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 must be for exclusives releasing in the future, but according to Apple's learnings, Epic is going to eat "at least $330 million in unrecouped costs from minimum guarantees alone" if you also consider 2019's deals. 

As for how much the Epic Games 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 and iOS policies against Epic's antitrust complaint (I've uploaded the PDF here). As part of its defense, Apple's army of lawyers wants to show that the Epic Games Store isn't comparable to its iOS App Store, and so it has included 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 (PDF here), Epic puts a happier face 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 Epic, and its 12 percent revenue cut will eventually be enough to sustain the store, something it has been saying since it launched the store at the end of 2018.

"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.

Other fun things Epic and Apple have to say about each other

All of this shin-kicking between Epic and Apple is over the way transactions are handled on iPhones and iPads. Apple makes developers get approval to sell iOS applications on its App Store, and also enforces use of its payment processing system for in-app purchases, which gives Apple a 30 percent revenue cut. Epic says that's unfair, 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. Epic wants to accept money from Fortnite iOS players with its own payment processor, bypassing Apple's fee (which it famously did without permission to kick off this whole fight), while Apple would like to continue getting 30 percent of Fortnite's iOS revenue, thank you very much.

Epic has even bigger plans than bypassing Apple's fee in Fortnite, though. It wants to put the Epic Games Store on iPhones and sell mobile games with its own payment system, competing with the App Store itself, and hopes US courts will rule that it would be anti-competitive for Apple to stop it.

Epic argues that iOS developers can't innovate and provide the safety features they want to due to Apple's overbearing policies, and Apple brings up the Epic Games Store's unprofitability in part to attack the idea that Epic actually does those things in the first place. "By its own admission, the Epic Games Store—two years after it launched—is still missing 'critical' features," writes Apple's lawyers (echoing large parts of Reddit). 

In a mostly-redacted section, Apple calls out "significant security breaches involving EGS," possibly referring to a 2019 Fortnite breach. It also says that Epic's customer support team is inferior to Apple's, citing an internal email sent by Sweeney in which he asks "what happened with the community team" that was supposed to offer customer service to people complaining online. "I've seen nothing," wrote Sweeney. "Literally zero, while we're being endlessly bombarded with claims of problems that Epic isn't answering."

During the trial, it may also come up that Epic doesn't force developers to 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 doesn't want the court to think that the App Store and Epic Games Store are comparable, saying that in-app purchases are part of the iOS platform, not just some store feature, and that the first iPhone didn't even allow third-party apps (read: you should be thanking us!).

Across the document, Apple more or less says: Epic, your store is a bonfire that you chuck 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!

I doubt comparisons between the Epic Games Store and App Store will be a big part of the case, in the end. Epic's issue with Apple isn't just that it runs a store with mandatory fees. Epic's complaint is that Apple also makes that store and its in-app purchase system 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 rebuttal 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, and since so many of them are iPhones, developers have no choice but to submit to Apple's rules. Apple says that's not true, because "consumers can and do switch away from iOS devices to Android devices," and lots of people play Fortnite on multiple platforms, so actually it is competitive.

The companies raise many more points and counterpoints in these recent filings, which comprise about 500 pages together. For instance, Apple says, as it has before, that Epic tried to negotiate a side deal with it, implying that Epic's open platform evangelism is actually self-serving. Epic, meanwhile, accuses Apple of burying competitor's apps in the App Store search.

Against my expectations, Apple's is the more aggressive of the two documents, making it the more interesting. Here are a few more tidbits from Apple's interpretation of the evidence:

• 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. 
• 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. Journalists won't be allowed in the room due to Covid-19 restrictions, but there'll be live audio. Before the trial, there will be a conference on April 21 where elements of each party's arguments may be clarified.

This article was updated on April 10, 2021 to add more details about the filings and case.