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        <span>May 01, 2024</span>
        
        <p>In the 1990s and 2000s, video game developer Epic Games had a string of mid-size successes. But the release of Fortnite Battle Royale in 2017 changed the company’s path forever.</p>
<p>The game was a blockbuster. By 2019, Fortnite had registered more than 250 million users, with 10 million concurrent users. But Fortnite’s phenomenal success raised a new question for Epic: How could they turn this singular hit into a series of growth opportunities?</p>
<p>In this episode, Harvard Business School associate professor <strong>Andy Wu</strong> explains why Epic monetized Fortnite through micro-transactions within the game, rather than charging a fee for the game itself. He also discusses how Epic’s creation of a platform, the Epic store, and a premium subscription service built on Fortnite’s success and helped to distinguish their brand from other free-play games.</p>
<p><strong>Key episode topics include:</strong> strategy, growth strategy, R&amp;D, strategy execution, video games, fortnite, epic games.</p>
<p>HBR On Strategy curates the best case studies and conversations with the world’s top business and management experts, to help you unlock new ways of doing business. New episodes every week.</p>
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<li>Listen to the original Cold Call episode: <a href="https://podcasts.apple.com/bh/podcast/fortnite-was-a-blockbuster-for-epic-games-whats-the-encore/id1156646189?i=1000471441268" rel="noopener" target="_blank">Fortnite Was a Blockbuster for Epic Games, What’s the Encore? (2020)</a></li>
<li>Find more episodes of <a href="https://podcasts.apple.com/us/podcast/cold-call/id1156646189" rel="noopener" target="_blank">Cold Call</a></li>
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            <p>HANNAH BATES: Welcome to <em>HBR On Strategy</em>, case studies and conversations with the world’s top business and management experts, hand-selected to help you unlock new ways of doing business.</p>
<p>In the 1990s and 2000s, video game developer Epic Games had a string of mid-size successes, like the Gears of War franchise and their Unreal graphics engine. Then in 2017, it released Fortnite Battle Royale – a game that changed the industry and the company’s path forever.</p>
<p>The game was a blockbuster success, and by 2019, Fortnite had registered more than 250 million users, with as many as 10 million concurrent users. In its first year alone, Fortnite generated an estimated 5 billion dollars for Epic.  But Fortnite’s phenomenal success raised a new question for Epic Games: what next?</p>
<p>Today, we bring you a conversation about how to turn one success into a series of growth opportunities with Harvard Business School associate professor Andy Wu.</p>
<p>In this episode, you’ll learn how Epic monetized Fortnite through micro-transactions within the game, rather than charging a fee for the game itself. You’ll also learn how they created a platform, the Epic store, and a premium subscription service for Fortnite to distinguish their brand from other free-play games.</p>
<p>This episode originally aired on <em>Cold Call </em>in April 2020. Here it is.</p>
<p>BRIAN KENNY: In December of 2000, a little-known Japanese film director by the name of Kinji Fukasaku released his new film to a limited number of theaters in Tokyo, and the reverberations are still being felt today. “Battle Royale,â€ as the film was called, created immediate controversy both for its disturbing theme as well as its thinly veiled criticism of the pressures that Japanese culture placed on its children. and it sparked a cultural phenomenon that remains highly influential in global pop culture. Battle Royale is its own very lucrative genre and in a case of life imitating art, competition in the video gaming industry resembles its own version of Battle Royale. To the victor goes the spoils.</p>
<p>BRIAN KENNY: Today, we’ll hear from professor Andy Wu about his case entitled, “Epic Games.â€ I’m your host Brian Kenny, and you’re listening to <em>Cold Call</em>, recorded in Klarman Hall Studio at Harvard Business School. Andy Wu conducts research on strategies for how technology entrepreneurs internally organize and externally mobilize resources to achieve scale for competitive advantage. I think that’s spot on for the case we’re going to discuss. Thanks for joining me.</p>
<p>ANDY WU: Thank you very much for having me, Brian.</p>
<p>BRIAN KENNY: All right. I’m not a gamer. I’m just going to confess that right up front. I’m not part of that generation, but I certainly have children, a son in particular who is in his early twenties now who spent a fair share of time playing video games. Are you a gamer? Do you play?</p>
<p>ANDY WU: I do occasionally, although I’m not very good myself.</p>
<p>BRIAN KENNY: Well neither am I, suffice to say. But I think many of our listeners are going to really enjoy hearing about Epic Games. It’s a great case and I think it’s highly relatable and somewhat ripped from the headlines too. I mean there’s been a lot of publicity about Fortnite which is their main product, so we’re going to talk about that. And so I think people will really enjoy hearing you talk about it. But let me just ask you to start by setting up the case. How do we begin here?</p>
