Is Epic Games a threat to Unity Software’s stock?

Once upon a time, but not so long ago, Nanalise covered a lot of tech startups. We have published dozens of lists of the best AI startups in the UAE (From all places(for some of the first synthetic biology startups to make fake food)It is now sold in fast food restaurants). Starting around 2017, some of these emerging tech companies have grown large enough to start disrupting their own industries. The ensuing flurry of IPOs has finally got retail investors to get their piece of the action, as some of the most exciting private tech companies have gone public. It all culminated in 2021 with more than 900 new public companies, driven largely by SPACtacular speculation.

The number of initial public offerings in the United States since 1999.
The cycle of IPO booms and busts over the past two decades. This year, private companies remain mostly private, with initial public offerings down more than 80% compared to last year. Credit: Statista

We have naturally shifted our focus to covering these companies, and now we analyze startups only occasionally when it becomes relevant for retail investors. This isn’t to say that there aren’t a lot of cool privates still to be discovered, but what’s the point if the average person can’t get a skin in the game? We recently told you about how ARK Invest is opening up a kind of hybrid fund for retail investors to gain limited exposure to private companies. The investment firm is still raising the ARK Venture Fund (ARKVX), with only seven private companies on the list. extreme exposure (approximately 12% of a file) to Twitter alone might be a bit of a surprise, but there are some more interesting names in the portfolio.

About Epic Games

For example, in third place with 8% of the portfolio is Epic Games, a 30-year-old video game company that has collected at least $6.4 billion in finance. The most recent fundraising round came in April this year – a $2 billion infusion from Sony, which has invested across multiple rounds, and a private Danish holding company that owns the LEGO brand. Nearly 40 investors have jumped on board since 2012, and notable names include Fidelity, Ballie Gifford, Franklin Templeton, T. Rowe Price, BlackRock, Lightspeed Venture, Kleiner Perkins, and Disney.

Topping the list is Chinese tech giant Tencent (0700.HK), which bought the company 10 years ago for $330m. Reportedly the world’s largest video game industry based on investments, Tencent owns 40% of Epic Games. Not a bad investment based on the North Carolina company’s $31.5 billion valuation, which is enough to make it one of the top 10 unicorns on the planet. CEO Tim Sweeney remains the controlling shareholder with an estimated 28% equity interest, according to Forbes.

Unreal Engine screenshot
Epic Games released Unreal Engine 5.1 this month. Credit: Epic Games

Sweeney originally founded the company as a computer consulting firm under the name Potomac Computer Systems in 1991. He changed gears after using his startup to publish his first commercial video game, ZZT. The game’s creator changed the name to Epic MegaGames before toning it down a bit with just Epic Games. There’s a lot to the company’s history, but things really took off after 2012 when Epic Games shifted with the industry and adopted the games-as-a-service model, a software-as-a-service model where recurring revenue revolves around customers paying for access to the online platform in perpetuity. And, of course, a little video game came out in 2017 that even Shakespeare scholars had heard of.

How does Epic Games make money?

Today, Epic Games is primarily known for three things.

  • Unreal Engine. This is the company’s powerful game engine that was originally developed for PC games. It is one of the most popular gaming platforms and supports content on desktop, mobile, and even virtual reality. It is also used by special effects processors in films such as the Star Wars franchise.
  • Fortnite. Far and away the company’s most popular game. Don’t ask us what it’s about. We don’t care, except that a large swath of the population is as addicted to it as a country doctor is to oxycontin.
  • Epic lawsuit with Apple. In 2020, Epic sued Apple, which disputed, over Apple’s App Store labor practices. Epic also sued Google for a similar reason. Apple prevailed, but Epic gained some street cred for taking on the most powerful of tech companies.

The last point is particularly important to us because Epic released financial numbers as part of the lawsuit – information that private companies usually don’t disclose. That’s how we know it made more than $9 billion between 2018 and 2019. The company also reported profits of more than $5.5 billion for the two-year period, according to an article in The Verge. Some of those numbers are likely behind this graph from Statista that shows past, current, and future revenue for Epic Games.

Epic Games earnings
Epic Games earnings. Credit: Statista

It’s somewhat surprising that Epic pulled in that much money considering how much product they’re giving away for next to nothing. Fortnite is free to download but users pay real money to buy fake things in the virtual worlds they create and compete in. Unreal Engine operates under a royalty model where it’s free to use, but Epic collects 5% of all revenue after the first $1 million. It actually waives its franchise fee if developers who use the Unreal Engine offer their games to epicture gamis srip (EGS), which launched in 2018 and carves out just 12% versus the benchmark 30%. Unreal Engine generated $221 million in revenue over the 2018-2019 time frame, and EGS generated about $235 million over those two years. Other games not under the Fortnite name made $108 million, which means the online gaming phenomenon accounts for most of the company’s revenue — nearly 90%.

