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Epic is losing hundreds of millions of dollars in its war against Steam

Apple wonders whether the EGS will ever be profitable.

In its bid to take on Steam with the Epic Games Store, the company behind Fortnite is burning through hundreds of millions of dollars on exclusives and free games.

The Epic Games Store releases free games every week, and has snapped up a number of eye-catching PC launch exclusives since it went live in December 2018.

Of course, it's expected that providing so many free games and timed exclusives would cost Epic cold hard cash - but the sheer numbers at play are eye-watering, and it's all spent at a loss.

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Court documents published this week as part of Epic's high-profile legal battle against Apple reveal Epic committed $444m in minimum guarantees for 2020 alone.

A minimum guarantee is an advance paid to a publisher or developer whether or not the game itself makes enough money to claw the advance back. An example is the €9.49m 505 parent company Digital Bros received from Epic for PC exclusivity for Remedy's Control.

It's a huge amount of money to pay out to developers for minimum guarantees last year, but it's something moneybags Epic is willing to do in order to take on Steam and its 30 per cent cut of revenue.

As Epic boss Tim Sweeney said in June 2019: "We believe exclusives are the only strategy that will change the 70/30 status quo at a large enough scale to permanently affect the whole game industry."

According to Apple's summary of the arguments it's bringing to court next month, and citing depositions from Epic executives, the Epic Games Store is unprofitable. Apple contends it "will not be profitable for at least multiple years, if ever".

Apple's filing reveals Epic lost around $181m on the Epic Games Store in 2019, and it projected to lose around $273m on the store in 2020. Even with "significant" growth, revenue for last year was projected at $401m. Epic has confirmed $700m was spent by PC players on the Epic Games Store in 2020, although only $265m of that was spent by players on third-party PC games in the Epic Games Store. So its $444m in minimum guarantees for 2020 alone is a big loss-leader.

Apparently Epic has admitted this trend will continue in the immediate future, and Epic projects to lose around $139m on the Epic Games Store in 2021. These are all "unrecouped costs" resulting from Epic's attempt to grow the Epic Games Store. That includes at least $330m in unrecouped costs from minimum guarantees alone. Ouch. That's a lot of games that missed their minimum sales target.

Here's the bombshell: "at best, Epic does not expect EGS to have a cumulative gross profit before 2027." Then: "As a result, Epic has funded, and must continue to fund, EGS through funding and capital raised by other parts of its business, which have been 'incredibly profitable' for 'several years'." That'll be Fortnite, then.

The Epic Games Store offers new free games every week.

Epic has had its say on these points, of course. In its response, the company said it expects the Epic Games Store to become profitable by 2023 - four years earlier than Apple's claim.

"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," the filing reads.

"EGS's 12 per cent transaction fee is sufficient to cover the variable costs of running EGS, including payment processing, customer service and bandwidth."

Ultimately, the points about the Epic Games Store's profitability are a minor part of a sweeping court case that has broader strokes. Epic is after Apple because it claims the company monopolises the iOS app distribution market and the iOS in-app payment solutions market within its iOS ecosystem.

Apple is putting all it can into protecting the way it operates the App Store - and of course its cut of revenue. But it's also framing Epic's legal battle as a nefarious attempt to revive interest in Fortnite.

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In its filing, Apple claims that between 2018 and 2019, Fortnite's average monthly active users and revenues declined. There's a lot of redacted information here, so we don't know the exact numbers. But, according to Apple, Epic launched a "pre-planned media strategy" called "Project Liberty", retaining a public relations firm in 2019 to execute its plan.

"These trends were consistent with Epic's observations that gamers were growing dissatisfied with Fortnite," reads the filing.

"The company understood that Fortnite was late in the video-game life cycle. And it took note internally when "#RIPFornite" was trending on Twitter. Epic knew these trends were not a blip; the company expected the declining interest and revenue to continue.

"As a later board presentation revealed, Epic coalesced around a goal: to revive and reinvigorate Fortnite by turning it out to developers to create new content. This would make Fortnite a platform and Epic the middleman. But in order for this new business model to succeed, Epic needed to find a way to cut the commissions charged by platform providers so Epic could 'share a majority of profit with creators'. According to Epic, 'Platform Fees' posed 'an Existential Issue' to the company's plans for Fortnite."

The result of all this: Project Liberty.

Epic denies all this, of course, which you can read about in its response. Epic vs Apple goes to trial in May.