<p>ANDY WU: So, Epic Games started in 1991 by Tim Sweeney as a storied video game company, so they developed both video games as well as the game engines that other video game developers use to create video games. And so, they have had a long series of big triple A titles that have been very successful. But the key thing we focus on in this case is the situation after September 2017. So, in September 2017, they released Fortnite Battle Royale, the game that you were describing earlier, and this is a free to play game that changed their path forever. They had unprecedented success with this game. By March 2019, they had 250 million players registered and then in February 2019, they had 10 million users logged in concurrently at once.</p>
<p>BRIAN KENNY: Wow.</p>
<p>ANDY WU: And given their current position of strength, the question is how do they parlay that strength into continued growth opportunities in the video game industry.</p>
<p>BRIAN KENNY: Part of that is about them becoming a platform company, I’m going to ask you to just describe for our users what a platform company is, if they’re not familiar with that term.</p>
<p>ANDY WU: Absolutely. So, a platform allows different types of stakeholders to directly interact and generate value through network effects and the positive feedback loops that result from network effects. And to clarify, there are two kinds of platforms that we might think of. First, there are marketplaces or transaction platforms. You can think of this as like eBay or Airbnb, and this is what we’re talking about in the case with Epic Games’ launch of the Epic Games store. Second, there’s also what we consider innovation platforms, which are technical foundations for third parties to develop applications or content. Microsoft Windows is a classic example of this and Epic Games product, Unreal Engine, is also in that category.</p>
<p>BRIAN KENNY: What made you decide to write about this case? How does it relate to the research that you do?</p>
<p>ANDY WU: Right, so I research and teach technology strategy for entrepreneurs in nascent markets, and one is just as far as impact goes, the game Fortnite has been unbelievably successful and I’m sure among our listeners here, almost all their children have seen or played this game.</p>
<p>BRIAN KENNY: For better or worse, right.</p>
<p>ANDY WU: For better or worse. And that’s sort of the general impact level motivation. But as far as for me personally, I think what this game and Epic Games represents is the intersection of several trends in technology and media that we’re seeing right now. The first is the rise of digital distribution and the idea that the games are being delivered via the internet as opposed to traditionally via like a disc that you would buy in a store. And in terms of Epic Games entering with the Epic Games store in itself becoming a distributor, this is very similar to what we’re seeing with the pattern of Disney and HBO entering streaming themselves, bypassing say Netflix. Related to that, in the video game industry, I think we’re seeing the forefront of many new business models that are going to apply to other industries. And what we’ll talk about later I think is that this is a game that is free, Fortnite Battle Royale, is a free game and they monetize it in a very peculiar way to you and me, which is that they charge for micro transactions in the game that have no, at least to you and me, have no direct real value. Finally I’ll just mention that this also represents I think the trend of globalization that we need to think about. So, in 2012, the Chinese tech giant Tencent made a major investment into Epic, $300 million. And we’re also seeing some of the patterns of that Chinese investment in Epic and in other video game companies.</p>
<p>BRIAN KENNY: Again, for those who aren’t really following the gaming industry very closely, there’s a lot of, I was surprised to learn in the case about how many different players there are in that landscape. What does it look like?</p>
<p>ANDY WU: Video games are a very complicated business, I’ll say. Beyond the developers, there are publishers that take the games that the developers create and then bring them to market. And so, these are big companies like Electronic Arts. And then you have hardware and operating system providers where the games are being played. So, you could think of this traditionally as like things like Microsoft Xbox, Sony PlayStation, and also like you know a Windows PC, but increasingly the platform, the hardware OS that matters is the mobile operating system. So, Apple and Android count in this category as well. And then there are game engines. Those are the tools that game developers use to create the game. And then there’s finally the distribution, which is the marketplaces.</p>
<p>BRIAN KENNY: That’s a really confusing ecosystem.</p>
<p>ANDY WU: It is very confusing because it’s a complicated business with a lot of money.</p>
<p>BRIAN KENNY: How many of those businesses I guess, or aspects of the business is Epic involved in?</p>
