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...

This is how it's done Darq's developer shows the right way to handle Epic's brand toxicity

In my last post, I laid out a seven-point strategy for how to announce your Epic exclusivity deal. That post ran long (and, really, which of my posts don't?) but if there's a single big point that I wanted people in the video game industry, and in the media that cover the industry, to take away, it is this:

When dealing with a subject that you know to be sensitive, be sensitive to the people who are going to hear your message.

Learn to read the room. Comedy is hard; making jokes about subjects which you know other people not only take seriously, but are likely to get angry about, is a high-wire act best left to professionals. Don't open discussions with sarcasm when you want to elevate the overall level of the discourse. Just be straight with people, and be transparent with people, and those people will reward your straightforward honesty with respect.

And now, right on schedule, we have a case study in how to handle the touchy subject of Epic exclusivity the right way. We have Darq.

PR Communications 101: Sarcasm = Mockeryor, Glumberland and Ooblets: A case study in how not to do any of this

Anybody who's been watching the F5 internet shitstorm that is Ooblets ill-considered EGS exclusivity announcement should be familiar with the framing that's been emerging in the last day and a half or so, one which paints the Ooblets developers as essentially blameless victims who are receiving an utterly undeserved tidal wave of inchoate rage and hate from "entitled" gamers whose fragile egos simply can't withstand a simple joke.

However, much as I hate to engage in anything that even resembles victim-blaming, I feel compelled to point out the flaw in this framing of the story: Ooblets' developers are not blameless victims here. Whether knowingly or not, Glumberland picked this fight.

No, they should not be receiving death threats. The people who are forging Discord chat logs and faking videos of Discord chat sessions that never happened, deliberately and for no other reason than to discredit the husband and wife duo that basically are Glumberland, have indeed gone beyond the pale. The level of vitriol on display is wildly disproportionate to both the Glumberlanders' initial offense, and to the Epic Game Store in general. But make no mistake: what Cordingley and Wasser initially did really was offensive, and it's very hard to believe that they weren't aware of that.

Tim Sweeney still isn't a fan of the Universal Windows Platform

From Gadgets 360, via Slashdot:

A few months ago, Tim Sweeney, co-founder of Epic Games, the studio behind the Gears of War and Unreal franchises, was in the news for criticising Microsoft's Universal Windows Platform (UWP).

[...]

Now Sweeney alleges that Microsoft plans to make Steam - the world's largest PC gaming platform, "progressively worse and more broken."

"Slowly, over the next five years, they will force-patch Windows 10 to make Steam progressively worse and more broken. They'll never completely break it, but will continue to break it until, in five years, people are so fed up that Steam is buggy that the Windows Store seem like an ideal alternative. That's exactly what they did to their previous competitors in other areas. Now they're doing it to Steam. It's only just starting to become visible. Microsoft might not be competent enough to succeed with their plan but they are certainly trying," Sweeney said in an interview with Edge Magazine (via NeoGAF).

[...]

"If they can succeed in doing that then it's a small leap to forcing all apps and games to be distributed through the Windows store. Once we reach that point, the PC has become a closed platform. It won't be that one day they flip a switch that will break your Steam library - what they're trying to do is a series of sneaky manoeuvres. They make it more and more inconvenient to use the old apps, and, simultaneously, they try to become the only source for the new ones," he claims.

Early on in the interview he says that Microsoft has been "able to [start] this via some sneaky PR moves. They make a bunch of statements that sound vaguely like they're promising openness but really they're not promising anything of the sort."

Considering that Microsoft are desperate not to piss off Steam PC gamers, I'm not sure that I entirely buy this line of argument, but it's certainly possible, and Microsoft haven't exactly done anything in the last year to earn the benefit of the doubt from consumers. It'll be interesting to see:

1. if Microsoft take time to respond to Sweeney this time around, the way they did last time, especially since he's not backing down on the rhetoric at all;
2. if the possibility that any such move would bring down the wrath of regulators in the US, the EU, and elsewhere has any impact here, especially since CNIL's recent actions have ensured that Microsoft pay a lot more attention to this possibility; and
3. if Valve do more in the coming months to push SteamOS and Steam Machine, which looked to be the core of their anti-UWP strategy but haven't been very actively promoted since they launched the Steam Link.

Stick a PIN in this one for later. Sweeney clearly isn't backing down or going away on this issues, and sooner or later we'll find out whether he was right about Microsoft's UWP long game.