Business of Esports TV: Apple/Epic Lawsuit Fallout

(Livestream #130B)

In this segment, we discuss some of the new discoveries and ramifications following the infamous Apple/Epic Games lawsuit.

The Business Of Esports brings you news, debates, and all the information you need to know about the gaming sector, the world’s fastest-growing market. With Paul “The Profit” Dawalibi leading the charge, and a variety of special guests, BoE TV is the only place to find insider information on the esports industry!

Check out the full livestream here:

Paul Dawalibi 15:59
Let’s talk about Epic. So Epic Apple. In the news, by the way, did anyone tune in for their, like the first day where they live? Like, I think they’re still continuing to live stream the proceedings. And

Lindsay Poss 16:13
the first 20 minutes when they can’t Yeah.

Paul Dawalibi 16:16
It was like a zoom call. But they didn’t mute the audience. So everyone was just putting in their two cents like, like, hardcore thoughts and opinions that people were just screaming out into this. Like, yeah, free like people yelling free Fortnite. So it was not the most professional start to these legal proceedings. But a ton of information has emerged as a consequence of this. So like, I don’t really care unless you guys really want to don’t really care about talking about the lawsuit itself. What’s more interesting is what has emerged, the information that has emerged from this lawsuit. And, and Matthew ball on Twitter reported a few of the things, namely, and I’ll just, I’ll bring this up here. Hopefully this works, because this has been pretty finicky. I don’t know if you guys can see this. But why did Epic Games profit fall short of plan of record in 2019. And, and this document that, you know, that was disclosed in this lawsuit reveals two causes one, cancellation of winter battle pass 322 million. And cause number two, overestimated eSports opportunity cost of 154 million. I’m just curious, in general, to get your reactions to this guy’s in terms of these two causes that have come out in terms of Epic Games falling short of their plan. Then is anything surprising in here? The numbers, the causes.

Jeff Cohen 18:01
Paul has legally paid me to say the profit was right about Fortnite eSports. So

Paul Dawalibi 18:08
20 1828 profit called a blog post long ago.

Jeff Cohen 18:13
What’s surprising to me These are EBITDA numbers, right. So not even revenue numbers. So they under they thought they were going to make, I assume they lost money. But they thought, you know, they thought they were clearly going to be making positive, you know, bottom line contribution from eSports. That’s pretty surprising. And to be off by that magnitude $154 million on the bottom line, like, you’d have to be off by multiples of that I would imagine on the top line, which means that they really, really dramatically overestimated, you know, the esports opportunity, or I guess, just overspent on some of the events. Maybe if they’re including, you know, how much how big was the Fortnite World Cup prize in that thing? Way million 40 million. So maybe that’s, I guess that’s probably how you overestimate by 150 million you you give away 50 million but uh, yeah, I mean, it’s that’s a big number.

William Collis 19:07
Here’s any guy Jeff,

Paul Dawalibi 19:08
is anyone surprised that the winter battle pass canceling that require like, results in 322 million?

William Collis 19:15
Why have Why did they Yeah, so the winter battle pass again. Can somebody remind me about that?

Jeff Cohen 19:20
I saw somewhere that they made a battle pass free to combat Apex legends. So there was a battle pass right around the launch of Apex or something like that, where they basically made it free to be

William Collis 19:32
crazy, because it doesn’t feel like they got $332 million worth of value from that. Like that’s a movie. Like they could have made a triple a Fortnite movie starring Leonardo DiCaprio. like am I right? Like, am I right? He could have done that. Like, I

Jeff Cohen 19:51
don’t know if I would agree with that assessment. If you’re a free to play game, the biggest The most important thing is engagement. So if you lose your players, you’re basically screwed but it so kept their players going like, you’d have to see the financials the rest of the way. But like, if they were able to theoretically keep someone and then they bought the next two battle passes, like that’s a pretty good investment. You know, one of the things that I thought also from the numbers was like, holy crap Fortnite was way bigger than I thought. Like, obviously, we all knew it was massive, and like the biggest game out there, but $9 billion in revenue in two years, like, yeah, that was way higher than I think the third party, you know, and like, I thought I would have guessed, like, you know, three to 5 billion, like it was multiples, multiples bigger than I think people thought. Or at least I don’t know, if you guys had a different perception.

Paul Dawalibi 20:44
Julia has a question here. And Julia, thank you for coming, by the way, says it because they started doing the Fortnite crew memberships. If you guys have thoughts on that, you know,

William Collis 20:55
I don’t actually what’s a Fortnite

Lindsay Poss 20:57
she’s talking about this is part of the revenue loss because of the crew memberships? Is that the question?

Paul Dawalibi 21:03
Yeah, correct. Okay.

Lindsay Poss 21:05
And the crew, what are the crew? Yeah, what is the crew membership?

