Platform Wars Update: Epic Store Losing $330 Million Per Year To Acquire Customers

(Mis)Uses of Technology

from the oof! dept

It’s been a while since we’ve checked in on how the PC gaming platform war is going. If you’ll recall, the Spring of 2019 saw a new entrant into this ongoing battle, with Epic releasing the Epic Store. Epic’s plan appeared to be essentially a PR battle at first, drawing in the public by proclaiming that Steam’s revenue splits with developers and publishers were bad for the gaming industry and by drawing in publishers and developers with a better version of those splits for them. On top of that, Epic used those splits to gobble up a bunch of exclusive or timed exclusive releases of games, which ended up pissing off many in the gaming public and, of course, Steam. Then came Epic’s free game releases, where the platform worked out deals with publishers to offer up AAA game titles for literally no money as a method for getting gamers to adopt the platform.

All of this didn’t come with zero fallout from what Epic was doing, of course. The public doesn’t like exclusives generally. Crowdfunding got weird due to the exclusivity. And the launch of the Epic Store in the early days was not without its hiccups, either. Now that we’re 2 years on, how has this all shaken out?

Well, Epic is getting a decent chunk of market share with its tactics, even as the platform takes on major losses in doing so. The reason for those losses? Well, largely they have to do with all of those free games and timed exclusives. And we have Epic’s battle with Apple to thank for the information.

The raw numbers, as reported in a “Proposed Findings of Fact and Conclusions of Law” document Apple filed last week, show massive incurred and projected losses for Epic’s game download hub, which launched in late 2018. Documents and testimony from Epic itself show a $181 million loss for the store in 2019 and projected losses of $273 million in 2020 and $139 million in 2021.

You might think Epic is incurring those losses because it only takes a 12 percent cut of third-party game revenues, compared to the industry-standard 30 percent cut on other digital storefronts. On the contrary, though—in its own court filings, Epic says that 12 percent revenue chunk has been “sufficient to cover its costs of distribution and allow for further innovation and investment in EGS.”

The main driver of EGS’ losses, instead, is Epic’s generous program of “minimum guarantees.” These encompass the advance payments Epic has used to attract so many timed exclusives to its storefront and seemingly also cover the free games Epic makes available to Epic Games Store users every week.

Now, while this isn’t precisely the type of method for using “free” as part of a business model as we’ve talked about in the past, it’s close enough to count. The upshot of all of this is that commentary from Epic’s folks makes it clear that they’re well aware of these monetary shortfalls… and are largely just fine with them. The whole point of all of this is to make as big a dent in market share in a short time period as possible. And, of the two ways Epic saw to do that, taking on initial losses like this was the better option.

“There are two ways to bring users into something,” Epic Games co-founder and CEO Tim Sweeney told Ars in 2019, just after the launch of the Epic Games Store. “You can run Google and Facebook ads and pay massive amounts of money to them. But we actually found it was more economical to pay developers [a lump sum] to distribute their game free for two weeks… We can actually bring in more users at lower cost by doing all these great things for great people rather than paying Google and Facebook.”

That effort is starting to work. Last June, Sweeney told PC Gamer that EGS had about 15 percent of the PC gaming market. That’s not great, but it’s not bad considering the near-monopoly power Steam has in PC gaming downloads (Sweeney estimated Steam’s share at 90 percent in 2019, though that could be a bit inflated).

In court documents, Epic went on to note that it expects its storefront to start turning a profit in 2023, so it looks like it has some runway there as well.

So, what does this all mean? Well, at the very least it’s an interesting experiment in using free loss-leaders to gain customers and give them reasons to buy elsewhere on the platform. Epic hasn’t pulled some magic trick to suddenly unseat Valve’s Steam platform as of yet… but it’s also apparently playing the long game here.

Filed Under: epic store, platform wars, steam, video games
Companies: apple, epic, valve