EGD News #43 — Epic the Usurper

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It’s Joakim here. Greetings from Helsinki! This week has been a busy week. Besides creating content for Elite Game Developers, I enrolled in an online course on Roam Research. I want to level up my systems, so I’m betting big on this course. Here’s a non-affiliated link to the course, if someone is interested. I’ll report back on how I’m learning.

On to this week’s news.

🎮 Epic the Usurper

As we are in 2020 and the war between Epic Games and Apple is heating up, I wanted to reflect on the history of digital distribution for games and get a perspective on what I think is going on. 

To proceed, I want to tell a story. This story is about three companies, one previously dominant, the second currently dominant, and the third who wants dominance.

Facebook

Since games started moving away from physical distribution, we’ve had major online platforms providing growth for the games industry. Over ten years ago, before the iPhone, Facebook canvas games were the place for free-to-play games. Gaming had immense growth when millions of people suddenly started playing games on this vast and ever-growing FB platform. Some of the records haven’t been broken since. In 2010, Zynga put out a game called Cityville, and within 50 days of its release, CityVille had reached 61 million monthly active users.

My first startup had a nightclub management game called Disco Empire. Our game had decent graphics, and we tried to lean on people’s liking for cocktails drinks. At our in-game bar, we served virtual Mojitos, Cosmopolitans. You name it. Our numbers had been growing nicely, and suddenly we got an email from Facebook’s administration that we have 48 hours to take down all references to alcoholic beverages. And if we didn’t comply, Facebook would shut our game down.

We rushed to change all drinks into juices and sodas. This way we avoided the boot and could continue running the game on Facebook. Now recollecting, it was the scariest moment of the whole project. We’d never had a face-to-face conversation with Facebook, but they were the way to reach our customers, and the reason our company existed.

During that same year, Facebook decided to end viral mechanics on the Facebook platform. No more posting from games to the valuable news feed. To make matters worse, Facebook announced that all developers were required to process payments only through Facebook Credits, where Facebook retains 30%, and developers get 70%. Previously, developers had used their own web-view payment with only a 5% cut for payment processing. 

Eventually, those who had relied on growing their games through the lucrative viral channels suffered and had to shut down.

Soon Facebook gaming died out, not only from the actions that marginalized the opportunities for game developers. It was the time for a new dominant platform, called the smartphone, to emerge.

To summarize, Facebook:

  • Facebook Canvas games opened up in 2007 to allow developers to run games directly on Facebook.
  • Massive viral growth. You had access to Facebook’s social graph. As players entered the game, developers could immediately ask the players to send game invites to their entire Facebook friends list.
  • Facebook’s agenda. It opened up in 2007 for developers to build an app ecosystem by bringing more “things” for users to do on their platform. As Facebook grew to billions of users, its growth plan didn’t include free installs for game developers. Facebook shifted it’s focus to:
  • A) blocking virality and allowing Facebook’s ad network to grow through a game developer’s user acquisition budget
  • B) monetization through its proprietary Facebook Credits.

Apple

The smartphone era made gaming become the dominant entertainment format over TV and music. Apple’s actions have significantly increased the total addressable market for gaming immensely, more than any other company in video gaming history. 

But things didn’t change much. Apple’s power over developers is not much different from the one that Facebook had. 

Here’s an example. In 2014, Apple instituted a rule that mobile games on iOS had to remove any and all references for guns and weapons from the app icons. Complying with the ruling would guarantee that your update would pass through Apple’s app review process. These moments remind developers that someone else is running the show, as a more prominent force in the background. Developers need to rely on Apple that things will be okay.

It might be a blessing in disguise that Apple’s game featuring on the front page of the App Store no longer has the significance it used to have. Now everyone has to rely on their user acquisition abilities to find their audience. But at the same time, smaller developers are less likely to receive install spikes at launch. Without sophisticated performance marketing, smaller developers will have their games launch unnoticed.

When operating on the App Store, developers don’t have a direct customer relationship. No direct email access. You can always ask players to type in their emails inside the game, but they’d rather be playing than typing. I’m sure developers would love to email their customers to tell them about a sequel, or about a new game. Apple’s actions cause developers to spend on ads to get the word out to past players.

To summarize what Apple does:

  • They brought a computer to everyone’s pocket. From day-1, Apple wanted to build an app ecosystem, which it successfully did.
  • That computer has one app store, where the owner of the app store takes 30% of the revenue.
  • Apple doesn’t facilitate a customer relationship between the developer and the player, but rather fosters the relationship with the customer and Apple as a brand.

Epic

Epic Games entered the scene in the 1990s when it released it’s shooter Unreal Tournament. Over the years, it’s Unreal Engine became a popular off-the-shelf gaming engine for thousands of developers all over the world. But only recently became a force to reckon with, as Fortnite launched in 2017. In Fortnite’s success, Epic has built out many developer-facing tools on top of its Unreal Engine. 

  • Epic Online Services for developers to build out their own online games, utilizing features and technical capabilities.
  • Epic Store. PC gaming online store, competing with Steam from Valve, which takes 12% cut from revenues, landing 88% to developers.
  • Epic Publishing. Offering publishing services for PC and console developers. Also taking a much lower fee, when compared to rivals like Microsoft.

