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How They Grow

How Epic Games Grows

A primer on the $200b gaming industry, the power of vertical integration, marketing/product lessons from a video game, and how to grow an ecosystem.

Jaryd Hermann

Jan 11, 2023

Hi, I’m Jaryd. 👋 Every other week, I pick one startup/company you probably know, and do a deep dive on how they kickstarted their growth, and drive growth today.

Plus, every Friday — I bring you 5 short-form insights and takeaways from the startup/tech universe. (this!)

If this is your first time reading, join the other folks interested in growing a company and learning about startups by subscribing for free here:

Hi friends 👋

I’ll start by saying that this deep dive is going to be different.

So far, we’ve looked at B2C and B2B tech companies across a few different business models. Today, we’re looking at a totally different type of company from a totally different industry.

I was playing the new Call of Duty the other day, and I suddenly felt inspired to learn more about gaming. There were loads of ways we could go from here. I could look at a standalone game and unpack why titles like Call of Duty, Minecraft, or FIFA are so successful. Or, I could zoom out and look at game studios like EA Games, Nintendo, or Ubisoft and figure out how they’ve come to dominate such a massive industry. Or, I could zoom out even further and look at game engines — the software used to power a game.

I did some light digging, and it quickly became clear that company I had to pick was Epic Games. They not only produce home-run hits like Fortnite, but they built Unreal Engine — one of the best and most used game engines in the (massive) gaming industry.

This means we get to have our cake and eat it too.

Epic Games has gone from a bootstrap shareware developer to one of the biggest game design studios in the world valued at $32 billion. They've also led the industry in building one of the most widely-used and recognizable game engines in the world — playing a key role in growing the industry overall and driving huge investor interest in the space (i.e from Tencent and the new a16z gaming fund.)

In our maiden deep dive of 2023 — we’ll look at how they did it.

Here’s what to expected today:

A brief history of video games
- A timeline of iconic events
- The gaming landscape
An Epic beginning — how they started
An Epic strategy — how they grow
- Vertical + Horizontal Integration
- Epic’s virtuous flywheel
- Deeper on: Fortnite, Unreal Engine, Epic Games Store
An Epic Future — where they’re going

And quick personal note, if you enjoy this deep dive and learn at least one new thing, consider subscribing if this is your first time reading How They Grow, and perhaps telling your mom or a friend. 🙏

Let’s begin. ▶️

🕹️ A brief history of video games

The gaming industry, a current $200 billion behemoth, is probably one of the most important and innovative corners in the tech world. Its importance to culture, social networking and entertainment are massive, and the term “entertainment industry” no longer just means Hollywood and the movie biz. Why?

Because gaming now brings us one of the most immersive and jaw dropping forms of entertainment to more than three billion people. That’s 37.5% of the people on the planet.

Back in the 70s, while people were toying around on those classic Pong joysticks (🕹️) in their basements and trying to clock the highest Pac-Man scores — nobody really had a clue where gaming was going.

But, these simple games were the bedrock of today’s gaming industry that set everything in motion.

A high-level timeline of the industry

To understand where gaming is going — we have to know where it came from. So, here’s a quick history lesson with some of the most iconic events in gaming.

Let’s start with a summarized visualization.

Note: If you’re not interested in the backstory of gaming or a summary of the gaming landscape — I promise I won’t be offended.

Turing’s Chess — the 40s

To find the first piece of video game code ever written, we have to start three years after World War Two in 1948. Alan Turing, often seen as the father of AI and the guy who cracked the German’s Enigma code, invented an AI-informed chess game. But, it was too powerful to be run by computers at the time, so instead was 'executed' by Turing manually. Unfortunately, Turing died before they executed the game on a real computer, but his work laid the foundations for decades to come.

Spacewar! — the 60s

The next big event in gaming came when MIT professor Steve Russell built 'Spacewar!' in 1962 on a giant University computer. It was important to the history of video games because the open source code was widely shared and recreated across other computer systems in the small programming world.

The arcade era— the 70s

In 1971 the first commercial arcade game was invented — Computer Space. Nolan Bushnell and Ted Dabney were the pioneers from Stanford, taking the basic concept of Spacewar! and making a standalone coin-operated machine.

While doing so, they founded Atari. Bushnell and Dabney followed their success of Computer Space by releasing Pong in 1972. It was an instant cultural phenomena and it opened the flood gates to other coin-operated arcade games. The arcade market grew, and this is where and Nintendo entered the game.

The console: part 1 — still the 70s

While the arcade market was growing, others were looking at how games could be played on existing TV sets. In 1972, the worlds first commercial console was released — Magnavox Odyssey. Atari took this idea, released their own console, and quickly achieved not just PMF, but mass-market success, by bringing Pong and their other video game to console.

The video game crash — the 80s

In 1983, the North American video game industry experienced a major crash due to a few different factors, including an oversaturated console market, competition from computer gaming, and a surplus of over-hyped, low-quality games, such as the infamous E.T by Atari. It’s often considered the worst game ever created.

