It’s one of the most highly anticipated IPOs…
And it’s not a hot semiconductor company in Silicon Valley.
It’s not a hyperbolic artificial intelligence company out of New York…
It’s a $22.5 billion gaming company out of Cary, North Carolina – just west of Raleigh.
Unless you’re a gamer, Epic Games is a name that most of us won’t recognize.
Even less known is that the company has been around since 1991.
It wallowed around with limited success… Until something happened in 2017.
That something was the release of Fortnite – an incredibly successful, massive, multiplayer online game. Fortnite’s gameplay style is mostly battle royale. The last player standing wins.
Source: Fortnite
For anyone with kids or grandkids, especially boys, you’ve almost certainly seen them playing this game at some point over the last seven years.
It’s one of the most popular games of all time, and it absolutely took the gaming market by storm.
And the revenues from Fortnite, for a relatively small gaming company, have been nothing short of unbelievable.
The below numbers are estimates, as Epic Games is still a private company, but they are roughly accurate.
Not only is Fortnite a game, but it’s also a form of a metaverse.
It has held some of the largest, most successful online events in history using its gaming environment. After all, it has more than 650 million registered users.
It is a highly social world where friends can compete with and against one another, which is one of the things that makes the game so sticky.
And it’s free to play.
Wait. Epic Games makes billions a year from a game that is free to download and play.
How?
For gamers who want access to the latest game modules, unique character “skins” (i.e. outfits and cosmetic items), special weapons, and other in-app purchases, they have to pay.
This point was the genesis for Epic Games filing major lawsuits against both Apple and Google in August 2020.
Epic Games was a rare unicorn. It created a blockbuster hit that was wildly profitable and making billions.
The crux of the issue was that Epic felt that Apple and Google were taking too large of a cut – roughly 30% of any revenues from applications offered in their respective app stores. And 30% of billions of dollars is a whole lotta money.
For example, to purchase game-related items in Fortnite, players have to purchase V-bucks, the Fortnite digital currency. That is considered an in-app purchase by Apple and Google, and thus those companies take their ~30% cuts.
Source: Fortnite
Fortnite got itself into trouble with Apple when it tried to circumvent Apple’s App Store by enabling the purchase of V-bucks directly from Fortnite. That resulted in Fortnite getting banned from the Apple App Store, a ban that is still in place today.
Epic CEO Tim Sweeney estimates that Epic may have lost out on as much as $1 billion of revenue due to this ban, which is – again – why Epic so fervently pursued lawsuits against the two tech giants.
Epic has spent hundreds of millions of dollars on these lawsuits, which simply wouldn’t have been possible had it not generated so much cash from its success with Fortnite.
As a result, these two lawsuits became two of the most interesting in corporate history. And this battle – a real-life battle royale – is finally coming to an end.
Apple succeeded in defeating Epic in an appeals court in April 2023.
The court upheld that Apple did not engage in anticompetitive behavior. The ruling was largely based on the fact that no one is forced to use an Apple iPhone.
Consumers have a wide range of choices with smartphones other than Apple. Almost all of them are Android-based, and they tend to be a lot cheaper than an Apple iPhone, despite having most of the same features and functionality.
And the other determining factor of the ruling is that Apple’s 30% cut in the App Store is consistent with other industry practices. Microsoft, Nintendo, and Sony all charge around the same rates for applications offered in their app stores.
The Epic Games versus Apple case was put to rest this January when the U.S. Supreme Court declined to hear the appeals case.
This was a major victory for Apple… and a major loss for Epic Games.
The only “win” for Epic is a small one, in that Apple has to remove its anti-steering clause from its agreement.
This will enable software developers to include links to their own websites and redirect traffic in hopes of getting consumers to pay for purchases via the web, as opposed to through the App Store.
Epic’s goal was to be able to launch its own app store on iOS so that it could retain Fortnite revenues and also host other developers’ games at more “fair” rates.
And here’s what most don’t know about Epic Games…
Epic is also one of the top two game engines in the industry.
Epic licenses its game engine – Unreal Engine – which it developed for Fortnite, to other game developers. Unreal is a powerful gaming platform on which at least 163 games have been developed on the latest version – Unreal Engine 5.
Its largest competitor is publicly traded Unity Software (U).
This puts Epic in a unique position in the industry – as both a game developer and a software developer (i.e. the Unreal gaming engine).
There were billions at stake, which is why Epic has been willing to risk so much in legal battles with Apple and Google. A victory could mean that Epic could enter the business of being an app store – another multibillion-dollar opportunity.
Which brings us to Epic’s case with Google.
And this time, Epic won.
This week, a judge ruled that Google’s Google Play app store is an illegal monopoly.
The ruling requires that Google must open up its Google Play app store to allow for competition from third-party app stores.
If that doesn’t hurt enough, Google has to provide those third-party app stores access to the full catalog of applications on Google’s Google Play app store. The only exception is if a software developer opts out on their own accord.
The duration of the ruling is three years, starting on November 1, 2024, and ending on November 1, 2027. Also part of the decision are the following requirements:
For anyone who would like to see the permanent injunction against Google, you can read it right here.
So what was it? Why the ruling for Apple but against Google?
In short, Google engaged in anti-competitive practices. It used money and other incentives given to third parties to control the Android ecosystem. And all parties were not treated consistently and on the same terms.
For example:
Google went to great lengths to avoid revealing these facts in the lawsuit. Google executives even went so far as to delete incriminating communications evidence in hopes that it would not be used in the trial.
All of this is why Google lost, and Apple won.
What surprises me about all the coverage of these two interesting cases is that it has all missed the underlying driver for the lawsuits all along…
The IPO!!!
Epic Games has been a wildly profitable multibillion-dollar company since probably 2018.
It certainly had the scale to go public then, but it knew billions were at stake with Apple and Google.
Epic was loaded with cash, so it could afford nine figures of legal expenses over many years of fighting the two giants in a battle royale.
And even if it won one of those battles, it would probably have been worth it.
The smart move by Epic Games was to tackle the lawsuits as a private company. About the worst thing it could have done was engage in these two lawsuits as a public company. It would have been a drag on Epic’s share price for years.
Now, it has the lawsuits behind it. And with a massive victory against Google, Epic now has a new, massive revenue channel to open up.
Epic now can launch its own Epic Games Store on Android OS.
Not only can all of its Unreal Engine software developers launch their games without the 30% fee to Google, but all other Android software developers will also be able to make their apps available in Epic’s app store.
Is this bad for Google (GOOGL)? You bet. It will probably cost Alphabet (Google) as much as $1 billion a year in net income.
But we have to keep things in context. Alphabet will generate almost $300 billion in revenue this year and $100 billion in net income. Next year will be even higher.
It won’t “hurt” Google that much, but it will help Epic Games a lot, as well as benefit countless other software developers.
In case you haven’t guessed it yet, the stage is now set for an Epic IPO.
Regards,
Jeff
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
