Epic will lose over $300M on Epic Games Store exclusives, is fine with that

To take on Steam, Epic Games has spent the past two years shoveling Fortnite money into the Epic Games Store, making over 100 exclusivity deals and giving away free games every week. We knew Epic was spending a lot of cash to get customers onto its store, but didn't have many specifics until now. Thanks to Epic's big legal fight with Apple, we learned this week that Epic committed around $444 million to Epic Game Store exclusivity deals in 2020 alone. Phew.

More precisely, that's $444 million on "minimum guarantees" for games that release on the Epic Games Store but stay off of Steam for a year. A "minimum guarantee" is just another way to refer to an advance. It means that Epic guarantees the publisher a certain amount of money whether or not their game actually sells enough to cover it. For example, Epic put down $10.45 million for Control.

In its end-of-year report, Epic said that players spent $700 million on the Epic Store in 2020, but third-party game sales only accounted for $265 million of that spending. That $444 million in advances to third-party devs isn't close to being recouped, then. Some of those deals probably haven't started making money yet (as in, the game hasn't released), but according to Apple's learnings, Epic is going to eat "at least $330 million in unrecouped costs from minimum guarantees alone" if you consider 2019's deals, too. 

As for how much the Epic Game Store will have lost in total by the end of 2021, factoring in exclusives and all other expenses, projections say it's less than $600 million. Just a bit of spending money, then.

These estimates come from Apple's (pretty spicy) summary of the arguments it's bringing to court next month as it defends its App Store policies against Epic's antitrust complaint. As part of its defense, Apple's lawyer army wants to show that the Epic Games Store isn't comparable to its iOS App Store, and so its fact finding includes everything Epic has said about how unprofitable the Epic Games Store is.

Citing depositions from Epic Games Store VP and GM Steve Allison and Epic VP of business development Joe Kreiner, Apple says that Epic lost $181 million on the Epic Games Store in 2019, projected a loss of $273 million last year, and projects another loss of $139 million this year. Added up, that's an estimated $600 million that the Epic Games Store will need to recoup before it'll be profitable on the whole. Apple points out that Epic doesn't think that'll happen until 2027.

In its new filing, Epic puts a more positive spin on its business plan, saying that it expects the Epic Games Store to start earning annual profits in 2023. And what Apple calls 'losing money,' Epic would probably call 'investing money.' This spending is all part of the plan, says the company, and its 12 percent revenue cut will eventually be enough to sustain the store, something it has said from the start.

"EGS is not yet profitable at its current scale and stage of development because it has front-loaded its marketing and user acquisition costs to gain market share," reads Epic's filing, citing CEO Tim Sweeney.

Why Epic and Apple are fighting

All of this shin-kicking between Epic and Apple is over the App Store, which Apple makes developers use if they want to distribute legitimate iOS applications for the iPhone and iPad. As part of that compulsory deal, Apple makes developers use its payment processing system, which gives Apple a 30 percent revenue cut. Epic says that's not fair, arguing that Apple and Google have all the power when it comes to smartphones, so developers are forced to pay their fees if they want to make successful mobile apps. Apple doesn't agree, and would like to continue getting 30 percent of all the money Fortnite players spend in the iOS version.

Epic has even bigger plans than bypassing Apple's fee in Fortnite. It wants to put the Epic Games Store on iPhones with its own payment system, and hopes US courts will rule that Apple's behavior is anti-competitive so that it can do that.

Apple is eager to say that the Epic Games Store has been burning money for a couple reasons. One, Epic is saying that app developers can't innovate and provide safety features because of Apple's policies, so Apple goes after the idea that the Epic Games Store actually does those things. "By its own admission, the Epic Games Store—two years after it launched—is still missing 'critical' features," writes Apple. More or less, Apple is saying with all this: Your store is a bonfire that you throw money into, all the gamers are mad at you, and if we'd let you run wild, you would've caused security breaches on our phones. You needed our App Store to earn $700 million in Fortnite revenue on iOS, you ungrateful nerds!

It might also be noted that Epic doesn't make developers use its payment processing for in-game purchases on its store. That's true in Ubisoft games on the Epic Games Store, for instance, which have their own in-game transaction system. Apple argues that in-app purchases are part of the iOS platform, not just some store feature. For that reason, it doesn't want the court to think the App Store and Epic Games Store are at all comparable. One is good and necessary, the other one loses hundreds of millions. That's Apple's take.

I doubt the comparison will be a big factor. Epic's issue with Apple isn't just that it runs a store with a mandatory fee. Epic's complaint is that Apple also makes that store unavoidable on a huge portion of the smartphones in the world. That's what makes it an antitrust issue, in Epic's view. Part of Apple's response is that Microsoft and Sony do the same thing with the Xbox and PlayStation. Epic says, no, that's not the same, because game consoles "do not include general computing features like smartphones," aren't very portable, and don't connect to cellular networks. "Smartphones are critical platforms for developers," says Epic. Apple says, alright, but "consumers can and do switch away from iOS devices to Android devices," so it's competitive.

The companies go back and forth like that for a few hundred pages in these most recent filings. Here are a few other tidbits from Apple's interpretation of the evidence presented so far, which, against my expectations, is the more aggressive of the two documents:

• Fortnite's average monthly users declined between 2018 and 2019, and Epic noticed when #RIPFortnite trended on Twitter. (See? Developers do hear you. And then they develop elaborate plans to sue Apple.)
• Epic believed Fortnite could be reinvigorated by turning it into a platform for creators, but felt that platform fees, like the App Store fee, might hinder the plan.
• Epic called its plan to go after Apple and Google "Project Liberty." Sweeney was "in the loop" on it "100 percent." (I mean, obviously, he tweets about it all the time.)
• 100-200 Epic employees were involved with "Project Liberty."
• Epic knew the public wouldn't necessarily sympathize with it when it defied Apple's rules, and was concerned about looking like "the baddies." It paid a PR firm $300,000 to work on Project Liberty. 
• As I mentioned, Epic has made more than $700 million just through Fortnite iOS transactions. (Which is one reason its Epic Games Store losses are no big deal.)

Epic and Apple go to court on May 3. It should be interesting!