The crash lasted a few years, and at the end of the 80s, Japanese developers started becoming more prominent, and and Nintendo’s products began to hit the US.

Gaming on the go — the 90s

In 1989 — handheld gaming became the hottest thing. With the introduction of cartridges for different games, gamers could easily play what they wanted, when they wanted, wherever they wanted. This led to the success of Nintendo’s Gameboy, which fun fact, is 3rd best-selling console of all time (118m unit sales).

The popularity of consoles amongst the young, emerging audience of gamers led to an influx of games in the 90s and beyond. Some iconic titles we still play today that came from this wave are Mario, Zelda, Street Fighter.

PCs, PCs everywhere — still the 90s

In 1994, about 27% of homes in the US had a computer, and nearly half played games on it. And because the computer industry was growing like wildfire and consumer adoption was skyrocketing — this brought the gaming industry incredible distribution.

The console: part 2 & 3 — the 2000’s

It was becoming clear that this industry was a huge opportunity. So, companies like Sega and Sony started scrambling to launch their own flagship consoles.

In late 1994, Sega beat Sony to market by a month, launching their Sega Saturn. I think we all know how this story goes, given the dominance of Playstation today. Sony’s PS1 outsold the Sega Saturn 10:1 and became the most sold console of the ‘90’s (excluding GameBoys).

The success of the PS1 and PS2 brought more attention to other hardware producers. In 2001, Microsoft put chips on the table with their Xbox. The famous rivalry began.

In ‘05 and ‘06, the Xbox 360, PlayStation 3, and Nintendo’s Wii arrived as the next gen of high-definition gaming. Each console came with exclusive titles, trying to bring in new players to their ecosystem. Sony teased users with Gran Tourismo, Little Big Planet, and The Last of Us, while Microsoft offered the legendary Halo and Gears of War.

The console wars raged on.

Mobile — still the 2000s

In the background, another piece of technology was quietly on the up-and-up. The idea of gaming on phones was not really there in the early 2000’s, and very limited to single-player experiences like the classic Nokia game — Snake.

But, in 2007, the legendary reveal of the first iPhone totally changed the game, pun certainly intended. Even though it was fairly limited and lacked an App Store or 3G, it truly was the MVP that largely represented the future of mobile gaming as we now know it.

When the App Store launched in ‘08, there were initially just 500 apps available. But, over the coming decade millions more were launched, among them, some of the most widely played games in history, like Angry Birds, Plants vs Zombies, and Candy Crush.

FTP games — the 2010’s

By 2010, the success of countless free-to-play mobile games had proved that there was a viable alternative to the standard pay-to-play rev model in gaming ( i.e $0.99c to download).

Instead of charging a one-time fix cost to access and play the game indefinitely, people could try the game for free and enjoy a limited but fully playable experience (i.e freemium pricing). From here, it was all about in-game purchases of digital items to modify their experience (like paying to speed things up in Clash of Clans)

Besides great revenues, this started to change the behavior around gaming.

GaaS + DLC — the late 2010’s

Gaming-as-a-Service, or the live-service model, is simply the concept of releasing a title and continually adding new Downloadable Content (DLC) over the lifetime of the game. Usually FTP, with the progression mechanics being locked behind a paywall or a ‘Season Pass’ subscription — just like SaaS.

This existed with games like World of Warcraft back in the late 90’s/early 00’s, but only really took off with the massive popularity of Epic’s Fortnite (more on this in a bit).

VR + AR — the 2020’s

More recently there’s been a ton of investment in new gaming devices geared towards creating deeply immersive experiences. People want to really feel like they’re in the game, and not only are consoles like the PS creating native headsets etc to create that for players, but there is a huge amount of third-party development in the space — like headsets, hepatic wearables, and treadmills.

The metaverse is something everyone keeps talking about, and gaming is really where I think we will see this concept come to life. VR isn’t new in gaming, but the hardware hasn’t really gotten to a place yet where mainstream consumers can have a great, affordable, experience at home. Right now, it’s limited to arcade-like experiences for the everyday Joe, and it’s very clear we’re still just playing a video game.

I’m curious to see how quickly Zuckerberg’s goal of “passing the Visual Turing Test” is achieved and we enter the realm of Black Mirror vibes.

Okay, that’s our quick get-up-to-speed on how the gaming industry has progressed over the decades.

Lastly, below is a visual roundup of the industry today and all the sub-markets of gaming. I think a 30,000ft view of the landscape is helpful in understanding the context of Epic’s business, and their vertical and horizontal integration strategy we’ll be getting into.

If you enjoy graphics like that…

As you can see — gaming is big business. In 2022 it raked in $220 billion in revenue, and is on track to hit $435bn by 2028. And adoption is huge, with 65% percent of adults in the US playing video games on at least one platform.

And just as a comparison, the global motion pictures business is valued at $42bn, and the global streaming industry is valued at $373bn.

If you’re interested, here’s a very neat visualization of gaming revenue overtime put together by Visual Capitalist (double click to expand).

Awesome, the scene has been set — let’s get into Epic Games.

💡An Epic beginning

Epic stories often start somewhere small, with the introduction of a budding and ambitious protagonist.

