Epic Games' History & Growth Strategy to a $32 Billion Valuation
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Epic Games has unlocked the secret to scaling products online. With a $32 billion valuation in 2022 and massive hit games like Fortnite, Gears of War, and Unreal under its belt, Epic has become a master of scale.1 The company also boasts 723 million players who spent $820 million on its games. While these numbers may seem unreal, it’s possible for you to do the same when you follow Epic's proven strategy for success.2
With further research into Epic Games' history, it becomes clear that its founder is a growth master. His strategic system for scaling the company boils down to three essential steps:
While Epic brought in $5 billion from Fortnite in its first year, it took its founder Tim Sweeney 13 years before it created its first overnight success.3 The company’s first game made only $100 a day, developed at founder Tim Sweeney's parents' house.4,5 Despite this slow start, the team kept going until Sweeney unlocked the secret to massive success.
Epic Games' success proves that even a small company can become a viral sensation with the right strategy. All this starts with the right foundation, history, and vision for the company's future.
Epic Games began in 1991 when its founder, Tim Sweeney, started Potomac Computer Systems. The company's initial focus was creating custom databases for clients. But according to Sweeney, “That took a lot of work, actually, and I didn't get anywhere with it.”6
After the release of Sweeney's first video game, ZZT, Sweeney shifted the company's focus towards creating games. At first, ZZT only sold three to four copies a day, or $100 in revenue.4 But since it beat the four dollars an hour he got at a hardware store, the money allowed Sweeney to try making video games full-time.6 This led to the creation of Jill of the Jungle, a 2D side-scrolling game that started selling 20-30 copies a day.7
With the success of Jill of the Jungle, Sweeney stretched his team from one to eight employees by 1992.6 This growth allowed the company to take phone orders to avoid customers visiting Sweeney’s parents’ house.6
Also that year, Mark Rein joined Epic Games as its Vice President.6 He handled marketing, deal-making, and sales so Sweeney could focus on building his company. At this point, they renamed Potomac Computer Systems as Epic MegaGames to reflect the company's focus. In 1999, the company moved to Cary, North Carolina and shortened its name to Epic Games.
Epic Games achieved blazing success with the release of Unreal Engine, a 3D computer graphics engine. Unreal became the backbone of the wildly popular Gears of War franchise, which grossed over $1 billion in sales.8
That said, Epic's quick growth was not just due to the success of its games but also its strategic positioning strategy. This played a crucial role in the company's expansion and growth.
Epic Games became one of the most successful companies in the gaming industry through strategic decisions. They did this by:
Epic Games initially sold shareware PC games to build its loyal fan base. But as demand grew, developers shifted to a new industry: video game publishing. However, some developers felt that major corporations prioritized quick profits over creative freedom.
In response, in 1998, Sweeney developed the Unreal Engine. His goal was to make a game engine that put game creators first. He rewrote the code seven times in three years to create a platform that made it easier to create immersive experiences.9
Epic Games further evolved the Unreal Engine’s pricing strategy to benefit developers:
The company's roadmap shows further plans to enhance its animation, rendering, and visual quality.13 With these additions, Unreal Engine will continue to evolve game development.
By licensing the engine, Epic Games positioned itself as the go-to tech provider to game developers. This made Unreal Engine one of the industry's most popular and widely used game engines.
The company's first game, ZZT, appealed to a younger audience. It offered gamers a friendly introduction to programming. Some of these developers were children under 10.14 Next, Epic released side-scrolling platform games like Jill of the Jungle (1992) and Jazz Jackrabbit (1994). Jazz Jackrabbit features a green rabbit which became a notable franchise with four major releases.15
During this period, Epic Games also published Epic Pinball (1993). It became the third most popular shareware game of its time.16 Epic also made fixed shooters, isometric shoot 'em ups, and real-time strategy games.
In 1998, Epic ventured into first-person shooters with the Unreal series.17 The franchise became known for its intense action, detailed graphics, and immersive environments. It also introduced the powerful graphics engine, Unreal Engine, to the gaming world. Other first-person shooter games made using Unreal include17:
In 2006, Epic released the well acclaimed 3rd-person shooter Gears of War. This soon became one of its flagship franchises. Epic Games termed it as a ‘stop-and-pop’ game with tense in-game moments.
