An Indie Developer’s Guide to the Epic Ecosystem presentation at Unreal Indie Dev Days 2019, also a source for this analysis.

Epic Games under the Disruptive Strategy Lenses: Part 2

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.

2. Situational Characterization

In 2020, Epic doubled down on Unreal Engine’s commoditization by clarifying their royalty-free and revenue sharing model for content creators, and announcing Unreal Engine 5, the next version of its development engine with stunning computer graphics capabilities, in tandem with Epic Online Services, a free software development kit to allow developers to incorporate marketplace, analytics platform, login accounts, and backend services to their creations.

These emergent strategy decisions hint that the company is willing to explore adjacent layers in the game development value chain to shift their revenue model to. This section characterizes the main market Epic Games relates to, the AAA game industry, and attempts strategic recommendations for new market explorations in the indie and enterprise markets.

2.1 The AAA game industry

2.1.1 AAA Game Developers: Sustaining Innovation

Disruption Theory

Sustaining innovation: As a AAA blockbuster game developer, Epic Games has developed very high-end tools for itself over time. Unreal Engine is constantly maintained, and serves as a great toolkit outsourcing alternative for the AAA game industry.

Good enough alternatives

Following Epic Games’ experience releasing Unreal Engine, other development studios are planning to publicly release their in-house developed AAA game engines. These “good enough” AAA game engine alternatives include the CryEngine, developed by CryTek, later modified and offered by Amazon as the Lumberyard game engine, Valve’s Source Engine, and Ubisoft’s UbiArt Framework.

2.1.2 AAA Game Developers: Discovering Customer Jobs to be Done

AAA industry game developer needs are mostly related to performance, high end computer graphics, and technological compatibility with various gaming platforms. This is the segment Epic Games has deliberately tackled with the Unreal Engine, since it historically provided the highest gross margins. As a consequence, Epic Game’s resource allocation process prioritizes updating the engine and its features to accommodate high-tier developers.

A key job to be done for the AAA game industry is “help me avoid implementing complex tools every time I need to start a new project”, and a performance metric for Epic Games can be measured in the number of games that were efficiently developed and deployed using Unreal Engine.

Under the disruptive innovation lens, Epic Games is a sustaining innovation company relative to the AAA game industry, offering Unreal Engine as an efficiency oriented product.

2.1.3 AAA Game Developers: Unreal Engine’s Interdependence and Modularity

Relative to how Epic Games is structured, Unreal Engine is an interdependent product, since the tool’s various features are managed across different interdependent teams in the company.

The tools in the engine are implemented using an engine specific programming language called Blueprints, based on the C++ programming language. C++ and Blueprints versed resources including engineers, developers, marketing professionals, and artists are needed to operate the business.

Relative to the value chain in the game development industry, Unreal Engine can be seen as modular, since it is a stand alone tool that efficiently interfaces with the game development value chain. The product imports assets from other software (3D objects, animation, images, sound, videos), and outputs code that can be interpreted by commercial AAA game consoles. Moreover, companies hire Epic Games to absorb Unreal Engine’s development environment, to avoid doing it themselves.

The theory of interdependence and modularity would suggest there is an opportunity for Epic Games to integrate forward towards two decoupling points, either providing technical services for AAA developers, or developing consumer facing AAA games in-house. This also indicates that Epic Games’ profit formula is profoundly integrated with its product. The success of Unreal Engine developed AAA games (which generated income through licensing) and the in-house developed Fortnite validated this.

2.1.4 AAA Game Developers: Organizing for Innovation

Serving the job to be done

Unreal Engine is a well positioned purpose brand for AAA game developers that nails their job to be done. Industry incumbents such as Nintendo, Rocksteady Studios, and Square Enix, are now starting to adopt Unreal Engine for their games.

Unreal Engine’s Custom Games Licensing can be attractive for highest grossing AAA studios wanting to negotiate the standard 5% royalty, and requiring technical support.

Resources, Processes, and Priorities

As stated above, Epic Game’s Resources, Processes, and Priorities (RPP) circle around the development of Unreal Engine and game development. In detail:

Dedicated resources to support AAA developers: Resource hiring is centered around AAA technical prowess and Unreal Engine experience, as well as AAA industry relationships.

Processes to support AAA developers: The RPP diagram suggests that processes should tailor AAA customer needs. Their technical, sales, marketing, and financial processes and culture probably focus on advancing the Unreal Engine development in-house.

Profit formula to serve AAA developers: As the Organizing for Innovation theory would suggest, Epic Games’ profit formula may be tailored to nail the high-tier AAA industry jobs to be done, prioritizing high-tier clients over low-tier developers when allocating resources and licensing.