This one is no different.

We’ll start in Potomac, Maryland. 1989.

While the internet was busy being released, the Berlin Wall was coming down, and the Simpson’s was about to start its run as the longest running TV show in history — Tim Sweeney got an IBM PC and started studying mechanical engineering.

He quickly fell in love with computers, and one weekend decided to open up a PC consulting business out of this parents garage. Classic.

It was short lived though and he shut it down, but Tim had the bug — so he started looking into making a video game.

But, he immediately ran into a problem. Even though he was a computer wiz, there was no real roadmap or instruction manual explaining how to actually go about making a game. No tutorials, no templates, and no engines he could use to build his game on. 💡

So, like a good founder, he started building a text editor to help him program his first game from scratch.

His idea was simple: what if he could just make a video game out of the text editor itself?

For 9 months he clicked-and-clacked away, and in 1991 after getting some early feedback from college friends and people in his neighborhood — he released a game called ZZT.

It was an action/adventure puzzle game met with success. But, not necessarily because of the game itself.

The real aha! of ZZT was that it was the first game ever made with OOP (Object Orientated Programming).

Why was that so significant?

Being developed in OOP made is very easy for other programers to change the game themselves — or, in the gaming world, mod(ify) the game.

I wrote ZZT in Turbo Pascal, using an object-oriented programming style, and designed ZZT-OOP to provide easy control over gameplay objects without the complexity of a 'real' language
— Tim Sweeney, Founder and CEO of Epic Games

By 1991, despite the growth of the gaming industry, even the biggest games were still being made by a handful of people and each new title was basically built from the ground-up, requiring loads of precise work from engineers, programmers, and creatives.

Sweeney's implementation of OOP in ZZT changed all of that. By making it a central part of the game's code, he allowed for significant user modification, where normal at-home computer users could make their own games within a game.

This approach laid out the conceptual framework for the idea of a game engine. "ZZT served as a conceptual blueprint for Unreal," Sweeney said. "A game engine with a high-productivity, what-you-see-is-what-you-get tools pipeline, bundled with a programming language aimed at simplifying gameplay logic."

In ‘91, he revived his original company, Potomac Computer Systems, and started stuffing game discs in envelopes and mailing them out. His distribution model for ZZT was shareware — releasing the software in pieces. He sent out the first piece for free, aiming to hook users. From there, he would then get them to pay later on.

He was making about $100 a day, and decided to go full-time into this rapidly growing gaming world.

In Potomac Computer Systems’ early days, Sweeney managed to pull in two other founders. Mark Rein, the business guy, and Cliff Bleszinkski, the 17-year-old brilliant game creator.

In 1992 — the three of them turned the company into Epic MegaGames to try have a standout name in the industry, and quickly started punting out more shareware games, such as Epic Pinball, Jill of the Jungle and Ken's Labyrinth.

With a pinball game, an action game, an adventure game — they found themselves lacking cohesion and strategic focus. But, soon the apple fell. 🍏 When rival company, id Software, released DOOM and Quake, they effectively created the 3D first-person shooter genre.

Epic found what they’d needed: a foil. If 3D was the future of video games (which they believed), they wanted to be the best 3D developer, beating id.

So, in ‘95, Epic started writing the code for their competitive shooter, but they began building with a new idea.

Sweeney decided to simultaneously program a game engine that would not only work for his game, but a wide variety of other future games.

That way, it could not only empower other game developers (solving the hard problem he first encountered), but also be licensed for additional revenue.

The plan seemed simple. Sweeney would create a 3D game engine, Cliff would design a first-person shooter to showcase the engine’s power, and Mark Rein deal with all things business and distribution.

They called the project Unreal.

Great in theory, but the downside was a longer time to market, and it wasn’t clear how good (i.e reusable) the engine would actually be. The only way to really validate that would be to try build more new games on top of it — which you can’t do until it’s done. 🫠

Well, sometimes you go with the gut!

So Sweeney bet big bet on himself, his vision for the future of gaming, and the future of Epic.

On May 22, 1998, Unreal Engine was released along with Unreal, their first-person-shooter (FPS). In just 2 weeks, it was the best selling game in the US and rivaled the iconic game, StarCraft, as the best selling game in the world.

Critical acclaim, massive sales, and a strong community all put Epic on the map. But, while Unreal was a glaring visual success — it was the unseen Unreal Engine in the background that would become an “unreal” growth engine for Epic and propel the company into the Goliath it is today.

Unreal Engine was a massive moment in the history of video games — licensed game development software. When there’s a gold rush , there are two types of people. Those who rush to try find gold, and those who sell them the mining picks. I’m sure you can see which one is better business.

Everyone was busy riding the video game wave trying to make the next hit title, and Epic decided to start playing a different game at the same time.

The era of Epic 2.0 began. And a year later, they rebranded to Epic Games and launched Unreal Tournament, opening them up to multiplayer online gaming.

So, from garage to one of the most successful game development studios on the planet — Tim Sweeney has described Epic as evolving through 4 eras.