<p>ANDY WU: So, at the time of the case, Epic is a developer. They occasionally publish. They have their own game engine, the Unreal Engine, and with the entry of the Epic Games store, they’re also a distributor.</p>
<p>BRIAN KENNY: Okay. Boy, you need like a little chart in front of you like you had in the case, but our listeners can’t see the chart. How do they make money?</p>
<p>ANDY WU: So, again, with the time of the case, Fortnite is their big, big offer, and remember that this game is a free game. So, how do they really make money on this? And for me it’s very peculiar and that’s what drew me to it. They make money through in-game micro transactions and these in-game micro transactions accounted for $2.4 billion in revenue in 2018. And so, what is a micro transaction? So, in Fortnite, essentially what the players of the game are doing is they are paying money to have cosmetic aesthetic items that they put on their player during the game. This includes like the clothing their virtual avatar wears. This includes even dance moves that their virtual avatar can do.</p>
<p>BRIAN KENNY: And we should tell people, if you want to describe kind of what the plot is behind Fortnite, that might be helpful for people.</p>
<p>ANDY WU: Fortnite Battle Royale is an online multiplayer game, online shooter game. And so the way it works is that a hundred players are dropped onto a map where they must explore and scavenge weapons and then fight to the death to survive, where the last man standing wins. One hundred players, one left standing, and an average game is about 15 to 20 minutes.</p>
<p>BRIAN KENNY: Okay. And live streaming is pretty critical to this whole business model.</p>
<p>ANDY WU: Absolutely. So, what’s really amazing about this setting is how many people watch other people play video games. It’s kind of an amazing number. To give you a sense of scale, more people watch people play video games than watch HBO or ESPN or Hulu combined.</p>
<p>BRIAN KENNY: That’s amazing. Do people pay to watch? Do you pay for the live stream?</p>
<p>ANDY WU: It depends on who the streamer is. So, some of the bigger celebrity streamers like Ninja will get paid for the work that they do by the subscribers. And also they’re also paid by often the video game companies to play a specific game.</p>
<p>BRIAN KENNY: Okay. And there’s also a subscription service here, so even though the game is free, people are subscribing.</p>
<p>ANDY WU: So, in this particular game, they’re not required to pay any direct subscription fee. There’s an additional add on feature they can pay for. That would be a subscription based one. So, a subscription model is the counterfactual to the business model that Fortnite Battle Royale has gone with. So, other companies that have similar types of Battle Royale games are instead pursuing a subscription model where users pay a monthly fee to play the game.</p>
<p>BRIAN KENNY: And have you sort of looked at the efficacy of one model versus the other, or are they both pretty substantial?</p>
<p>ANDY WU: I think this is similar to what we’ll see in all kinds of media distribution. There will be a proliferation of different business models. I will say that for the business model of Fortnite Battle Royale, I think this is one of the things that really stands out. Because the game relies on network effects and having a large user base to be successful, giving access to as many gamers as possible is really important to its success. And so, of course, making it free allows for that to happen. And in the course of getting that many users, you have some subset of users that are going to really spend some serious money on those micro transactions.</p>
<p>BRIAN KENNY: Are they the first to adopt this model? Was this sort of Epic’s idea?</p>
<p>ANDY WU: They were the first to adapt this free to play model for the Battle Royale game format. But the concept of free to play is not new, and in fact, Epic was one of the early pioneers in the 90s in this type of business model. So, in the 1990s, they would distribute games via Shareware. So, they would mail people like CD disks that had a game for free and then you’d be able to pay money for extra content beyond what that disc contained.</p>
<p>BRIAN KENNY: Okay. We actually did a podcast, a case on Candy Crush, the whole story behind Candy Crush. Where do they sort of fit in that scheme? That’s not a multiplayer game, right? That’s a, is that a single player game?</p>
<p>ANDY WU: Single player, but there’s definitely a social virality effect related to that game. In this game, there’s obviously direct interaction between the players in the game. One is you need all the players in a given game, but the more important part to think about is actually when you have a large number of players, it allows games to form faster. So, what gamers really hate is the time in between games where the game is, they need to find all the players for the game and they’re just sitting there waiting. With millions of players on board, you can form a game virtually instantly because there’s another hundred people that aren’t in a game yet.</p>
<p>BRIAN KENNY: Right. Tell us a little bit about Epic. How did they evolve over time?</p>
