially since their entire legal argument is that the 30% cut is unnecessary. Apple can now counter that argument by simply pointing out that Epic's 12% cut is losing them money hand over first, and clearly not a sustainable business model. Look for that lawsuit to badly for Epic.

Will Epic's epic-scale Game Store losses cause the company to course-correct?

Probably not, alas. Sweeney is still Epic's majority shareholder, which means that he's basically able to do whatever he wants with the company. Epic's next-largest shareholder, Tencent Holdings, who own 40% of Epic, do have the sort of resources required to put pressure on Sweeney, but they can't simply vote him out as CEO, or off Epic's board of governors, which will limit their options... assuming they're even inclines to intervene here, which is far from certain. For all the suspicion that surrounds any Tencent acquisition, their management style has so far been pretty hands-off, at least with their interests outside of China.

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.

In the near term, however, while Epic still have a fat war chest and a loyal Fortnite fan base, I expect that the PC gaming industry news is going to be very, very interesting. Watch this space...

VICTORY!!! After waging a very noisy, one-sided war against Google, Valve, and gamers, Epic Games has quietly surrendered

What a difference a year and a half can make.

And, yes, it has been only that long since Epic Games announced the very first EGS-exclusive title: Supergiant's Hades, an early-access game that announced at the Game Awards in December of 2018, and released the same night. That was only a few months after Epic declared that Fortnite: Battle Royale for Android would be side-loadable only from their own digital distribution channel, rather than just making the game available on Google Play like every other developer with an Android app to flog.

Tim Sweeney's Epic Games would go on from there to declare themselves to be so deeply opposed, on principle, to everything about Valve Software's Steam service that they just had to launch a competing service... which offered absolutely nothing to consumers that Steam didn't, and was actually missing a whole bunch of stuff that Steam users were used to. No worries, though, because Tim Sweeney had a plan: to embrace exactly the same platform exclusivity deals that he'd once called evil, back when Microsoft and Sony were profiting from them, and not him.

The message from Epic to gamers was crystal clear: fuck you, pay me. And gamers got the message; they heard Epic loud and clear... and, en masse, gamers refused to pay.

Epic's other other problem

When Epic announced that their digital storefront would be opening itself up to games from other publishers in a bid to eclipse Valve's Steam service, the general reaction from developer-friendly games media outlets was positive. People who spent a lot of time talking to developers, and none at all talking to average consumers, were convinced that Steam was desperately in need of a new competitor, one that would somehow succeed where GoG, Origin, Uplay, and even Microsoft's built-in Windows 10 storefront had not.

The assumption, one which even Epic seemed to share, was that Fortnite had given Epic a large enough base of customers that could be leveraged to take market share away from Steam, while their richer-for-developers revenue cut would necessarily pull disgruntled indie devs away from the more established platform. I have doubts about both points, of course, but it turns out that we're didn't need to wait all that long for the loyalty of Epic's customer base to be tested. The test has come in the form of a competing game: Apex Legends, which combines Battle Royale and Hero Shooter gameplay into a package that's become the top game on Twitch, dethroning Epic's Fortnite less than a week after its launch.

This is the customer base on whose loyalty the success of Epic's storefront depends, already abandoning Epic in favour of a newer, shinier game that is every bit as finished and polished as Fortnite, but with the more conventional look and gameplay of the Titanfall series. These are the customers that are supposed to abandon Steam, which they've been happily using for years, and buy into yet another ecosystem, even though that ecosystem offers nothing by way of features that are absent or inadequate on the platform they already use.