Era 1 (1991-1997): Stuffing game discs in an envelope from his parents garage.
Era 2 (1998-2005): Epic widens its distribution through partnerships, and released Unreal and Unreal Engine.
Era 3 (2006-2011): Epic sees a shift away from PC and toward consoles and develops first game just for Xbox — Gears of War.
Era 4 (2012-present): Epic sees a pivotal shift, bringing them from a console focus back to the PC. It’s a shift brought on by Sweeney’s recognition of the power of digital distribution and Games-as-a-Services (GaaS).

Let’s get into their business strategy.

♟️ An Epic strategy - how they grow

Epic have mastered the chess board that is the gaming industry. Their strategy is one of vertical and horizontal integration, and they basically have a finger on all the pieces on the board.

To summarize, Epic develops, publishes, and distributes games. They have their own game engine empowering others to develop games, while they also develop and publish their own titles like Fortnite mostly following a free-to-play model with in-app upselling. And from a distribution standpoint — they also own an important pipeline with their own online games store, where developers (who probably made their game on Unreal Engine) can now reach customers and sell their games.

Owning value creation and value distribution

This is a beautiful example of vertical integration. A recent post by Jacob Jolibois gave a really tight and understandable definition of this:

The holy grail of an efficient business is vertical integration - consolidating multiple phases of the value chain under one company.
Apple owning the operating system AND the SoC (system on a chip) instead of outsourcing to Intel.
Amazon owning the online store front AND the shipping fleet instead of outsourcing to FedEx.
SpaceX owning the Starlink satellites AND the launch vehicles instead of outsourcing to NASA.
This consolidation brings countless advantages including eliminated transaction costs, tighter technological integrations, better communication and collaboration, and reduced risk.
And for a subset of internet products - creator tools - there are two key pieces of the value chain that can have outsized returns when consolidated under one umbrella.
The Means of Creation
The Means of Distribution
These two pieces, when working in concert, create the Vertical Integration Flywheel whereby a user creates a thing and shares it with other people who then adopt the product to create more things.
— The Next Frontier of Online Content (2/2), Jacob Jolibois via Making Product Sense

And from a horizontal integration standpoint, Epic has been acquiring studios for years, as well as companies who develop gaming services. This keeps expanding their product and service offering at the developing and publishing stages.

Here’s a simplified visualization of Epic’s vertical + horizontal integration strategy.

Now you might be noticing, given how Epic is operating at all these different stages of the value chain, that there is loop here for us students’ of growth to look at. 🤩

4 core products that propel a virtuous cycle of growth

Epic have four major parts of their business, that brought together, create a lovely growth engine:

Video games: Through major games like Fortnite, Epic creates a community of players and streamers, who not only bring in significant revenue for them, but also drive “viral” growth of their own games and drive demand for games. This incentivizes more supply (developers, publishers).
Game engine: Through Unreal Engine, they break down barriers and create new developers, who then propel the flywheel even more as more video games are made and sales inside those games go up, which in turn drives more R&D to make their engine even better. They then use those resources to build more great games of their own ontop of their own engine. Plus, by using their own tool and being involved in tool development, Epic’s team have built a deeper understanding of the industry, and mastery of their own software.
Epic Games Store: Through their games distribution platform which has a global audience, they capture a piece of all game sales and micro-transactions (12%). This fuels both of the above.
Epic Online Services: Epic has created a bunch of easy to integrate, open, and modular set of online services for game development — from adding things like multiplayer functionality, community, game progression/rewards, game ops, account services and more. These free, cross-platform services make it easier and faster for devs to successfully launch, operate, and scale high-quality games and ingrain Epic into the game development community even further.

With all of this, Epic’s flywheel not only grows their own business, but it grows the entire gaming ecosystem.

Let’s go a bit deeper on three of Epic’s core products:

Video Games (looking at Fortnite as an example)
Unreal Engine
Epic Games Store

Enjoying this deep dive? Consider subscribing for more like this every other Wednesday.

🦹‍♂️ Video Games — Fortnite

On July 21 2017, Epic released one of their biggest successes and what would quickly become one of the most viral games in the world. In less than a year after its release, Fortnite had 125 million gamers and made $1.2 billion in revenue.

Today — the game that lets players collaborate/fight to try survive in an open-world environment — has over 400 million global players and generates billions in revenue.

From the content format (how the game is scripted and played) to the distribution model (how the game is made accessible to people) to the revenue model (how they monetizes it) — Fortnite has pioneered a new business model for gaming.

GaaS is now not only Epic’s core strategy within video games, but it has become a massive trend across in the industry.

Gaming-as-a-Service (GaaS)

AKA cloud gaming or gaming on demand — this new model allows developers to monetize their games after release and for the long run. Games get updated frequently with new experience (i.e maps, challenges, characters), and revenue comes in from either a subscription, and/or from in-game purchases (microtransactions).

A huge benefit here is that instead of a being able to finish the game and then churn, players have a reason to keep coming back.

