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Home›Gaming for cash›Why does Fortnite maker Epic Games need to raise $ 1.3 billion?

Why does Fortnite maker Epic Games need to raise $ 1.3 billion?

By Vizcarra Adams
April 19, 2021
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Compare Fortnite with my favorite game Red Dead Redemption 2 (RDR2), a Triple-A from Nasdaq-listed Take 2 Interactive, valued at $ 27 billion. Two thousand people worked for seven years to develop RDR2 at a cost of around $ 600 million. Launched with a solo story and priced over $ 100, it grossed nearly $ 1 billion in its debut weekend, 25% more than the blockbuster movie. Avengers: Infinity War.

It’s numbers like these that push valuations into the tens of billions.

Again Fortnite is perhaps the least interesting part of Epic Games, which is celebrating its 30th anniversary this year. Remarkably, it is still run by its founder and majority shareholder, the 51-year-old American Tim Sweeney.

Epic likely had $ 6.5 billion in revenue and $ 1.3 billion EBITDA in 2020, so this is way more than fair Fortnite (as a private company, the results of CY20 are not yet available).

Epic’s most impressive and successful product is the Unreal Engine. To understand the magic of Unreal, imagine a Fortnite player firing his sniper rifle. First, the laws of physics must be carefully coded so that bullet speed, pistol recoil, damage mechanics, etc. can be calculated and animated.

Unreal Engine offers a flexible pre-cut software environment so developers can skip this coding job and focus on gameplay instead. Not only Fortnite built on Unreal, but so are titles from other developers, including the Triple-A game Borderlands 3 and Yoshi from Nintendo Handicraft world.

Unreal charges a 5% royalty on sales over US $ 1 million, generating predictable subscription-like revenue that increases game-based game development.

This combination means that Epic is not only a successful game store, but also a platform game, which has proven to be very attractive to investors, including PlayStation 5 maker Sony.

Considering its profitability, why does Epic need the large amount of investor cash it just raised? The answer may lie in two problems that share a common theme: income leakage.

Goldman Sachs estimates that by 2025, digital downloads will account for 80% of total game sales. For PC games, the ubiquitous market is Steam, owned by privately held Valve Software and valued at $ 13 billion by Bloomberg in 2019.

The developers pay Steam a 20-30% commission on each download and subsequent in-game “micro-transaction”, which creates a big revenue leak problem for Epic.

In response, it has created its own competitive market, but the Epic Games Store has recorded staggering losses of $ 400 million so far, with large losses expected to continue.

Those numbers came to light during Epic’s response to its second big revenue leak problem, mobile gaming.

Like Steam, Apple also charges an ongoing 30% commission on in-game purchases when an iOS app is downloaded from its App Store. Last year, Epic and Apple had a brief but brutal public row over orders. The result was Fortnitethe removal of the platform and a lawsuit against Apple.

In a local twist, late last year Epic filed a second Australian Consumer Law complaint against Apple. He also filed a similar complaint against Google last month, saying our consumer protection law is seen around the world as a framework with sharp legal teeth.

Epic is appealing the Federal Court’s decision to temporarily stay the local Apple proceedings, and the U.S. case is expected to begin in May.

Whatever the outcome, the financial cost of litigation will be enormous. Added to the losses of Epic’s game store, these anti-leak actions could partly explain the capital increase. Epic may have no other choice considering that out of $ 5 billion in revenue, each additional 1% commission costs $ 50 million.

As for Epic’s valuation, at 5.6x revenue and 28x EBITDA, it is not cheap. However, the company is a well-established and diverse market leader that has likely seen strong growth in 2020.

A $ 37 billion valuation for dummy outfits and Unreal Engine? What an epic time to be alive.



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