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Interview Synopsis

Epic Games – Unreal Engine update

  • Private Equity
  • TMT
  • North America

The COVID-19 pandemic ignited a period of exceptional growth in the gaming sector. However, as the prospect of a global recession looms, Third Bridge Forum interviewed a former senior executive at Epic Games to discover what effect an economic downturn could have on the company’s game development tool Unreal Engine (EU) and its most popular game Fortnite.

Recession could cause Epic Games ARPU to drop

In the Interview, the specialist said that Fortnite is the “single-biggest” driver for Epic Games, contributing to approximately 90% of the company’s revenue. We heard that if there is a “2-3 quarter recession”, then Fortnite’s average revenue per user (ARPU) could decrease by 10-15%. Any loss of ARPU could potentially lower royalty streams for Epic Games and “hurt” UE’s ability to build games. 

Although Epic Games is “well-funded”, we were told that a recession could lead to increased salary expenses at the company. Such extra margin pressure could result in the company being more “careful” in choosing its projects, the specialist added.

Meanwhile, the specialist told us UE is the “Ferrari” of game development platforms, focusing on “triple-A… high-quality video, graphics and special effects”. But by concentrating on the “top 10%” of game developers, UE now trails rival Unity in market share. The specialist said an immediate growth opportunity for UE in non-gaming is media and entertainment – highlighting Disney’s use of its green screen technology for the first season of The Mandalorian.

The specialist said UE could also grow market share by expanding its mobile gaming development capabilities. Nearly three-quarters (70%) of games are now mobile, we were told – especially in APAC – and UE could expand its presence there through a mixture of acquisitions and organic development. 

Epic Games is an industry leader in protecting personal identifiable information, according to the specialist. They said the company does not track user-specific data and has acquired companies which specialise in advertising to under 18s to help secure this reputation. 

The specialist told us Epic Games is unlikely to IPO in the immediate future given the current market headwinds and CEO Tim Sweeney’s preference to stay private. However, they said it is something management should consider given it could help the company retain employees better. The specialist also told us to monitor Epic Games Store, which has the potential to take market share from smaller players like Unity and Roblox but not Apple or Facebook. 

Dealing with a potential recession will be high on management’s priorities, the specialist said. However, long term, they told us Epic Games should look at how it can diversify away from its star product and create the “next” Fortnight.

Click here to access all the human insights in Third Bridge Forum’s “Epic Games – Unreal Engine Update & Q3 2022 Outlook” Interview.

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