As user acquisition costs have skyrocketed, user retention is key to game success. To keep players and users around developers are managing their games as services and constantly evolve their product.
— Why AAA Studios Shift to Games-as-a-Service (GaaS) Model, Slava Zaiets

Comparing GaaS as a strategy to the traditional model of premium game releases, we can see some clear advantages to Epic and other developers using this model:

And this model is growing as a stand-alone industry, big time.

Okay, so GaaS has been key to making Fortnite a financial success. But the real success has come from the massive adoption and deeply loyal community. So, I was curious what founders and builders in the world (outside of gaming) can learn from the game. Turns out, a lot. 👇

What founders and builders can learn from Fortnite

In short, Epic Games are masters of onboarding, retention, and engagement, using principles that can be applied by any company.

If you’ve read anything about growth marketing, you’ve probably run across the popular examples. Airbnb drove traffic to its site by building a way for its hosts to cross-post their listings on Craigslist. Dropbox grew its user base by giving existing users free storage for referrals. Hotmail expanded its reach with a footer link advertising the service in every outgoing email.
And while these are all excellent examples of ways companies have used growth marketing to acquire new users—and acquire them quickly and exponentially—these examples create a poor picture of what growth marketing is really about.
Growth marketing isn’t all about big, quick wins, and it isn’t 100% focused on new user acquisition. To find an exceptional growth marketing example, then, we need to look deeply at how a company uses growth marketing to move the needle throughout the entire customer lifecycle.
And when it comes to full-cycle growth marketing, the popular video game Fortnite may be the ultimate example.
In their book Hacking Growth, Sean Ellis and Morgan Brown write:
“[Growth hacking] is not, as it’s been misunderstood by some, about discovering one ‘silver bullet’ solution.… [W]hile finding such big breakthrough ideas—like Dropbox’s referral program—is absolutely a goal of the process, in truth, most growth is due to an accumulation of small wins.
Furthermore, Ellis and Brown write that growth hacking isn’t solely about new user acquisition:
“Growth hacking is often characterised as being specifically about bringing in new users or customers. But in fact, growth teams are, and should be, tasked with much broader responsibilities.”
Those broader responsibilities include finding ways:
to turn new customers into engaged and active users (activation)
to retain those customers long-term (retention)
to monetize those customers and increase the revenue they generate (magnetization)
So to find the best examples of growth marketing, we need to look beyond individual acquisition quick wins. We need to look at how high-growth companies not only acquired their users, but also how they activated them, how they retain them, and how they monetize them over time to increase company revenue.
If you look at all of those things, you get a much clearer picture of the brilliant growth marketing methods that Fortnite used to attract more than 200 million users and earn more than $2 billion USD in revenue from a free-to-play game in a little more than a year.
— Case Study: Here’s Why Fortnite May Be The Ultimate Growth Marketing Example, via Gallantway

So, with that, let’s go deeper. 🔬

1. Acquisition — know your audience and remove friction

Fortnite has done an excellent job at removing friction and getting users to experience the core benefit of the product as quickly as possible.

Before Fortnite, most major games required an upfront commitment of about $50.

But, the vast majority of Fortnite players are between 10 and 30 years old. That’s a young audience, and Epic have done a really job of building around that demographic.

For starters, kids don’t have disposable income and generally need their parents to buy things like games for them. But Fortnite is completely free, making it super easy for kids who learn about the game to sneakily download it under their desk at school.

Word-of-mouth growth combined with the low barrier to entry has been a big part of the game’s massive user acquisition.

I spoke about the viral aspect of Epic’s flywheel earlier, and a relevant stat worth sharing here is that 81% of Fortnite’s players watch live-streamers play the game. Epic has leaned into this user behavior, and the overall tailwind of streaming, and hosts events and tournaments with celebrities and big-name streamers.

If your product or service requires customers to make a financial commitment, make it as easy as possible to experience the benefits before making the commitment. Epic Games capitalizes on frictionless, free access, focussing first on creating value, and earning the customer's motivation to purchase.
— 3 Fortnite Growth Strategies for Every Business, Simon Moss

💡 Tips: Start with onboarding and use customer journey maps. Look for ways to remove friction from trials, sign-ups, or registration workflows. Track conversion and engagement rates and iterate by building, measuring, and learning through experiments.

2. Activation — again, know your audience

Fortnite once again proves that it knows its audience based on how the game has been designed.

At its core, Fortnite is a shooter, but it’s remarkably cartoon-like in comparison to other popular shooting games like Halo and Call of Duty. There’s no blood. You don’t kill opponents, you “eliminate” them. You find weapons in treasure chests and hide out in locations with titles like “Junk Junction” and “Flush Factory.”
All of this makes the game appropriate for a younger audience; it just doesn’t have the gory, hyper-realistic, or violent aspects of shooting games that parents are typically concerned with.
And Fortnite isn’t just a shooter. A big part of the game consists of building your fort out of materials you find in-game. This harkens back to many of the popular games that Fortnite’s audience played when they were younger—titles like Minecraft and Terraria.
So new users are first compelled to download the game by their favorite streamers and friends. Then, once they start playing the game, they enjoy its similarity to games they remember fondly.
— Case Study: Here’s Why Fortnite May Be The Ultimate Growth Marketing Example, via Gallantway

3. Retention — use fresh content and incentives

Fortnite shows that they understand the magic moments in their customer journey, and clearly optimize every aspect of the game to help people get to it faster — accelerating their growth and bringing them one of the best retention rates amongst gaming companies.