Epic Games may, as an example, offer support to AAA custom licensees when developing their games with Unreal Engine, to facilitate technology adoption at the decoupling point. This would facilitate upselling or maintaining repeat customers.

Skating to where the puck/money is: For AAA studios that want to continue selling game copies over time, the Epic Games Store online marketplace is another forward integration attempt. The Epic Games Store promotes game visibility and charges an intermediary fee of 12%, a considerable reduction relative to the industry’s 30% standard sales royalty. This complements the Unreal Engine offer, by trying to shift to another layer in the value chain.

2.2 Indie Developers

2.2.1 Indie Developers: Aligning with Innovation and Disruption

Disruption theory

Low-end disruption: Relative to the whole game industry, Epic Games’ Unreal Engine could be seen as a low-end disruption to the market thanks to its royalty-free pricing commoditization strategy.

New-market disruption: However, relative to the game engines that independent developers previously had access to, Unreal Engine can be seen as a new-market disruption.

Performance surplus: Good enough alternatives

Unreal Engine is more than “good enough” for the indie segment: It overserves them. Other free and affordable game engines that are already “good enough” exist and are used by personal and low-end independent studios.

Indie teams, mostly composed of artistic self-learners, are pressed to search for funding, marketing, and freelance talent.

Being small entities, indies struggle with fixed costs due to long development periods without income. This leads to cost, visibility, equipment, and talent retention constraints.

As a result, indies prefer using engines with the fastest learning curves and largest developer communities to reduce learning, development, and time to market periods.

Possible disruptor: As a result, the go-to game engine for the low-end, non-incumbent, indie has been the Unity game engine. Seen as a less complex alternative, Unity is adopted by entry level, immersive, and mobile developers. As opposed to the needs of the high-end AAA industry segment often targeted by Unreal Engine, Unity caters to the low-end of the market where simplicity is appreciated.

2.2.2 Indie Developers: Discovering Customer Jobs to be Done

From a jobs to be done perspective, an indie developer studio manager would often say “Help me focus on quickly making and commercializing an interactive experience with my constrained resources”. In the case of indie developers, constrained resources can mean retaining or producing trained talent, low-end technological equipment, and limited access to capital.

Due to a lack of income, limited resources, and a deliberate strategy focused on developing and launching a single game, launching a game without visibility can easily lead to bankruptcy for an indie studio.

2.2.3 Indie Developers: Organizing for Innovation

Serving the job to be done

In an attempt to reduce the learning curve for game developers, and to compete with good enough alternatives, Epic Games has launched the Unreal Engine Learn course platform, a gamified experience to teach the tool through online courses. They have also launched the Epic MegaGrants initiative to fund teams that use Unreal Engine as a development tool.

At a first glance, it would seem Epic Games’ growth and increased notoriety in the indie space has been successful. However, if we consider that the performance criteria for indie developers is to profitably develop, distribute, and commercialize games, it would be a stretch to say that most studios hire Epic Games over competing alternatives. Many indies choose another game engine, seek support from publishers/investors, and try to sell game copies on marketplaces with higher visibility.

Resources, Processes, and Priorities

Dedicated resources to support indies: A technology evangelism team highly versed in the Unreal Engine has been deployed internationally to support indies across regions. These teams have autonomy to approach their developer communities.

Processes to support the indie operation: The evangelism team can promote, organize, and create freely available resources and events including documentation, forums, meetups, workshops, youtube channels, webinars, and educational materials to seed adoption of Unreal Engine.

Since the indie job describes “making and commercializing interactive experiences”, and a full pipeline to support an indie developer from idea to commercialization has not been announced to date, an argument can be made regarding Epic Games not supporting the segment’s commercial needs.

Profit formula to serve indies: As indies adopt Unreal Engine, they are encouraged to work with the evangelism team for limited support. However, since few indies actually complete their games due to resource constraints and it is hard for a small team to achieve a million dollar threshold, it may be worth considering that few indies become Unreal Engine licensing customers.

Since Epic Games’ resource allocation process has historically focused on AAA developers, initiatives to support indies as an emerging opportunity may have been overlooked by the allocation criteria.

Possible disruptors: As of July 2020, indie games are offered on the Epic Games Store, alongside AAA games. This may pose a visibility problem for indie games. Some indie developers are starting to adopt “good enough” alternative “indie marketplaces” like GOG, Itch.io, and Humble Bundle have appeared with new business models.

This is an emergent opportunity to evaluate. An indie marketplace, a financing program providing “good money”, focused on profit generation, or a new business unit for indie commercialization could be explored.