At the same time, Epic has raised a bunch of capital to take its operations to the next level, altogether $1.78 billion during the summer of 2020. This is a war chest of a few billion to take on the platforms, especially Apple. Fortnite has been a huge success on the iPhone, but it’s not happy about Apple’s App Store taking 30% of the revenue.

Epic’s war against Apple started out of the blue, as it released its own payment system inside the iOS version of Fortnite. Apple retaliated by moving Fortnite away from the store. After the first blows, Epic stated it’s altruistic motives by messaging that Apple was to blame for removing Fortnite. Epic said that Apple had too much control over game developers. But Epic seems to be playing a similar game of power, as did Apple and Facebook.

Let’s talk about the differences between Epic, Apple, and Facebook. Of the three, Epic has always been a gaming startup. Unreal Tournament was their first success, then the game engine did wonders for them. Later, it developed Fortnite, so it continues to be a games company. 

Epic is made out of people who know gaming, all the way from top to bottom. It’s positioned itself to grow the whole gaming market in a way that none other could. Epic also understands the developer’s struggle. It knows that a 30% cut is too much to push the market forward, that’s why it’s arguing that it should be 12%.

Apple giving a concession, and relenting would mean that Epic has taken over the dominant spot, and has become the new kingmaker of the games industry. The question is, can developers trust Epic, a company that doesn’t abide by the rules and definitely has its own agenda? Can we trust an organization that privately embarks on crusades to save game development?

📄 Pre-mortems, and why your game will fail

To defy the games industry’s hit-driven nature, we need to come up with ways to navigate our games past the possible failure situations. Today, I’m publishing my article on pre-mortems, one of the best tools for seeing into the future, before investing all the time and resources in the project.

“But how do they make the right decisions? There is a massive opportunity cost to working on a project that could fail. In gaming, development costs and time allocations have grown immensely. Projects last six to twelve months and cost millions of dollars to complete.”

Read the full article here.

🎙 Gigi Levy-Weiss, NFX

I had Gigi Levy Weiss, managing partner of NFX, on the podcast. Gigi’s companies include Playtika, Plarium and Moon Active. Since early in his career, Gigi has worked in gaming and with gaming companies, and he has a lot of interesting insights into funding and company building.

Top takeaways:

  • The essence of network effects for startup founders, is to think about users bringing continuous value to each other, once they are in the service
  • “After investing in 20 games companies, it’s easy to know which team can excel on the optimization side. And it’s almost impossible to predict who is going to be amazing on the creative side.”
  • Keys to understand gaming investment: 1) Understand when the talent is the right mix needed. 2) Understand the early KPIs and learn to predict how they develop. 3) Develop pattern recognition for successful gaming companies.

Full episode and transcript available here.

💵 VCs asking questions from founders

Here’s a few questions that VCs ask founders:

When did you know this was your life’s work?

Used for evaluating ambition level, storytelling skills (sales) and commitment.

If I called your previous colleagues, what would they tell me about you?

Tests the honesty of the founder.

If it didn’t work out, why not?

Tests biggest risks and self-awareness, and if the founder can navigate through failure situations.

🖥 Audience-first game development webinar

Elite Game Developers webinars are back!

We’re starting the 2nd season with a webinar on Audience-first game development. I’m joined by Mitchell Smallman, Head of Product at Netspeak Games. We’ll talk about the approaches you can take to have an audience before you have a game.

Sign up to the webinar by going here.

📃 Articles worth reading

+ Former Glu CEO is ready to take another company public — As someone who has IPOed a company, I think the SPAC model is super exciting, when compared to the traditional initial public offering. Alex Danco wrote about SPAC recently, and now former Glu exec De Masi is doing something similar in gaming. “The SPAC industry is booming now, as it’s a way of going public without all of the hassle. Investors put their money into a shell entity, and the management will acquire one or more companies. De Masi said it will focus on gaming, with a total enterprise value in the range of $1 billion to $3 billion.”

+ Tencent invests in Voodoo — Tencent grabs a minority stake in French hypercasual developer Voodoo. It marks the first hypercasual deal since Zynga bought Rollic in early August for $168m. “For Voodoo, the Tencent deal is clearly a gateway into the massive Asia Pacific gaming market. The partnership can further extend its two-pronged business of distributing its own games and third-party titles to the region, said Voodoo CEO Yazdi”.

+ Accelerated Learning: Learn Faster and Remember More — This is such a great post from Shane at Farnam Street. I’m fascinated with learning and becoming a better learner. In this post, Shane talks about learning from others’ history and learning from experience and reflection. He also talks about the Feynman Technique, which is brilliant. “Outside of your intellectual comfort zone is where you experience the greatest learning. For this reason, having a lot of helpful guidance early on can be counterproductive if it eliminates the all-important struggle to master new material.”

💬 Quote that I’m thinking about

“Why would we want to play a competitive game in a field where we have no advantage — maybe a disadvantage — instead of in a field where we have a clear advantage?”

— Charlie Munger


This newsletter is sponsored by ironSource
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That’s it for this week. I hope you have a great weekend!

Cheers,

Joakim

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