Launch of the Epic Games Store, a milestone for fairer developer revenue sharing.

Epic Games under the Disruptive Strategy Lenses: Part 1

Disclaimer: This is a 4 part analysis I wrote as an assignment for a strategy course. It looks at Epic Games, a game development company, through the disruptive strategy theories of Dr. Clayton Christensen, based on publicly available information.

I decided to share the analysis under the Creative Commons Attribution-NonCommercial-NoDerivatives-4.0 International (CC BY-NC 4.0) license, as a response to recent events (#FreeFortnite), in hopes it could be of use to the company in its efforts to disrupt the gaming industry.

• Part 1: Company Backstory
• Part 2: Situational Characterization
• Part 3: Recommendations
• Appendix: Corporate Structure Example Applying the Theories

1. Company Backstory

1.1 Tim Sweeney and Epic Games

Epic Games, Inc. is a United States company based in Cary, North Carolina that makes high-tier (AAA) video games. The company was founded by Tim Sweeney, under the names of Potomac Computer Systems (1991–1992), then Epic MegaGames (1992–1999). After a 29-year trajectory of video game developments across different platforms, including launching videogame industry hits such as ZZT, Jazz Jackrabbit, Unreal Tournament, Gears of War, and most recently, Fortnite, the highest-earning video game of 2018 and 2019, Epic Games is now a globally renowned brand in the industry. As of June 2020, Epic Games’ estimated valuation was of $17 billion, after 40% of its participation was sold in 2012 to the Chinese entertainment giant Tencent, to explore business opportunities beyond selling games.

Tim Sweeney’s perspective on openness and freedom is arguably one of Epic Games’ factors for success, as well as his vision on the software industry’s revenue models. The founder has repeatedly shared his opinions on games being a social activity that drives consumer adoption, affected by marketplace intermediaries forcing themselves in front of consumers He is a strong proponent of supporting equal global access to game consumers. Sweeney’s vision has been a strong motivator for the company to distribute various games as shareware in its early days, to launch a publishing model with reduced intermediary fees, and to invest in shared virtual experiences within their games in recent years.

1.2 Unreal Engine Open Sourced and Emerging Opportunities

In 2015, at the Game Developers Conference, the game development industry’s largest event, Epic Games announced it had open sourced the Unreal Engine, their in-house built game-development-toolkit used by various game industry firms to produce high-end “AAA” games. This decision converted their paid licensing model into a royalty-based one, in which users would not need to pay any licensing fees, but would instead pay Epic Games a 5% royalty on commercial endeavors that made use of the engine.

Offering previously unattainable high-end software at no initial cost was caught as a surprise from other game engine competitors, such as Unity and CryEngine, who were pushed to implementing similar models. As a result of Epic Games’ decision, access to professional game development tools was commoditized.

The technology’s affordability, robustness, and openness attracted low-end market developers, including independent creators and producers (“indies”), and high-tier developers from outside the gaming industry (“enterprise” non-consumer industries) such as: architecture, automotive and transportation, broadcast and live events, film and television, training, simulation, and manufacturing, to adopt Unreal Engine as a workbench platform.

By 2019, Epic Games had started to slowly embrace these new adopter emerging opportunities. An Unreal Indies website was launched to offer resources for the indie game development community and a specific website had been created for each non-games industry segment. Moreover, their licensing offerings were split into games and non-games, to cater for different tiers within each case.

References

1. Epic Games, Wikipedia, as retrieved on July 4, 2020. URL: https://en.wikipedia.org/wiki/Epic_Games
2. Fortnite made $1.8 Billion in 2019, retains title as highest-earning game, Aaron Mamiit (January 5, 2020), Digital Trends, as retrieved on July 4, 2020. URL: https://www.digitaltrends.com/gaming/fortnite-highest-earning-game-2019/
3. Fortnite Maker Epic Games Nears Funding at $17 Billion Value, Katie Roof, Gillian Tan, Liana Baker, and Olga Kharif at Bloomberg (June 15, 2020), as retrieved July 4, 2020. URL: https://www.bloomberg.com/news/articles/2020-06-15/fortnite-maker-epic-is-said-to-near-funding-at-17-billion-value
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