<p>ANDY WU: Tim Sweeney started Epic Games in 1991 and their first major hit was a game called Unreal in 1998, that was a shooter game. And so that game actually led to the technology called the Unreal Engine that they now license out to other game developers. And again, I mentioned earlier that they leveraged their early Shareware business model to grow early on. And then the next big hit they had was in 2006 with Gears of War. So, this is another shooter game that was originally exclusive for Microsoft Xbox. And this is what we would call a triple A title. So this is a big title, lots of money, very expensive to develop. And then the big transition for the company was in 2011, 2012 where Sweeney wanted to move away from the traditional model. So in the case of Gears of War, that is a game where they went through a publisher, Xbox Game Studios and sold the game at retail for $50 or $60. And so, Sweeney wanted to move away from that business model, and so they raised $300 million from Tencent to start this transition. And the transition was towards the model that we talked about earlier that is emblematic of Fortnite, which is that free to play model.</p>
<p>BRIAN KENNY: Now you mentioned there are millions of people on the system at any given time. Like who are these people and how much time do they spend on the system?</p>
<p>ANDY WU: Majority of players are under age 24 so what we’d call Gen Z, although there’s still millions of millennials and Gen X that are playing this game, and these players play a huge amount. Almost half of the players play more than 10 hours a week. So, more than an hour a day.</p>
<p>BRIAN KENNY: I don’t know where they’re finding the time to do that.</p>
<p>ANDY WU: I think they just basically take all their spare time and play and remember that this is a game that you can play across platforms. You can play on your PC at home, but you can also play it on your mobile phone when you’re waiting for the bus.</p>
<p>BRIAN KENNY: Right. But they faced a little bit of controversy around this, too. Fortnite I mentioned before has been in the headlines and not always in a positive way.</p>
<p>ANDY WU: That’s right. And I think that the headwinds that Fortnite is facing are emblematic of the broader headwinds that the video game industry in general is facing. I think the first is that there is this concern about video game addiction. And so there’s players who go beyond what they should be and play an enormous amount on these games, more than what is healthy. Beyond that, there’s also the relationship that Epic Games has with China that has drawn some controversy. Again, they received investment from Tencent several years ago. And the company itself says that they’re completely operationally independent from Tencent, but detractors would counter that.</p>
<p>BRIAN KENNY: So, one of the questions that’s central to the case is them creating their own storefront, moving into that marketplace. What are some of the challenges that they face along the way in trying to do that?</p>
<p>ANDY WU: I think the first thing that’s been very much on the message boards among gamers is that there is a question about the overall quality of the marketplace itself in terms of the technology that goes into the marketplace. They’ve taken much longer than Epic expected in order to develop the technology and add reviews and other features to the marketplace. The other thing is what we call the chicken or egg problem: how do you get users to use the marketplace if there’s no games on it? And how do you get games on the platform, to list on the platform, if there’s no users using the marketplace? And so, they definitely had limited offerings at start. They obviously had a big advantage coming into this space because they can move users from Fortnite into this marketplace. But even with that, people are pretty frustrated if you’re going to a store and there’s nothing to buy. And so, what they’ve done is that they’ve had to incur some huge expenses in order to get exclusive games from other video game developers to list on their platform as opposed to the competitor, which is Valve’s Steam marketplace. And so, they’ve had to pay lots of money to get those exclusives, and they also have to give away free games to get people on the store. So, they’ve actually, if you sign up, you can actually get free games to play.</p>
<p>BRIAN KENNY: Okay. Now you mentioned Valve’s Steam. Who are some of the other players? Like who’s doing this really well? What are the best marketplaces?</p>
<p>ANDY WU: Yes, so the market leader is absolutely the Steam Marketplace by Valve. They’ve absolutely dominated the market. The other key marketplaces we want to think about are one, the marketplaces that are specific to certain consoles. So Xbox and PlayStation each have their own marketplace for games. And then the other thing I would say the more important one to keep an eye on is actually, not even what we think normally is a video game marketplace, it’s the Apple app store and the Google play store. As we shift more and more gaming to mobile gaming, those marketplaces are going to have an increasing amount of power. And again, they’ve already gotten into a lot of conflicts with the other, not even video games, with other third party applications that are listed on those stores. So, for example, Apple and Netflix. Apple and Spotify have gotten into lots of arguments about what’s the right way to split the revenues coming off the store.</p>