Getting 400M+ users is a massive achievement, but having ~60% of them play every month, in my opinion, dwarfs that. If a company focuses too much on acquisition without sustainable retention, it will burn through its addressable market.

Retention is the #1 metric for long-term growth.

So, how is Fortnite doing it?

Let’s start with some theory, by Simon Moss (CPO at Whalar):

Using cohorts to understand customer retention better is the critical first step to unlock growth, access new markets and, if you're a startup, raising capital.

Independent of the product or service you provide, it's likely your customer retention cohorts resemble one (or a mix) of the following three types of patterns:

Pattern 1: ~100% Churn

Imagine studying an active user retention cohort of people who purchased FIFA 2007, or the first iPhone in 2007. Few would expect a large percentage of customers to be still playing FIFA 2007, or using the first version of the iPhone in 2019.

For traditional gaming companies, or consumer technology companies, a retention cohort that drops to zero is reasonable to expect with certain products.

In these business models, it's critical to understand where the curve dips, to time product release cycles and customer retention across multiple versions over time.

Pattern 2: Segment retention In essence, your company retains a certain percentage of customers that find your product or service valuable, and those customers keep coming back for more. In this case, the cohort analysis might look like this:

Pattern 3. ~Magic Moments / Inflection Points

Alex Schultz, VP Growth at Facebook, describes 'magic moments' as the moments when your customers say "Yes, I've got it!".

In its early days, Facebook studied the correlations between the number of friends new members connected with, and members retained over time. The team found something interesting was happening to specific segments of new users, that correlated to repeat platform activity.

Mark Zuckerberg defined the moment as reaching ten friends in fourteen days, which in turn became the guiding north star metric for the company to focus on.

We picked a point on the curve... and found a strong correlation between the number of friends you've got in the first 14 days, and whether we would retain or not
— Alex Schultz, VP Growth, Facebook

If segments of your customer base exhibit similar patterns, your retained customer cohort may look like this:

Triggers for these inflection points may come from a variety of factors such as being available on more platforms or channels, a new integration, network effects, or the introduction of new product or service categories.

And Fortnite has several inflection points, or magic moments.

Cross-platform: Epic has made Fortnite available on every console and device. And not just available, but a unified experience with shared gaming history. So, a player can begin playing on a phone under their desk while the history lesson goes on, and get home and move over to their Play Station.
Network Effects: The more players there are, the more sticky the game becomes, especially due to the collaborative and social nature of Fortnite. As Matthew Ball said, "Much of this has to do with Fortnite ’s much-talked-about role as a social network or hangout rather than a game. Teenagers in the 1970s to 2010s would come home and spend three hours talking on the phone. Now they talk to their friends on Fortnite but not about Fortnite”
Continuous new features and fresh content: Fortnite is one of the most updated games in the world. Epic have made sure that to keep adding new seasons, modes, challenges, skins, and endless types of customizations to keep players hooked and coming back.
Incentives: Fortnite runs in seasons, with each new season bringing changes to the game and new opportunities for players to climb to the tops of the leaderboards. And regular tournaments with nine-figure prize pools is a huge carrot to keep players engaged.

💡 Tips: Identify the magic moments when customers first experience your product or service. Understanding this is can be as simple as asking the right questions of your customers. Gather and organize feedback, then validate with data. Align organizational resources to help more customers achieve these magic moments faster.

4. Staying relevant and in the cultural zeitgeist

Related to fresh content — a crucial pillar in turning Fortnite into a cultural phenomenon is partnerships and cultural crossovers.

With each new season, Epic have tapped into the opportunity to introduce new cross-cultural IP into the game.

In an entertainment era that is seemingly defined by the concept of the multiverse, cultural crossovers and collaborations, it stands to reason that many expect meta-experiences to become a space in which cultural passions collide. A space like the IP-smashing visions of Ready Player One or the Marvel Cinematic Universe, where Spider-Man dukes it out with John Wick. Why not?
On top of realizing players’ wishes to have their favorite IP accessible cross-platform, Fortnite has had a big hand in re-imagining live entertainment for digital. The much-lauded and endlessly cited examples of the in-game Travis Scott or Ariana Grande concerts aren’t just inspiring case studies for the potential of virtual gigs; they illustrate the need to supercharge meta-experiences by bringing in talent partners to feed the entertainment needs of your audience.
Our audience’s ‘passion points’ can’t be thought of in silo (they never could); they bleed into and complement one another. Epic’s recent acquisition of community and artist-first platform Bandcamp is perhaps further evidence that Epic is pushing for a cross-cultural realization of the metaverse that caters to the diverse interests of its user base, both as creators and consumers.
Epic’s approach to collaboration isn’t just evident in its IP-sharing with some of the biggest names in entertainment. The studio recently announced a partnership with Sony and Lego, with a shared goal of defining ‘the future of digital entertainment,’ as well as building a safe, digital platform for kids to connect, free from the malicious forces of the internet.
In the face of what is at present a fragmented realization of the metaverse, with multiple platforms that lack interoperability and major issues with safety and representation, this collaborative approach promises a more joined-up offering, packed with IP and entertainment that will make audiences feel welcome and keep them engaged.
— The secret to Epic Games’ success? Partnerships and cultural crossover, via the Drum

By bringing people like The Rock and MrBeast into the game — that’s massive distribution gain through celebs broadcasting to their own audience.

