File picture: Reuters
File picture: Reuters

Apple vs Epic Games trial shows Fortnite maker's inner workings

By The Washington Post Time of article published May 5, 2021

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By Shannon Liao, Mikhail Klimentov

As Apple and Epic Games face off in court over the fate of "Fortnite" on iOS, the companies have entered more than 100 documents into evidence to make their case. Many of these documents - which range from financial spreadsheets to internal presentations and emails - belong to Epic, and give the public unprecedented insight into the private company's strategy and finances.

Epic Games has made waves in the gaming industry for offering free games in its digital store nearly every week. One slide show uploaded into evidence on Monday showed how much Epic paid developers to agree to those deals.

One spreadsheet displayed the sums Epic paid in commission fees to third-party platforms, including Microsoft, Sony and Apple, for "Fortnite" and other titles. Another document showed that the company's 2019 efforts to throw over $70 million in cash prizes at teens and young adults playing "Fortnite" in competitions did not provide much return on investment, with another showing that in 2019, Epic's gross revenue fell below its projections in part due to its esports investment.

These documents do not necessarily reflect the state of Epic's business; many date back to 2018 and 2019. But they shed light on a private company that reshaped the video game industry and seeks to do the same in the mobile app market.

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Since its launch in December 2018, Epic Games has courted developers for its games store, seeking to publish certain games exclusively and offer other games free. But few details had been shared about Epic's efforts to get games onto its platform and the company's underlying strategy until now.

In testimony Tuesday, Epic Games CEO Tim Sweeney told Apple counsel that the Epic games store is projected to have incurred a $719 million loss by the year 2027, even if it does not allocate costs across the company. Sweeney also confirmed estimated earnings from the store that year would be $5 million, when asked by Apple's attorneys.

An internal Epic Games presentation from October 2019 is the clearest demonstration of Epic's user acquisition strategy and its long term ambitions. The Epic games store's first free game, "Subnautica," brought in about 1.5 million new users on its first day of availability. Epic paid the developer, Unknown Worlds, $1.4 million to offer the game free of charge on its platform.

The offer brought 804,052 new accounts to the Epic Games Store and, by Epic's calculation, each user cost the company $1.74, according to evidence uploaded Monday. The presentation notes that the store's growth is driven by exclusives and similar deals.

This approach to gaining users is cheaper for Epic than taking out advertisements on social media and gets money in developers' hands, Sweeney said in an interview in December 2020.

"If I'm trying to bring a new user to the Epic game store through Google or Facebook advertising, it costs about $5 per user," Sweeney said. "And it sucks because when Facebook sells an ad on a creator's, on someone's Facebook page, Facebook gets all the money and the creator gets nothing."

Unknown Worlds was paid more than most of the other developers detailed in the document, with many notable names, including Jackbox and Ubisoft, arranging five-figure deals with Epic. Free games led to about 5 million new users on the platform, costing Epic about $2.37 per new account.

On another slide, Epic calculated the benefits of its exclusivity arrangement around the game "Borderlands 3." In its first two weeks, "Borderlands 3" made approximately $100 million in revenue. From just those two weeks of sales, Epic walked away with a 12% cut, totaling $9.2 million. The offer attracted 1.56 million users, 53% of whom were new to the Epic games store.

While Valve's Steam PC games store commands the market, Epic has worked to wrest market share from Steam through exclusivity arrangements and free game offerings. Most Epic games store users were lured to the store by some kind of free offering; thus far, Epic has turned about 7% of those users into paying customers on the Epic Games Store, according to the exhibit.

Beyond courting players, Epic is attempting to disrupt the dominance of Valve's store - Steam - by offering developer-friendly policies. For example, Epic takes a 12% revenue cut from developers, less than the 30% commission that Steam and Apple charge.

The Epic games store has yet to turn a profit. Sweeney said in testimony Monday that it is "hundreds of millions of dollars short of being profitable" because of upfront costs and is expected to become profitable "within three or four years."

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Epic Games has paid billions of dollars in commissions to third-party companies hosting "Fortnite," such as Microsoft, Sony, Nintendo and Apple, according to evidence discussed Monday. The majority of these payments, listed in a spreadsheet shared with the court, relate to "Fortnite." A smaller percentage is accounted for by "Rocket League" and several other Epic properties.

Between January 2017 and October 2020, Epic Games paid $237 million in commissions to Apple for "Fortnite." In 2020, payments to Microsoft ($245 million) and Sony ($451 million) exceeded Epic's total commission payments to Apple.

Crucially, though, Epic's case is not just about the costs imposed by Apple. Epic's case revolves around antitrust questions - namely, whether Apple has a monopoly through its app store.

"Antitrust doesn't really set prices," Randy Picker, a professor of law at the University of Chicago, told The Washington Post in August 2020. "Antitrust regulates, as it were, mechanisms. And those mechanisms generate what prices they generate. But [antitrust is] not in the price-setting business."

The spreadsheet also details revenue Epic collected from "Fortnite," "Rocket League" and "other" titles from 2017 through 2020. Epic's net revenue peaked in 2018 at over $2 billion. In 2019 and 2020, that figure dropped to $546 million and $302 million, respectively.

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In 2019, Epic Games staged the Fortnite World Cup event in New York that featured a prize pool of $30 million, in addition to millions in other cash prizes it handed out that year. Back then, Epic drew skepticism around the event's profitability. The stadium was not full, and the event did not appear to have many sponsors.

Now, the picture of Epic's esports investment in 2019 is clearer. The company "overestimated" how much money it could make on esports in 2019 by $154 million, according to a financial document entered as evidence in the trial.

In emails from 2019 entered into evidence, Epic employees discussed partnering with Apple and making the tech giant the "presenting sponsor" for the Fortnite World Cup, which could "give us some more leverage with Apple." Ultimately, the World Cup was held at the Arthur Ashe stadium with no significant branding.

The Washington Post

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