Epic Games – The Company Disrupting Our (Digital) World

"If one central company gains control of [the metaverse], they will become more powerful than any government and be a god on Earth.”

Epic Games Founder Tim Sweeney, 2016[i]

Wired magazine described the articulation of “the metaverse” as akin to describing the internet in the 1970s before anyone could know what the internet would become.[ii] The metaverse looks likely to develop into a network of 3D virtual worlds with a social connection. Using virtual/augmented reality and an avatar, you can interact with others socially or professionally using 3D, real-time software.

The metaverse – a massive market waiting to be tapped

Bloomberg estimated that the global metaverse revenue opportunity could be close to USD 800 billion in 2024.[iii] USD 400 billion is estimated to come from online game makers and hardware. At the same time, the remainder would be opportunities from live entertainment and social media. Looking slightly more into the future, the projected numbers start to reveal the true potential of the metaverse ecosystem: According to a report from Citi, the revenue opportunity from the segment could be as much as USD 13 trillion[iv], while more conservative McKinsey Research places the opportunity at USD 5 trillion by 2030.[v] As the technology world begins to build an open, interconnected metaverse with its myriad opportunities, the astute investor would be wise to watch significant players within the sector. Epic Games is one such company. Here’s why Stableton keeps Epic Games on the radar, and investors should, too.

Gaming, one of the metaverse’s technological parents, has grown massively

In simple terms, the metaverse is a version of the internet that we can inhabit, that we are “inside,” and that we experience using an avatar representation of ourselves. It has been described as a 3D construct – unlike today’s 2D, linear internet that we look at. For this reason, the games companies are uniquely positioned to play a lead role in constructing the metaverse, having already created multiple, increasingly realistic, 3D immersive worlds. It is no wonder, therefore, that the race to shape the metaverse has been supercharged by the explosive growth of the online gaming market. Currently worth more than USD 190 billion annually, the gaming industry is set to grow more than 12% annually (CAGR) over the next five years. First, the pandemic forced people to stay at home; for many, connecting virtually was the only way to engage with others. As a result, socializing moved online, and the gaming industry facilitated this with their 3D virtual worlds.

The race for dominance in the metaverse is on

A battle for metaverse territory is now taking place between the game makers, Big Tech and social networks. In addition to Epic Games, Meta (Facebook) has the scale and muscle for significant VR investments. Other game makers like Roblox and Unity Software are also capitalizing on this movement, building the infrastructure that may form part of the metaverse. Game makers who can harvest greater customer engagement using virtual 3D technology will generate demand for the metaverse. Microsoft’s recent acquisition of games company Activision Blizzard and the resulting UK antitrust investigation[vi] are much more revealing within this context. Other big tech companies such as Apple, Google and Amazon are increasing their investments in metaverse-enabling tools. In addition, many are looking to the cloud for inspiration – developing game subscriptions (rather than buying individual games/in-app payments/hardware) to create revenue.

Introducing EPIC Games

If you haven’t heard of Epic Games, you’ve undoubtedly heard of its flagship product – the wildly successful, immersive computer game Fortnite. Fortnite is arguably the most popular game globally, with over 350 million players. It is estimated to generate more than USD2 billion in annual revenue. Epic Games is the creator, distributor, and engine powering Fortnite and many other successful games, including Infinity Blade and Gears of War. The company was founded in 1991 by Tim Sweeney as Epic MegaGames. Sweeney was a game-obsessed child but preferred to dissect and understand a game’s workings and how it was programmed. By 15, he had become an impressive programmer. After graduating from the University of Maryland as a mechanical engineer, Sweeney realized he could program his own games and created a text-mode game called ZZT. Sweeney first built the game engine and editor and then created the actual gaming worlds within it. In addition, ZZT had a free built-in game editor, allowing anyone to create their games within the engine. Epic MegaGames is now called Epic Games and, today, employs 3,200 staff, but the “shareware” philosophy remains the same. Their leading Unreal Engine product is an environment for software development, used by Epic Games and many other businesses and industries to build video games and entertainment experiences. This ethos has proved highly successful and continues to drive today’s revenue model.