Who wouldn’t want to play as The Rock!

And characters aside, they elegantly weave in storylines and content with real-world events such as the World Cup, NFL, or the release of a Star Wars movie, and integrate corporate partnerships into the plot with branded content and offers. But they do this in a way that is authentic and relevant to their community without ever detracting from, or interrupting the user-experience.

 💡 Tip: Appeal to the head and the heart. In addition to giving your customers the reasons why they should try your product or service, tell them your brand story. Why do you exist? How did you get here? What will it mean for them to be part of your community? Explore creative new ways and formats to share your story with consistency. Focus on the formats and channels that already have your customers attention.

A clear takeaway here from Fortnite’s success is know your audience. Who are they, what do they want, where are they hanging out? And then know exactly how your business fits into all of that.

And you know your audience by talking to your customers.

The thing that Fortnite, Yelp, PayPal, Airbnb and so many of the most popular and prevalent growth marketing success stories have in common is at least one moment where they stopped to listen and find out what their customers really needed from their products.
And the thing that led to extreme, ongoing growth for many of these companies is that they didn’t stop listening after finding that one huge “aha!” moment that drove significant adoption.
Instead, like Fortnite, these companies had significant success with growth marketing because they focused on their target audience while building their products to spur growth in the acquisition and activation phases, then they continued to focus on delivering what customers wanted to inspire retention and drive monetisation.
— Gallantway

And to close out the analysis on Fortnite — it’s important to note that the success of the game has helped finance Unreal Engine and all of Epic’s new initiatives, such as the Epic Games Store (2018), Epic Online Services (2019) and the recent Epic Games Publishing.

It’s also a powerful platform to distribute new experiences to a massive use base. For example, the Epic Games Store was launched onto tens of millions of day-one devices through an update to the Fortnite app.

And with all that playtime data and development hours — Fortnite is also a huge R&D platform for their game engine.

Share How They Grow

⚙️ Unreal Engine — growing the industry

Screenshot of the Unreal Engine platform

Game engines are eating all of media & entertainment
— Matthew Ball

When Tim, Mark, and Cliff set out to build a game engine alongside their first 3D shooter, they probably didn’t know this would become the core of their multi-billion dollar business, let alone a pivotal piece of the future of gaming and entertainment.

Today, Unreal Engine has become an extensive suite of tools, technology, and services that empower devs to create virtual experiences without needing to write or fiddle with the code that’s needed to make them “work”. They don’t even need to know how it works — freeing them up to focus on the creative and business side of making a game.

Defensibility of their core business

Despite the size if the gaming industry — there are just two engines that are commonly used: Unreal and Unity.

The reason for this illustrates the deep defensibility of Epic’s core business:

The cost of building an engine now is hundreds of millions of dollars, representing the work of hundreds of people for many years. You can’t build an engine that’s just good for one type of game anymore. The economics don’t work.
— Tim Sweeney

And speaking of defensibility — Unreal’s technical advantages are likely to keep growing too.

As the complexity of video games grows, the incentives and need to use a third-party engine are growing, too. And as game makers want to be on all these platforms that continuously update, the table-stakes to making an engine keep rising considerably. This makes engine design considerably harder.

What’s more — Unreal gets a ton of data and an ever-growing number of unique feedback loops that help expand its dominance.

Lastly, network effects. As Unreal pushes Epic into film and TV, it could well make them a leader in live music and events. Unreal powers Disney’s Star Wars: Galaxy’s Edge VR theme park attraction and Sony Music has already announced it’s building a technology team just for Unreal-based concerts. With more and more types of experiences being built on the back of Unreal — there’s a clear network effect around this: it’s much easier to drop a Star Wars character made on Unreal into Fortnite than it is to add to a game made outside of the engine.

