Epic Games has risen to become one of the most valuable private gaming companies in the world, with recent estimates valuing the Fortnite maker at over $28 billion. But why is Epic worth so much despite being less than half the size of publicly traded rivals like Activision Blizzard? The gaming startup‘s meteoric growth over the past decade boils down to two words: Fortnite and Unreal.
The Unprecedented Success of Fortnite
Epic struck gold with the release of Fortnite Battle Royale in September 2017. The free-to-play multiplayer shooter skyrocketed to popularity, amassing 350 million registered players globally as of May 2021. To put that in perspective, it took World of Warcraft over a decade to reach 100 million users.
Fortnite generates billions in annual revenue through in-game microtransactions – about $5.1 billion in 2020 alone. Players eagerly spend money on skins, emotes, and the seasonal Battle Pass to customize their characters and progress through reward tiers.
The game averaged over 12 million concurrent players in 2021. Epic has expertly sustained interest by constantly updating Fortnite with new seasons, cross-promotions with popular franchises like Marvel and Star Wars, and interactive live events like virtual concerts.
Fortnite‘s Revenue and Players Over Time
| Year | Annual Revenue | Registered Players |
| 2018 | $5.4 billion | 200 million |
| 2019 | $4.2 billion | 250 million |
| 2020 | $5.1 billion | 350 million |
Fortnite single-handedly transformed Epic from a profitable but unremarkable developer into a gaming juggernaut. But Epic has another equally invaluable asset propelling its success – the Unreal Engine.
Unreal Engine‘s Wide Usage Across Industries
First launched in 1998, Unreal Engine is Epic‘s proprietary game development engine and toolkit for building cutting-edge 3D experiences. It provides game developers with advanced real-time rendering, physics, animation, artificial intelligence, and other features needed to power immersive, high-fidelity games and simulation.
Unreal Engine is used across the gaming industry by studios like Bandai Namco, Gearbox, and Ubisoft. Beyond gaming, it‘s become a versatile 3D content creation tool adopted by major film and TV productions like The Mandalorian. The automotive, architecture, and aerospace industries also leverage Unreal Engine for design visualization and simulations.
Epic makes money from Unreal Engine through seat-based subscriptions and royalties: 5% of a game‘s gross revenue after the first $1 million. In 2020, the engine accounted for over $97 million in royalties and brought Epic $716 million in total revenue.
Unreal Engine‘s success does not rise and fall with the popularity of Fortnite. As CEO Tim Sweeney stated, "We have a tremendously profitable business outside of Fortnite." This diversified revenue stream is a key factor stabilizing Epic‘s valuation.
Epic Games Store Challenging Steam
In December 2018, Epic entered the PC gaming distribution market by launching the Epic Games Store to compete with Valve‘s Steam platform.
Epic disrupted the 30% revenue cut standard set by Steam and Google by only taking 12% of developers‘ earnings. This attractive profit share led major publishers like Ubisoft, Take-Two, and Activision to distribute games through Epic‘s store.
The company also utilized Fortnite‘s popularity to drive adoption by offering 1 to 2 free games every week, costing Epic an estimated $11 million. While still significantly smaller than Steam, the Epic Games Store grew to hit over 56 million monthly active users by the end of 2020.
PC Game Distribution Market Share
| Storefront | Estimated Market Share |
| Steam | 75-80% |
| Epic Games Store | 10-15% |
Epic takes a loss by funding free game giveaways and maintaining lower revenue cuts. But this loss-leading strategy has proven successful in building a customer base and applying competitive pressure in the market. Once a large enough user base is established, profits should keep flowing.
Visionary Leadership from Tim Sweeney
Behind Epic‘s rise is the forward-thinking leadership of founder and CEO Tim Sweeney. He started the company in his parents‘ basement as a 21-year-old in 1991 before releasing the hit games ZZT and Jazz Jackrabbit.
Sweeney has led Epic‘s transition from purely building games to becoming a multifaceted giant through tech development and digital distribution. He also pioneered integrating user-generated content in games like RoboSports and Unreal, presaging the rise of mods and creative games like Minecraft.
Former Epic executive Mark Rein described Sweeney‘s management style as "leading by pure passion." His intense focus on bigger visions over short-term revenue shapes Epic‘s culture of innovation and big bets like entering the distribution business.
Tencent Investment Provides Capital and China Access
Chinese tech firm Tencent first acquired a 40% stake in Epic Games in 2012 for $330 million. This provided crucial capital for Epic to keep investing in Unreal Engine‘s development while building Fortnite and their game store.
In return, Tencent gained the rights to distribute Epic‘s games in China. This partnership with a Chinese tech giant has been invaluable in accessing China‘s massive gaming market. Tencent later increased its stake to 48.4% through participation in funding rounds.
Having Tencent as a committed investor has given Epic the freedom to focus on long-term growth rather than short-term pressures. As Sweeney stated, “We have lots of freedom to spend money on things we don’t know will work."
Cross-Play Capabilities Strengthen Competitive Position
A key factor in Fortnite‘s popularity was Epic allowing cross-platform play between PS4, Xbox One, Switch, PC and mobile from the beginning. This enabled friends on different systems to squad up, unlike titles locked into their own walled gardens.
Delivering robust cross-play support entails significant technical challenges. But Epic‘s experience building online frameworks like Xbox Live gave them the expertise to make it work. This ability to connect players strengthens Epic‘s position as the social interactive future of gaming takes shape.
Future Growth Potential in the Metaverse
With the "metaverse" being heralded as the next frontier of social connection and entertainment, Epic finds itself in prime position to capitalize on Web 3.0 digital worlds.
Fortnite‘s existence as a virtual hangout with integrated social features provides great experience Epic can build on. Unreal Engine‘s 3D design tools and real-time rendering put it at the forefront of building metaverse environments and content.
Epic‘s MetaHuman Creator for making photorealistic digital avatars and their cross-platform Epic Online Services also give them key technology for the open metaverse. If the concept sees mass adoption, Epic could make their metaverse moves pay off handsomely.
Profitability Still in Progress
Despite billions earned from Fortnite and the Unreal Engine, profitability has eluded Epic thus far as they pour money into their ecosystem. But they are playing the long game.
Once the Epic Games Store becomes self-sustaining and the capital-intensive early metaverse investments pay dividends, profitability will certainly follow. Until then, Tencent‘s support prevents any rush into profit-seeking moves that undermine the future.
What Could Derail Epic‘s Value?
Of course, the road ahead still presents risks that could devalue Epic. Perhaps the biggest is the metaverse failing to achieve mainstream appeal, denying Epic that new frontier of growth.
There is also the chance players finally tire of Fortnite after its unprecedented lifespan. And as Apple and Google have shown, Epic faces fierce competition from tech giants also vying for the future.
Regulatory threats like loot box crackdowns and right to repair laws could hurt key revenue streams. But Epic has so far demonstrated masterful ability to adapt and realign their efforts towards gaming trends.
The Future Remains Bright
While nothing is guaranteed, Epic finds itself blessed with two gaming gems in Fortnite and Unreal Engine, a compelling ecosystem vision guided by pioneering leadership, and the resources to put big bets into shaping the future.
Epic may not rival Activision Blizzard in size yet, but their strategic assets justify valuation estimates over $28 billion. For an enterprise less than 30 years young, Epic Games boasts tremendous value thanks to the unique success combination of Fortnite, Unreal, visionary leadership, and trust in the future metaverse.