EPIC’s three revenue pillars

1. The Unreal Engine This is the rich game engine and real-time graphics environment on which Epic’s games are built. It is also a highly successful 3D platform licensed out to other companies. Epic then earns royalties on games developed using its platform. Outside of gaming, 35% of Unreal’s client base are film and TV businesses (indicating the high quality of their 3D production). 2. Epic Game Store (EGS) EGS is a digital storefront holding more than 650 games built into the Epic Games launcher application. EGS commits to giving developers a generous-for-the-sector 88% of their game sales, retaining 12% for operating costs and profit. Indeed, Epic Games challenged Apple and Google’s revenue-sharing cut and restrictive in-app practices. Although the lawsuit wasn’t successful, it prompted Apple and Google to significantly reduce their commission for smaller app developers. 3. Proprietary video game development Developing games is its third revenue stream with many gaming franchises in its fold, including Infinity Blade, Gears of War, and the Fortnite phenomenon. Here, Epic Games flipped the traditional game-sales model on its head. Instead of selling a console at cost and profiting from game sales, Epic Games made the games themselves free and then upsold within the game itself – an example of a freemium model. This was highly efficient at distributing games (Fortnite, in particular) to a vast audience. Fortnite’s live events have been so popular that they are ranked among themselves.[vii] With the world’s most popular immersive video game and the 3D capabilities of the Unreal Engine, Epic Games seems extremely well-placed to become a driving force in the emerging metaverse. The metaverse will encompass not only teenagers and adults. Most recently, EPIC Games partnered with famous toy maker Lego to develop a safe and fun immersive digital experience for children.[viii] This initiative is part of an April 2022 USD 2 billion funding round that, in addition to Kirkbi, the Danish parent of toymaker Lego, includes Sony Group, with each party bringing USD 1 billion to the table. Sony is not new to EPIC Games. The Japanese electronics and entertainment giant has invested USD 1.45 billion across three funding rounds, increasing its stake to approximately 4.9%. “We are thrilled to invest in Epic to deepen our relationship in the metaverse field, a space where creators and users share their time,” said Kenichiro Yoshida, Sony’s chairman, president and CEO, in the latest funding announcement.[ix]

Conclusion – EPIC as an investment opportunity

Today, EPIC Games is already the primary metaverse beneficiary and a landmark for leading brands, artists, and creators in a vast yet highly defensive sector that features recurring, sticky revenues, largely independent of economic conditions. This means that EPIC Games’ operating segment is particularly relevant in current times, as performance is primarily driven by the pace of content and success rate rather than the economic climate. For example, in 2021, EPIC’s game store sales totalled USD 840 million, up from USD 700 million the year before. Simultaneously, the company has significantly expanded its community to an average of 60 million monthly active users. It is no wonder, therefore, that some of the most renowned venture capital firms are heavily backing EPIC, including Blackrock, Fidelity, Tencent, KKR, Sony, Disney Accelerator, and Lightspeed Ventures.

Contact Stableton or sign up to explore this and other investment opportunities

In the past, accessing the opportunities such as EPIC Games presents meant seeking early access through venture capital funds (which, once well-established, might not even be interested in your commitment). In addition, it involved high investment minimums, cumbersome paperwork, scarce information (often not even knowing what you will be investing in), and long holding periods. Today, there is an alternative. Accessing promising businesses via late-stage venture investments is increasingly popular. For one, investors know the name of the company they are investing in. Secondly, as in the case of EPIC Games as a disruptor in the metaverse, the product-market fit has already been established, and the path to profitability is clear. To hop on an investment at this stage means a lot of upside potential, while the risk level stays relatively moderate. Stableton is Switzerland’s leading provider for access to late-stage venture capital & pre-IPO Investments to smaller qualified investors. Our mission is to help investors get access to the otherwise secluded private investment market. With a minimum of CHF 10’000, this type of investing should be considered as part of a portfolio. This article only scratches the surface of the opportunities late-stage VC and pre-IPO investing present. Contact your Stableton representative now to learn more and find out about opportunities that exist right now.

[i] https://venturebeat.com/2016/12/16/epics-tim-sweeney-be-patient-the-metaverse-will-come-and-it-will-be-open/ [ii] https://www.wired.com/story/what-is-the-metaverse/ [iii] https://www.bloomberg.com/professional/blog/metaverse-may-be-800-billion-market-next-tech-platform/ [iv] https://www.coindesk.com/business/2022/06/07/metaverse-related-economy-could-be-as-much-as-13-trillion-citi/ [v] https://www.mckinsey.com/~/media/mckinsey/business%20functions/marketing%20and%20sales/our%20insights/value%20creation%20in%20the%20metaverse/Value-creation-in-the-metaverse.pdf [vi] https://edition.cnn.com/2022/07/06/tech/microsoft-activision-uk-antitrust/index.html [vii] https://www.complex.com/pop-culture/best-fortnite-live-events-ranked/ [viii] https://techcrunch.com/2022/04/07/fortnite-epic-games-lego-partner-build-metaverse-kids/?guccounter=1&guce_referrer=aHR0cHM6Ly93d3cuZ29vZ2xlLmNvbS8&guce_referrer_sig=AQAAAMpOLMh21vJLXGw-8gPxGLGjxaHSJWBMikhqGnpvBESbYvuXW-z498NfdaIfZ9AHAVi8MArV2PfQnKB5Z7K7bh21BDCP-Pafgt3AFe1AVT0GZt_gdXClrNdR2cBpSVDO5Kg2d0HCwEwG26oTKOcp-gxm3sOIx2_1vvglTYWTIUMf [ix] https://asia.nikkei.com/Business/Media-Entertainment/Sony-to-pump-1bn-more-into-Fortnite-developer-Epic-Games2