Paul Dawalibi 21:09
I don’t actually let me just while while while we’re waiting for Juliette to come back on that, I just want to show you one other thing here, which is this other little tidbit that came out? I don’t know if this is not gonna let me I will just say it’s another little tidbit that came out here, which was only if they looked at the one of the things that came out about the Epic Games Store was that only 7% of people who, who acquired a free game on the Epic Games Store, only 7% became paid what they called payers, in other words, then purchased another game other than the free game that they got, is anyone’s like, because we had this discussion, right? The value of all the hundreds of millions being invested in the Epic Games Store. Does anyone think now with that statistic, that maybe the 600 million whatever that they’ve lost on the Epic Games Store is not an investment that’s looking like it’s paying off their?

Lindsay Poss 22:14
You The only issue is, you have to do it somehow. I don’t necessarily think that free games was the winning strategy, but you had to you had to pay to get people on the platform. Somehow. I don’t think they picked the right way of doing especially since they gave away such good games that there just wasn’t like when you give away stuff sex, you’re gonna get a lot of people who want to play so sex and stuff sex only it was just a big deal.

Jeff Cohen 22:41
I mean, we don’t have I it’s hard to answer this question without all the numbers. Right. So, you know, because we don’t know what the lifetime

William Collis 22:50
there? Yeah, we don’t know. We don’t know why that was that was aggressive. I love the way he’s like 6666. Of course,

Jeff Cohen 22:57
we don’t have the lifetime value, right of these customers. They’re acquiring. So just saying 7% converted to premium, like, you know, this is effectively a freemium funnel, right. So you know, that’s no different than saying, Oh, my God, like, only seven. Actually, it’s probably less like 5% of people who download Candy Crush, like, play actually pay money, like must be a terrible business. When you’re paying to acquire all those players,

Lindsay Poss 23:23
the one you can quickly compare it to that just happened, though, was that quibi lost 91% of its subscribers after the free trial ended. I mean, that’s a problem in my mind, obviously. Well, actually, they did worse than quibi. Because quibi kept 9% after the free trial ended. And that’s just like a raw number. But I would think anything, when you’re talking about retaining less than 1/10 of use, or converting rather less than 1/10 of users, that’s pretty iffy.

Paul Dawalibi 23:51
Yeah, it’s one of these things. I’m sorry. Go ahead, Jeff.

Jeff Cohen 23:53
No, no, you got,

Paul Dawalibi 23:55
I was just gonna say it’s a little bit different in the sense that if you got the free game, right, you still have to come back to play the free game. So they continuously have more chances, I guess, to hook you as a pain as a payer, like they call it. It’s just, it’s one of those things where the number given the size of the investment seems low, to me sort of confirms my initial belief, which is, this was a bad investment. And you could argue it’s more long term than this. We haven’t had enough time, the long term value of that 7% might be very high. Like you could make that argument and I understand that argument. I just think fundamentally, the sheer size of the giveaway in the freebies should have probably resulted in more in my opinion, for this to for me to feel good about this.

Jeff Cohen 24:46
So I’d have to look up this number to be sure but I thought I saw a number that said like they the amount of like users they acquired, they paid like $2.50 per user, like just to buy through that number. You’d be like, well, that’s, that’s pretty good, right? Like if I told you Epic would acquire 10 million users of that for their store, at a price of $2.50, a user, whatever the math is like that, to me seems like I, they probably take that in a heartbeat. When

Lindsay Poss 25:17
you look at scalability of their the size that they created, and the map they were able to retain, I don’t think it makes as much sense. Like if you’re talking about, I thought, we’re talking about like, a lot more users than 10 million. I don’t remember now, because I remember the two, it was like $2.62, or something like that.

Jeff Cohen 25:35
Yeah, that was, yeah. That to say no,

Lindsay Poss 25:40
I know. And I can’t remember what it was either. And I thought it was much larger than that. But then if you have, like, I don’t know exactly how to explain this. But with more organic growth, you would expect to retain more people. And this is obviously not organic growth, it’s paid growth. But given that so few of the paid growth subscribers were able to see the organic value in it. It’s concerning. I don’t know if you’re following, but

Jeff Cohen 26:03
I do fall I just again, I think without knowing, because let’s say let’s say 7%, those 7% stuck around and that was this was their main store, like you, you will make I mean, Valve is literally a money printing machine. Right, Steve, we got to Paul’s freaky. That’s too much intelligence here.

William Collis 26:22
I actually thought that was kind of cool. I thought it was like he cloned himself. And he was unveiling it live on the podcast. Like,

Jeff Cohen 26:28
that would be news.

Lindsay Poss 26:31
Okay. Google search. Google Search says 180 million. Just so you know. Find your point.

Jeff Cohen 26:37
Yeah, they got 180 million people 7% became paid. top result. So if those 7% I mean, you’re talking about 14 million people stuck around and bought another game. Like, what if those 14 million people make this their main store, like that is a massive opportunity, you could make hundreds of millions in revenue off that in for, you know, in perpetuity and lifetime value.