In 2010, Epic Games tried its hand at mobile games with Infinity Blade which quickly became a hot seller.18 Although simple by today’s standards, the game set the tone for how future mobile games would unfold.
In 2016, Epic explored the Multiplayer Online Battle Arena (MOBA) genre with Paragon.19 Although the game was shut down two years later, it paved the way for the massively popular Fortnite.
Fortnite was an instant hit because it was different from other games. Mainly due to its unique building mechanic and colorful graphics.20 The Save the World mode provided a collective survival experience.
These examples show how Epic Games positioned itself by appealing to different customer personas.
To help developers make money from their games, Epic launched the Epic Games Store (EGS). EGS offers a 88/12% revenue split model with no extra service costs.21 They also waive their Unreal engine royalty fees of 5%. The platform supports 76 payment processors and 46 regional payments. This makes it easier for developers to increase their take-home revenue.
Compared to the industry average of 15 to 30%, Epic's Game Store draws in developers with a low revenue share (12%).22 In March 2023, Epic started letting developers self-publish their games on the EGS. It also partners with the International Age Rating Coalition to offer age ratings for free. Compare this with the storefront Steam, where ratings only appear on big-budget games.
Here are some key takeaways from Epic Games' positioning strategy that you can apply to any business:
Epic's positioning strategy proves the importance of understanding customer needs. By adapting to changing trends, they were able to achieve success.
But how do you learn about your customers' needs and demands? One option is to adopt a DIY approach.
If a DIY approach seems overwhelming, expert guidance can provide valuable insights. Our brand positioning services can help you develop an effective strategy. We also offer a free discovery call to help you get started. Like Epic Games, having the right positioning strategy can help you grow even in a crowded market.
Once done with positioning strategy, it's important to explore ways to attract customers. Like Epic Games, focus on doubling down on the right distribution channels to reach your target audience effectively. This brings us to step two: creating your go-to-market strategy.
To get enough customers to become a $32 billion company, Epic Games had a comprehensive GTM strategy. Their plan involved using various distribution channels, including:
The PLG model was the foundation of Epic's success, offering 99% of what they offer for free.
Epic Games' successful product-led growth (PLG) attracts players looking to play free games. How did they do this? By creating viral games like its competitors. For example, Epic Games capitalized on the popularity of PUBG by developing a Fortnite version called Battle Royale.23
In two weeks of its release, Fortnite Battle Royale gained 10 million players. Epic Games then assigned different dev teams to expand to new platforms. This includes Nintendo Switch, Android, and iOS mobile devices.
Fortnite Battle Royale gained over 125 million players, earning the company over $3 billion in profit in 2018.24 The game's success was also due to network effects, including the ability to invite friends and create a map of up to 100 players.
Additionally, Epic paid developers $11.6 million to release their games for free on the Epic Games Store. This helped them gain five million new users at $2.37 per user.25 The speed of Epic’s success comes from the creation of its graphics software, Unreal Engine.
According to the Guinness World Records, the Unreal Engine, developed by Epic Games, is the most successful video game engine.26 It's been used to create over 400 games and generated $235 million in revenue. Popular games such as Fortnite, Street Fighter 5, and Tomb Raider were made using Unreal Engine.3 Even Disney used Unreal to render scenes in some movies, including Finding Dory and Rogue One: A Star Wars Story.27
What led to Epic Games creating a little engine that could power some of the greatest games and films?
The Make Something Unreal competition was a key factor.28 The competition invited game developers to create mods using the Unreal game engine.
Prizes for the competition included:
The grand prize for the best mod went to World War II shooter Red Orchestra. Tripwire Interactive made the game and won almost $80,000 in cash.29
Epic Games also offered a reasonable license fee to increase the number of game developers using Unreal. As of this writing, the Unreal Engine is royalty-free until a game makes $1,000,000, with only a 5% fee.12 That’s 1/5th what the company originally charged.
This contributed to the network effect that made Unreal Engine one of today's most popular game engines. Epic also attracted players to its network by making its games available on different platforms.
