Why Epic Games' Metaverse Ambitions Cost It Its Identity

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In a surprising move, Epic Games, the creator of Fortnite and one of the most significant companies in the gaming industry, laid off 830 employees on Thursday. That accounts for a whopping 16 percent of its workforce.

While the recent news about Epic Games is startling, it was not entirely unforeseen. Earlier this year, I shed light on Epic's shift to a net-zero hiring policy, redirecting its workforce toward critical ventures such as Fortnite, Unreal Engine and its metaverse partnership with LEGO.

Epic stands at a crossroads that many in the gaming industry face: grappling with the challenge of transforming its intellectual properties into indispensable parts of our daily lives, aiming to build a metaverse. Yet, Epic's journey is distinct. As one of the most valuable gaming entities not listed on the stock exchange and remaining privately held, one might expect some insulation from market fluctuations. However, it's evident that even this privileged status hasn't rendered it impervious to external pressures.

Over the last year, Epic has navigated a tumultuous financial landscape, with challenges both self-imposed and influenced by outside forces. Following the creation of Fortnite, arguably the most culturally impactful video game ever, the company embarked on a six-year investment marathon. This phase saw Epic acquiring notable independent developers and taking on global tech giants in legal battles.

There’s a more practical answer to why Epic is making these layoffs. It’s not making enough money, it hired much faster than its revenues supported and it’s facing headwinds on how it generates revenues.

But there’s a less profit-and-loss-focused and more philosophical problem that Epic is facing: It lacks an identity.

After it found its massive success with Fortnite in 2017 and 2018, the company raised billions of dollars from the likes of Sony and LEGO. It has remained a private, founder-controlled company, insulating it from the influences of retail investors or a bigger conglomerate. It has focused on acquiring indie developers to build out its marketplace, the Epic Games Store.

And though its acquisition strategy may have made sense in a business plan or on a whiteboard, it has not panned out in reality.

Epic does many things, but those things generally don’t synergize well with one another.

It’s almost fitting that the creator of the game that lets players suit up as Darth Vader, John Wick, Spider-Man, Optimus Prime, Goku, Patrick Mahomes or countless other big-ticket IPs can’t figure out what it is.

In the time since Fortnite’s mainstream prominence, the company has acquired “kidtech” startup SuperAwesome, indie music distribution platform Bandcamp, digital portfolio company ArtStation and a handful of others. It has made very classic game publisher acquisitions, too, like “Rocket League” creator Psyonix and “Fall Guys” developer Mediatonic. But on the former, it has invested in many companies that have not proven fruitful.

Bandcamp might be the most glaring example of that. A platform that easily allows indie musicians to monetize their music, Bandcamp has always been relevant, but to a niche consumer—smaller musicians without access to label distribution or wherewithal to distribute their music alone. When Epic acquired Bandcamp, the former said it wanted to integrate the latter into its much-larger vision of building a creator marketplace.

But that didn’t service its core consumer: gamers. Epic has now sold Bandcamp to a new owner.

The creator economy is fragmented, and there isn’t a one-stop shop for creators with various hobbies to build their business.

There are video platforms such as YouTube, Twitch and TikTok; distribution platforms like DistroKid, CD Baby, DeviantArt and Behance; subscription platforms such as Patreon and Substack; and merchandising platforms like Shopify. To be a successful creator in the modern creator economy is to understand how to integrate all these things to build a sustainable business.

Yet there’s almost no demand for a one-stop-shop solution for creators. In part, because most aspiring creators—be they YouTubers, livestreamers, musicians or artists—never make it to the level where even half of those aforementioned platforms are relevant to them.

The one percent that do make it hire people who know how to make all of those pieces fit together. What Epic was chasing turned out to not generate sufficient demand.

Where Epic has found success is truly two-fold: One, Fortnite, obviously. And two, Unreal Engine, one of the longest-standing pillars of its business.

Though there’s a shortage of creators asking for an all-in-one marketplace, there’s no shortage of aspiring video game makers—be they A-list creators like Karl Jacobs, or just kids who are in their early programming journey, making games from home.

Epic has done a fantastic job, much like its biggest rival, Roblox, at making creating a game relatively simple. No longer do you need years of C++ or C# coding experience to create a game, though it helps. With the further integration of Unreal Engine into Fortnite, small teams can create unique experiences. Demand for that is not going away, as Gen Alpha—who identify heavily as gamers—grow into professional working age and turn their hobbies into professions.

Epic has struggled, though, to monetize this, at least at a sustainable clip.

In his statement on the layoffs on Thursday, Epic CEO Tim Sweeney acknowledged its cut of indie game creators building on top of Fortnite and Unreal Engine is a lion’s share of the company’s revenue, but the margins on that business are incredibly low.