2.3 Non-Games Enterprise

Various high-tier corporate industries (“enterprise” customer segments) which were historically not associated with interactive experiences or game development, are now adopting Epic Games’ product. Unreal Engine is being used as a “good enough” alternative to expensive rendering pipeline solutions, and as a new option to implement corporate immersive experiences.

The uses of the engine depend on each enterprise segment’s use case, and range from low-end to new market non-consumption, but it is safe to say it has disrupted the non-games market. At this point in time, the lack of a single, unified job to be done for the whole enterprise industry has resulted in an emergent strategy to explore opportunities. However, the theory would suggest that this will lead towards focusing on a few highest profit margin adopter segments.

2.3.1 Non-Games Enterprise: Aligning with Innovation and Disruption

Disruption theory

Low-end disruption (non-immersive enterprise): Relative to existing technologies in the enterprise sector, which often involve expensive licensing schemes, using Unreal Engine’s game development technology enables industries to simulate or visualize 3D worlds and content. This content is rendered in a “good enough” quality so that the customers can significantly reduce cost and time, streamlining their work. This is particularly true for enterprise segments closer to the AAA interactive industry, such as film and broadcast, where animation and rendering pipelines are replaced by real time experiences.

New-market disruption (immersive enterprise): Most of the enterprise industries Epic Games tailors to had limited to no access to interactive experience development tools due to complexity, pricing, or lack of development capacities. Relative to the traditional rendering tools, Unreal Engine offers a new solution to non-consumer segments interested in offering immersive experiences (such as virtual reality, augmented reality, or pixel streaming) such as simulation, architecture, and automotive.

Performance: Good enough alternatives

As is the case for indies, “good enough” alternatives such as Unity have also entered the non-games space, targeting mid-tier and low-tier enterprise companies. Some mid-tier enterprise adopters with lower performance equipment may concede a hyper-realistic experience for a good enough visual experience. Other enterprise segments, including the gambling and edutainment spaces, where hyper realistic graphics are not a requirement, are also adopting good enough alternatives.

2.3.2 Non-Games Enterprise: Discovering Customer Jobs to be Done

A generalized job to be done for some enterprise industry segments can be “help me optimize resources in my workflow to create visually appealing experiences”. This is especially true for the low-end disruption enterprise markets like architectural visualization, film and television, broadcast, and live events, where Unreal Engine is used to replace costly infrastructure, reduce spending on post production and special effects, and 3D rendering equipment.

Another job to be done for the enterprise sector can be “help me train my staff without needing to invest in expensive resources, processes, or equipment”, which is true for the training and simulation enterprise markets, where Unreal Engine is used as an affordable, low-risk alternative to expensive, inaccessible, or hazardous training.

2.3.3 Non-Games Enterprise: Organizing for Innovation

Serving the job to be done

The resource optimization job to be done is nailed by Epic Games in industries where production pipelines are greatly optimized with good enough technology. For these industries, Unreal Engine can be considered a low-end innovation.

The training job to be done is nailed by Epic Games in industries where access or cost was limited. For these industries, Unreal Engine can be considered a new-market innovation.

The company has leveraged high-tier industry collaborations to showcase Unreal Engine’s capabilities. This is showcased by means of case studies, videos, webinars, and participation in key industry events, like Build: London for Architecture.

Resources, Processes, and Priorities

Resources for enterprise: Epic has hired specialized staff to manage and build evangelism teams and content for each enterprise industry, which are offered through the aforementioned Unreal Engine Learn platform, as well as through events. The interdependence and modularity theory would suggest the enterprise team be kept separate from the indie evangelism team to explore new profit formulas.

Creating and absorbing new interfaces: Industry tools have been acquired and developed in-house to reduce the learning curve of Unreal Engine and polishing interfaces with the enterprise value chain.

Twinmotion, a real-time architectural visualization tool, was developed using Unreal Engine to entice adoption of the technology by architects. Datasmith, a plugin for Unreal Engine that imports files from non-games software, was also launched to import manufacturing, automotive, and architectural files. Quixel, a company that produces surface megascans, entered a partnership with Epic Games to enable free access to hyper-realistic looking objects for use in enterprise projects.

Processes and profit formula to support enterprise: The non-games evangelism team may operate in a way that is strategic to each industry, and, according to the licensing website, may be able to offer custom licensing options. A custom licensing option is consistent with the exploratory nature of new-market disruption and the high-tier prioritized profit formula the company has used in the past.

Part 2 References:

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davidfchang

davidfchang

Technology adoption, market creation, and capacity building in LATAM. Ecuatoriano.