Fortnite's journey from a PC-only game to a cross-platform hit started with a launch on Xbox One and PS4. In 2018, the game's cross-platform success helped it generate a whopping $3 billion in revenue.30
The mobile versions of Fortnite also helped boost Epic's revenue, with the Apple App Store generating $1 billion in two years.31
Epic Games released a cross-play tool to streamline cross-platform connectivity in June of 2022 further.31b Before releasing this feature to the community, the company tested it across Fortnite, Rocket League, and Fall Guys.
Epic also began to buy companies to increase the number of players on each platform. These acquisitions equipped Epic with the tools and resources necessary for advancing its games.
Since 2018, Epic Games has been acquiring companies to help scale its growth. In turn, this created a more comprehensive ecosystem for gamers and creators. Their acquisition strategy has included buying companies like:
In total, Epic bought 18 companies.38 In addition to buying companies, Epic also partnered with other big-name brands to scale its growth.
Epic has a history of collaborating with popular TV series, music artists, and fashion houses to update each season of Fortnite. As a result, Fortnite acquires new skins, storylines, themes, and, most importantly, new customers. These partnerships enable Epic Games to attract and retain millions of players.
One successful example of this is the Avengers: Infinity War crossover with Marvel Studios.39 This event alone attracted over 8.3 million players.40 No cash was exchanged for the collaboration, yet it was a massive event for both parties.41
Epic Games has also partnered with leading musicians such as Ariana Grande, Travis Scott, and Marshmello. These artists held concerts that attracted millions of viewers, with Marshmello having 27 million viewers.42 Ariana Grande had 1 million viewers, and Travis Scott's show had a viewership of 12.3 million viewers too.43, 44
Additionally, Epic Games collaborated with fashion house Balenciaga to offer luxury skins for players to buy.45 Balenciaga's collection included high-fashion items like hats, tees, pickaxes, and other accessories. All these items were available to buy at Balenciaga stores and in-game.46
Epic Games also released NFL-branded skins, selling 3.3 million for $15 each.47 The company earned $50 million from this partnership.
Here are some key takeaways from Epic Games’ go-to-market strategy that you can use in your business:
1. “Free” is a powerful strategy: Free is a formidable way to attract massive customers, as long as it's monetized effectively. For example, Epic Games offers some of its games for free but charges for in-game upgrades. They also provide Unreal Engine for game developers to use for free, then make money only on massively successful products and their marketplace. Consider ways your business can offer value for free and still make money.
2. Choose distribution channels that align with your growth strategy. Epic Games has doubled down on distribution channels that support its PLG model. This includes:
Determine which distribution channels work best for your business and focus on leveraging them.
3. Acquiring companies can be a faster path to success. It takes years to create an “overnight success.” And yet buying companies can shorten the time it takes to achieve success.
Epic Games acquired companies like Cloudengine, Twinmotion, Quixel, and Psyonix to enhance its offerings. Consider whether buying a company can help your business achieve its goals more quickly. You can also explore alternative payment structures like stock compensation or a percentage of revenue. This can allow you to get companies with no money down.
To apply these insights:
Assuming you’ve already set up your voice of the customer program, you can move on to crafting your go-to-market strategy by:
Alternatively, you could hire a product marketing agency like Growth Ramp. We offer comprehensive go-to-market services. You can fill out this short form to book a consultation call with us. You’ll see how our services can help you grow your business faster.
Implementing these steps can attract a massive user base like Epic Games. And yet having many users is meaningless without a potent pricing strategy, which brings us to the next step.
Epic Games has a diverse business model with three primary sources of revenue:
In 2014, Microsoft acquired the Gears of War (GOW) franchise from Epic Games.48 The franchise sold over 22 million units and grossed $1 billion.8 So why did Epic Games sell the series?
Epic Games recognized the potential risks of a ballooning budget. GOW 3 was four to five times the cost of the first game. The next GOW installment was predicted to cost over $100 million. This would require getting a good number of customers for the project's success.
Epic Games also wanted to reduce its dependence on Microsoft and focus on the games-as-a-service (GaaS) model.49 Like SaaS, Epic Games saw that the subscription model provides sustainable and predictable income. They did this through Fortnite's $12/month subscription for various in-game features and add-ons.50
Fortnite, a free-to-play game, has generated a lot of revenue through in-game purchases. With 69% of players buying skins, accessories, and outfits at an average spend of $85, this model is highly lucrative for Epic.51 In fact, 36.7% of players made their first-ever gaming purchase on Fortnite.51 This is partially due to the perceived value provided by a free game, known as the reciprocity effect.