Epic Games vs Steam

In fact, it appears that Epic is milking the Fortnite cash cow to support its other commercial ventures, especially its storefront. Ars Technica had a good analysis of how much money Epic is hemorrhaging, based on court filings from both Epic and Apple, as it tries to build the EGS business. We’ll bring you Cliff’s notes here with the numbers released on 2020 revenue and losses: ESG lost $635 million between 2019 and 2021, based on documents and affidavits associated with the lawsuit. Here’s the thing: The online store itself is said to be self-sufficient. The problem goes back to all the free stuff. Epic Games shall be named Epic Giveaway. It is said to have distributed approximately 750 million free games in 2020, possibly representing tens of millions of dollars in revenue. In the same year, it was also reported by Ars Technica, that Epic also paid $444 million in minimum guarantees to developers for exclusive publishing rights.

Number of games added to Steam since 2004.
Steam has been gaining momentum by adding thousands of video game titles in recent years. Credit: Statista

This is all not just to gain market share from Apple and Google, but to tackle an online gaming store monopoly that is perhaps not so well known outside of gaming culture. By most measures, a service called Steam is the leading distributor of video games online. It’s developed by Valve, a private video game developer, publisher, and digital distributor from Bellevue, Washington, where Microsoft’s OGs began in 1996. Earlier this year, Steam had nearly 28 million concurrent players on its platform, which It is apparently a record-breaking online game distributor, boasting 120 million active users. For comparison, Epic hit 13.2 million concurrent users and 31 million daily active users in 2021 – so it’s definitely making inroads and a carving out of Valve’s dominant market share. The chart below is from a 2019 survey of nearly 4,000 game developers, just about a year after EGS launched.

The most popular computer video game store.
The Epic Games Store wasn’t even on the radar until 2019. Credit: Game Developers Conference

Steam has nearly 50,000 games for just 917 on the Epic Games Store, but the entry bar is much higher if it’s cheaper on EGS. In fact, third-party games accounted for only 36% of the $840 million spent through the store in 2021. It would seem like it would cost Epic a lot of freebies to win more market share.

Epic Games vs Unity

The battle we’re really interested in is the battle with Unity Software (U). As we described in a previous article on Unity, the company has a very different business model compared to Epic Games, as all of its revenue revolves around its game engine. Developers pay a subscription to create games and content on their platform, although most of the revenue actually comes from post-creation activities, mainly marketing. However, both companies are long-term plays on the metaverse. That’s because close range doesn’t look so great: slash play bleeds like comp Facebook Meta (META) is dry, trying to convince consumers that life is better inside a half-built matrix.

Screenshot from Unity Engine.
Unity game engine. Credit: Unity

If you Google Epic Games vs Unity, you’ll end up with about 32 million hits compared to the top game engine. The consensus seems to be that Unity is easier to use and optimized for mobile, while Unreal by Epic is more powerful and designed for full-fledged video games. Market share has been difficult to pin down, but the consensus is that the unit has a commanding lead overall. The numbers seem to range somewhere like 40% to 50% for Unity and 10% to 20% for Epic’s Unreal Engine. Here’s a snapshot of UK game developers, for example:

The preferred game engine by UK developers.
The preferred game engine by UK developers. Credit: Statista

This may seem counterintuitive given that Epic’s revenue is much larger in 2021 than Unity — $5.8 billion versus $1.1 billion — but remember that Fortnite generates the most money. Unity’s recent merger/acquisition of ironSource will further tighten its grip on the mobile gaming and content market, while pushing Epic to grow market share with its online video store.

In some ways, the two companies are more complementary than competitive. Additionally, a recent study indicated that both game engines have applications in other fields, from artificial intelligence to television production to being the foundation of the metaverse. The researchers went so far as to suggest that game engines from companies such as Epic Games or Unity are “set to become influential actors in all social and economic spheres that begin to rely on game engines to provide software or services. This makes them an important topic for studying platforms because they provide essential building blocks.” increasingly important in the digitization of economic, political and social life. There appears to be a large total market to be tackled for both companies in the future.


ARK appears to be neutral in the debate, as Unity is also part of a new venture capital fund portfolio, which currently includes dozens of public technology companies. Another player in the metaverse, Roblox (RBLX), is on the list, along with a couple of companies we’ve covered recently, including DraftKings (DKNG) and Roku (ROKU). The portfolio certainly seems to reinforce the idea that the digitization of life will increasingly dominate our lives. We remain convinced that Unity is the right game for us. Epic Games certainly deserves a second look if it goes public, but at just 8% of the ARKVX portfolio – a number that will surely drop as more companies are added – the exposure is slim. The fact that Tencent is seeking to add to its gaming empire, while the de facto emperor of China is making life difficult for local companies, may make the Epic Games acquisition particularly attractive.

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