“While Fortnite is starting to grow again, the growth is driven primarily by creator content with significant revenue-sharing, and this is a lower-margin business than we had when Fortnite Battle Royale took off and began funding our expansion,” Sweeney wrote. “Success with the creator ecosystem is a great achievement, but it means a major structural change to our economics.”

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I’d also be remiss not to mention that in the FAQ of Sweeney’s public statement, it mentions Project Liberty, the codename for the legal war that Epic has been waging against Apple and Google over the past few years. It’s a weird mention, but significant in the fact that Epic has spent god knows how much in legal fees to fight this battle.

If you’re not familiar with Project Liberty, Epic is at the forefront of app and game developers who have pushed back against Apple and Google’s “app tax.”

Each time a transaction happens on the App Store or Google Play, historically, Apple and Google have taken 30 percent of that revenue from developers. That was, until Epic filed suit against Apple in mid 2020 after Apple delisted Fortnite from the App Store when Epic circumvented the app tax.

Epic has spent the past three years in courtrooms with Apple, and while it has made some progress, it has mostly fought a losing battle¹ . A San Francisco court ruled that Apple isn’t running a monopoly, and though Epic scored a victory in forcing Apple to disclose alternative payment methods, Epic is knee-deep in legal fees—and for what? Epic now says it’s reducing its legal expenses, but will continue the fight against Apple and Google.

Epic is interesting because it’s unique. Most gaming companies go one of two ways when they’re at this stage of their development. They either go public and allow retail investors to partake, or they get acquired. Epic’s big enough to go public, but it has chosen not to. Instead, it has continued to raise late-stage venture capital to grow.

It’s a quintessential problem in venture capital investing: Trend chasing² .

Though Epic’s latest $2 billion round was co-led by Sony and LEGO, the $1 billion round it raised on the heels of Fortnite’s success featured a who’s-who of the VC and private equity worlds. Dare I say it, I don’t think it was very hard for Sweeney and Co. to walk into luxury office buildings in New York, Los Angeles and San Francisco and pitch on why someone should invest in the creator of Fortnite. Epic could have raised a lot more than $2 billion if it wanted to.

And yet, a lot of that $3 billion total has been spent outside of Fortnite, attempting to grow the company horizontally, not vertically, and expand it outside of its core business. In that, Epic has lost a little bit of its way.

Don’t get me wrong: Fortnite is still widely popular. It’s had a dip, as all games do, since its 2017 to 2020 peak of cultural relevance, but it’s still one of the most popular games in the world—and its semi-pivot away from being a competitive, multiplayer game to a creative engine is smart. That will keep Fortnite, just like Roblox, relevant for decades to come.

When you really think about it more critically, though, it’s concerning that Epic could raise $3 billion to begin with. From a tech asset perspective, Unreal Engine is the most valuable piece of software that Epic creates. It’s the backbone of thousands of games, from small devs to triple-A studios. But at a time when gaming companies are struggling to score funding to get in-development games across the finish line, that business, too, is struggling. That’s why you saw Unity, Unreal’s most-used competitor, make extremely controversial changes to its licensing last week.

I don’t know Sweeney or the Epic executives well enough to comment on their egos and how much of what’s happening there is well-intentioned bad business calculus versus megalomania. But from the outside looking in, it does look as if Epic got too big for its britches, and now it’s facing the consequences.

Footnotes:

1. My point of view on the Epic v. Apple case, which I’ve covered over the past three years extensively, has changed pretty frequently. The premise of cutting down Apple’s “walled garden,” as critics call it, is spot-on. The company does have a duopoly with Google, with the combined having 99 percent of the market share among cell phone operating systems.
   
   Yet, as I’ve listened to case hearings and testimony, I believe the Epic lawyers have done an awful job illustrating Apple’s power. It has gotten into the weeds of comparing phones to gaming systems—which they are, kind of—and it has spun itself in circles. The resulting rulings from judges in California have leaned heavily Apple-favored, and it’s possible to make the argument, though I’m not an antitrust attorney, that the case law set in the Epic v. Apple matter will hurt future attempts at corralling Apple’s power.
   

2. A little perspective here, though certainly biased by my experience as a founder: Few venture capitalists lead. I don’t mean in the investing sense of that word, which means putting in the most money and helping find other investors for the round. I mean that most VCs invest in trends and don’t lead their industry by investing in new ideas.
   
   That’s relevant to Epic becoming the clear-cut favorite to win “the metaverse,” which got red-hot among investors in 2021 and 2022. The metaverse as an idea is cool — all the things in a virtual world, like “Ready Player One.” But the reality is that there’s not a demand for the metaverse yet, and Epic’s now learning that the hard way.