To further boost its revenue streams, Fortnite hosts events, sells products, and gets sponsorships. Epic Games also plans to host pay-to-attend concerts in the future.52 Additionally, Epic Games has given away its graphics engine for free, then profits through a revenue-share model.
They have also launched the Unreal Dev Grants, a $5 million fund for new developers.53 These creators can earn cash from $5,000 to $50,000 and use the funds however they want.
By transitioning to a GaaS model, Epic Games has successfully created recurring revenue. This comes from in-game purchases, subscriptions, and other sources. In turn, this reduces their dependence on traditional sales models.
During the development of Epic Games' first game, ZZT, CEO Tim Sweeney had the concept for what would become the Unreal Engine.9 As he built the game, he saw the need for a high-output game engine. Initially designed for first-person shooters, the Unreal Engine works for various game and film projects.
Epic Games also does not charge anyone to use the Unreal Engine. Instead, they take a 5% revenue share of every sale.21 Initially, developers had to pay $99 upfront and a 25% royalty fee, which was relatively inexpensive compared to the standard price of $2,500 per person.10 However, the license fee was later waived until the game's release, which cost $100 with no royalties until the game made at least $50,000.11
Over time, the Unreal Engine became royalty-free until a game made $1,000,000, with only a 5% fee.12 From 2018 to 2019, the engine generated a revenue of $221 million.3 Developers who sell their creations on Epic's game marketplace also waive all fees.
Thanks to Sweeney's vision, the Unreal Engine has become an industry standard. It empowers thousands of developers with a high-productivity game engine without breaking the bank.
The Epic Game Store (EGS) is a virtual platform that distributes third-party video games to over 230 million PC users in 2023.2 That’s a whopping 36 million increase since 2021. Unlike its competitors, Epic Games takes only a 12% revenue share from every game sold on its store.21 This makes it a more lucrative option for game developers.
In 2018-2019, the EGS generated $235 million in revenue and features.3 The platform sold popular titles such as Hogwarts Legacy, Gears of War, and The Last of Us. Thanks to its developer-friendly approach, the EGS has become a go-to platform for game developers. In turn, Epic Games created a nine-figure product.
Here are some key takeaways from Epic Games' pricing strategy that you can apply to your business:
You, too, can use these pricing principles to grow and generate revenue while also providing value to your customers.
Epic Games has refined its pricing strategy by leveraging experts. However, your business can follow its lead by developing a well-planned pricing strategy and executing it.
Crafting a successful pricing strategy may take some time and effort. That said, the following resources can aid you in getting started:
For a more streamlined approach, consider hiring a product marketing agency like Growth Ramp. We can assist you in aligning your pricing strategy with data-driven insights to enhance customer lifetime value. You can see Growth Ramp's pricing process and schedule a free consultation call with us.
Perhaps you, too, can improve your customer lifetime value like Epic Games.
From its simple beginnings with ZZT to the explosive success of Fortnite, Epic Games has experienced tremendous growth. This came by creating immersive gaming experiences and supporting developers.
Epic's strategy of bringing the right games to the right audiences at the right time led to its success. This includes the creation of the Unreal Engine and Epic Game Store. By using a freemium model, it was also easier to appeal to both gamers and game developers.
To attract gamers, Epic Games go-to-market uses a free-to-play model. This focuses on using distribution channels like network effects, company acquisitions, and brand partnerships.
The company crafted a pricing strategy that enables developers to create and gamers to play with ease. The Unreal Engine is free for everyone, with only a 5% royalty on games earning over $1 million. The Epic Game Store provides a platform for developers to sell more games and generate more revenue than competitors.
What’s the future like for this $32 billion company? Epic Games remains committed to helping developers create new game experiences. You can see evidence of this in Fortnite Creative 2.0, which allows players to create custom scripts and models for the game.54
The company also launched Postparty, a social app that enables players to capture and share gaming moments.55 The app has been downloaded over 100,000 times on Google Play Store and ranks in the top 200 entertainment apps on the Apple Store.56, 57
By emulating Epic Games' approach to scaling, you can position your own startup for success. For further guidance, consider subscribing to this newsletter. Either way, stay tuned for more startup success stories in future articles.
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