William Collis 27:00
But But there’s also a strong assumption there, which is they make it their main store. And I, I suspect, and this is again, a you know, like, I, I’m really hype at the height, like overreaching here, but I suspect a lot of people who convert from that are just buying the Epic Store Exclusive titles, right? Like I there that Yeah, like just not not to be, you know, negative Nancy here, whatever phrase you want to use, but like, I feel like a lot of people download the freebie. See that control, which was a critically acclaimed game was only available in the Epic Store. They already have it anyway, they buy it there. That’s not really an effective, you know, that I’m sure they’re counted in the upgraded user category. But they weren’t really an upgraded user. You’re right. The goal is the real valuable users are the ones that do what you’re describing. They say I’m done with Steam. This is my main port of call. I’m going to be buying every game I get from here on out here. But I suspect that is a much harder conversion to achieve. And it’s certainly not what’s being measured or what seems to be being measured in their number.

Jeff Cohen 28:05
Because but I guess the point would be wouldn’t not to belabor the point. But wouldn’t it be like you have to build that habit. So it’s like you the strategy like literally day one,

William Collis 28:13
we said this, I have your nickname Jeff Jeff, the apologists Cohen.

Jeff Cohen 28:17
I’m saying like, isn’t this exactly what you would expect? And we’ve said all along like Steam was an incredibly tough competitor to be, it would be very hard to beat them. But if you did, you’d literally have a license to print money, because that’s basically what Valve has. So what they did was they gave away a bunch of free games, it costs a lot of money. Then they bought exclusives, which kept people in the ecosystem. Over time, as Paul said, they need to make their platform actually better than Steam, so people stick around. But in theory, if they can do that, they build the habit and they continue spinning the flywheel with good exclusive games like I don’t know when this be exact. If you want it to Steam when this be exactly what you had to do that

William Collis 28:56
that doesn’t work like that. This is the only strategy that that sounds like something I would say. And I do actually I agree with you, Jeff, all joking aside, I think you’re right. This is not like they didn’t launch this thinking this was going to be a two week fight. And then they’d win. Right? They launched this recognizing this was a protracted, protracted multi year investment, where it was going to be gradually inculcating a player base. And they probably were smart enough to I’d say, to recognize that acquiring a user versus converting to this habitual hyper user was gonna occur in many stages, too. So you’re right. Like I agree with that. It’s just, it’s tough, because we’re at the point in the war that they’ve chosen to fight where, you know, they haven’t won yet. Right. But they but they have experienced a lot of losses. And, you know, this is where the conviction moment kicks in. Because you’re right. I do think success looks a lot like failure for quite a while. Which is certainly why Epic is prepared to stick with these metrics for you know, the foreseeable Future it

Paul Dawalibi 30:00
seems like to be honest it’s easier to have conviction when Fortnite’s generating like four and a half billion dollars a year revenue right like it’s a little easier to give away hundreds of millions of dollars of free games when you have this cash cow printing money in the background anyways guys I want to move on from this I just want to read a couple of these Julia says the monthly memberships 1199 This is how disconnected from Fortnite Am I didn’t even know Fortnite had a monthly membership? I don’t think that was the reason why they canceled that specific battle pass. But guys the question I thought I don’t think we addressed is you know how did they so wildly overestimate the esports revenue? Like how did Epic get that so wrong? And again, is it a lack of self awareness there just think about that for a second I just want to read these comments and then we’ll come to that Zeb says the juice just got here we still going with that we are xev of course we are Sam says double the profit so you go army Pathfinder we talking Apple vs Epic this week army we are but not your right not technically Epic versus Apple. Just the findings. The learnings that have come out from the Epic Apple lawsuit, Chris says I think agreeing here with Jeff Epic still drawing in younger players, tomorrow’s hardcore gamers were not old enough to stand Steam. This is I think that is a good point. That is a good point. That is one of the openings that Epic has here. Any thoughts on the esports front guys before I move to the final learning? Or do you want me to give you the final learning from the from the lawsuit here one of the more muted but

William Collis 31:43
Paul, I want your final learning I want to get

Jeff Cohen 31:46
right initially. So I want to hear your thoughts on why they failed.

Paul Dawalibi 31:51
I mean, because Epic was a Fortnite was never set up to be an esport like you can’t have a third player shooter that changes meta every single week, like be a successful esport It was never going to work as a competitive game. And it always was clear to me in the way Epic executed on Fortnite eSports that this was a marketing play, right? This was how do we get people excited about Fortnite playing Fortnite and buying new skins. This was not we want to foster a competitive scene and support the top players and right like there was nothing there was nothing in the way of building out a long term sustainable esport this was all flash and sizzle. And let’s get excited rah rah Fortnite. And so it’s a great marketing play. But for some reason, they just didn’t admit to themselves that it was a great marketing play. Someone there was sufficiently delusional that they thought it was going to do 150 million of EBIT da, which is like, to Jeff’s point, like we’re talking half a billion dollars of revenue, at least. Most likely. So Sam says Fortnite eSports is such a terrible viewer experience. It’s Yeah, it’s and it’s probably a worst player experience, too. for a lot of reasons.