The strategic value of Unreal

Although game engines don’t own the end consumer like a game publisher (e.g. Activision Blizzard) or platform (Sony), they are uniquely valuable because of how they have access to and can influence the developers that make games in the first place.
What Epic decides to invest in, improve, or create, for example, immediately impacts not just what experiences developers will (or can make), but also the hardware that’s made, the standards deployed, and the content consumers buy, and so on.
If Epic chooses to invest into real-time ray tracing (a technology which changes the way computers create an image, resulting in greater realism), they allow developers to make games with higher visual fidelity. This, in turn, gives gamers reasons to buy Nvidia GPUs with real-time ray tracing support and PC manufacturers reasons to integrate these GPUs. If Epic invests into VR and AR technologies, it becomes much easier for developers to deploy games with those technologies onto Oculus or Apple products. This means there are more reasons to buy these devices, which leads to greater sales, thereby increasing the addressable playerbase of VR/AR gamers, which leads to more developers producing VR/AR games. And, of course, the gaming space is rapidly growing in terms of players, playtime, and importance globally.
In addition, engine-makers can use their reach to push and accelerate many other businesses. […] Epic was also able to use Unreal to launch a games store, as well as an online services and a publishing arm.
Unreal is so deeply deployed today that it’s also difficult for its market leadership position to quickly erode. In theory, an airplane could have its engines swapped mid-flight. A video game cannot change its engine after it’s released. And as games shift from packaged sales of play-and-finish games to live-operated unending ones, the lifespan of a single title continues to grow. As a result, building on Unreal today can mean committing to it through 2035.
Taking a further step back, it’s critical to recognize that whole generations of developers have now been trained in Unreal and spent up to several decades becoming experienced in it. As a group, developers are incredibly reluctant to learn new engines; there’s little upside, lots of risk, and a huge investment required.
— Epic's Flywheel & Unreal Engine, Matthew Ball & Jacob Navok

And finally…

🏦 The Epic Games Store

The primary storefront and digital channel for gaming on PCs has been for years, Steam, a games marketplace operated by Valve. But, in 2018, Epic launched its own version, Epic Games Stores (EGS), which raked in $680 million within a year. EGS allows developers to reach a massive audience of potential customers and distribute their games, whether made on Unreal or not.

With EGS, Epic retains full control of the value chain, giving them control over pricing and access to key customer insights. Epic has grown the platform by charging developers about half the revenue split as Steam (12% v 30%), and giving customers the occasional free game.

The strategic value of the EGS

Beyond its impact on the gaming ecosystem, and even though much smaller than Steam, EGS offers a ton of strategic value to Epic:

It substantially grow the number of active users in its player network
It grows the size of the Epic social graph
It increases the total time spend gaming, the volume of data, and the spend per Fortnite user.
It allows Epic to use third-party games to retain and delight every player in the Epic network.
It grows Epic’s influence across the gaming ecosystem.

Through their game engine, Epic captures the best, and aspiring, game developers as customers. They then have a neat supply-drives-demand loop come into play — where all the players that come for these games turn into Epic customers. This grows their graph network.

And in addition to that — EGS gives Epic insight into which games, features, and experiences players are enjoying, which helps inform investments in other parts of their platform.

Bringing that all together — video games, a game engine, and a digital storefront for distribution — Epic have integrated themselves into the most essential corners of the gaming industry.

This has brought them to a handsome $32 billion dollar valuation — a long way from Tim stuffing disks into envelopes in Potomac.

But what’s next?

👾 An Epic future — how Sweeney’s shaping it

The metaverse

The metaverse is basically a quasi-successor to the internet, where the idea is that everyone and every company can exist, work, socialize, trade, and create. A key premise to make this happen is that things can easily move between different experiences (called interoperability). This will require a ton of collaboration between different companies.

Yea, I know. It’s confusing as hell. So here’s a quick explanation by Matthew Ball.

It’s important to emphasize that the Metaverse isn’t a “game” (e.g. a bigger, more realistic Minecraft), or hardware (VR), or an “expansive virtual world with a digital economy” (e.g. Second Life). This would be like saying World of Warcraft, Google, or the iPhone, is the Internet. They are digital worlds, services, websites, devices, etc. The Internet, conversely, is a wide set of protocols, technology, tubes and languages, each of which matters because of the devices, content, and communication experiences built atop them. The Metaverse will be, too.
— Matthew Ball, CEO at Epyllion

Okay, the metaverse. Confusing as it is…Sweeney has very strong beliefs in it, and how it should be run.

Just as every company a few decades ago created a webpage, and then at some point every company created a Facebook page, I think we’re approaching the point where every company will have a real-time live 3D presence, through partnerships with game companies or through games like Fortnite and Minecraft and Roblox... That’s starting to happen now. It’s going to be a much bigger thing than these previous generational shifts. Not only will it be a boon for game developers, but it will be the beginning of tearing down the barriers not just between platforms but between games.
- Tim Sweeney, via The LA Times

If he’s right, the metaverse could create trillions in value. And from what it looks like, just as no single company is the internet, no single company will be the metaverse.

That being said — Epic is in a great position to be a leader in the creation of it:

We’ve seen how popular Unreal Engine is — and it’s already being used for a wide range of virtual use cases (i.e concerts, theme parks, building design). This gives Epic a lot of influence, as well as the ability to connect different virtual worlds and experiences.
Same story with EOS — which will help power the online services for an even greater number of virtual worlds and experiences (built on Unreal or not)
With their store — they can distribute virtual experiences and manages access to them.

So, given their unique position and Sweeney’s deep belief in the metaverse — this will certainly be a big part of their future.

And on that note — that wraps up Epic Games!

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See you next time!

— Jaryd ✌️

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