<p>BRIAN KENNY: Talk about console games a little bit too because it feels like as everybody moves onto mobile devices, the need for a console kind of seems to be much less than it used to be. And that was where I think a lot of these companies were making a lot of their money was off the hardware itself.</p>
<p>ANDY WU: Actually, in the video game industry, there’s been a traditional model of actually losing money on selling video game consoles. So, the price of an Xbox or a PlayStation is below the bill of materials to produce the hardware. And the reason for that is to essentially create a large installed base of consoles, so that the video game developers and publishers will want to write games for that console. And so, the way it works actually is that the video game console company, so Microsoft Xbox and Sony PlayStation, they make money by charging the video game publishers and developers. So they don’t make money from the people who buy the consoles.</p>
<p>BRIAN KENNY: So how is Epic thinking about they’re moving this at this point. I mean do they know kind of where they go next?</p>
<p>ANDY WU: I think they’re going to push on this for a while. Again, they’ve got a lot of opportunity in terms of improving the product quality of the marketplace, in terms of refining the technology and then on top of that, again they’re still going to put out money to bring additional games on the platform. I think we might want to keep an eye out for the possibility that they’re going to try to raise a large amount of money in the near future in order to be able to continue to support the growth of the platform. And remember that for Epic and their marketplace, some of this motivation is more than just the direct ability to make money on the marketplace. There’s been a lot of complaints in the industry about what Valve has done for the industry. So, Valve itself charges essentially a 30% cut of the revenue for a particular game that’s being sold through that marketplace. Now, if you’re an artist or creator that is developing a game and putting up millions of dollars to develop that game, giving 30% to a middleman seems a little bit unfair. And so what the Epic store marketplace does is they charge 12% which is a much, much lower rate and they’ve been trying to change the status quo of Steam dominating the space.</p>
<p>BRIAN KENNY: Okay. You know, there is a quote in the case by Sweeney where he talks about kind of what he sees as like where this is all going, kind of the future of the gaming space. I don’t need you to say the quote directly, but can you just describe kind of what his vision is around this?</p>
<p>ANDY WU: Tim Sweeney is a very under spoken guy, but I think his heart’s in the right place and he’s always been very true to the gaming industry. So, Sweeney is striving towards what he describes as a “metaverse,â€ that is his vision for the future. And so, what he imagines is that gaming is going to be a part of all the other virtual worlds. So that includes things like virtual reality, augmented reality, social networks, and the other forms of entertainment and engagement that we participate in. And so, gaming will be an active part of that. And in addition, I think his view is that there’ll be an active ecosystem in the future where all parties can consume content as well as contribute content. And so, I think he’s much more about supporting the broader ecosystem as a whole.</p>
<p>BRIAN KENNY: So, he doesn’t see this as a Battle Royale where Epic will be the only one standing at the end.</p>
<p>ANDY WU: I mean, I think they hope that a little bit with Fortnite, but they definitely had a differentiated position and I don’t think he is out to like fight it all the way to the last man standing per se. But you know, at least with the marketplace, I think the hope is to make the space a bit more fair for the regular game developer.</p>
<p>BRIAN KENNY: Andy, thanks so much for joining us today.</p>
<p>ANDY WU: Yes, Brian. It’s been an absolute pleasure. Thank you so much.</p>
<p>HANNAH BATES: You just heard Harvard Business School associate professor Andy Wu in conversation with Brian Kenny on <em>Cold Call</em>.</p>
<p>We’ll be back next Wednesday with another hand-picked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues, and follow our show on Apple Podcasts, Spotify, or wherever you get your podcasts. While you’re there, be sure to leave us a review.</p>
<p>And when you’re ready for more podcasts, articles, case studies, books, and videos with the world’s top business and management experts, find it all at HBR.org.</p>
<p>This episode was produced by Anne Saini, and me, Hannah Bates. Ian Fox is our editor. And special thanks to Maureen Hoch, Nicole Smith, Erica Truxler, Ramsey Khabbaz, Anne Bartholomew, and you – our listener. See you next week.</p>

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