Thoughts on Unity and Game Engine before Unity IPO

If you still click the tweet T+N days after Unity S-1 was filed, I bet you have already checked Fintwit threads and relevant information on the stock so I would just skip S-1 summaries, comp table/chart on SaaS metrics, or historical financials. If you haven’t checked those information, I collect stuff I believe informative in Notion page.

This post primarily focuses on the conceptual runway of game engine. Math-related exercises like market sizing and adoption trajectory pattern matching are left for specialists with incentive.

Investors who have skimmed the game engine business should have an impression that the industry has a long runway. Instead of doing modeling with long time horizon that looks funny, investors might just assign a premium on the multiple.

This post intends to be funny. Here, the long runway for game engine industry means the growth stage the industry enjoys is abnormally long and the market leader would enjoy even longer growth stage. Let’s be more specific, I assume a market leader in game engine like Unity can have 25-year CAGR of 20%😵.

Topline Compounding

Let me save your time on doing compounding. First, annualize Unity’s revenue of six months ended in June 2020 which is 2 x $350M = $700M in CY2020(E). And then compound $700M for 25 years at 20% which gives us $66.8B (for reference, Unity currently estimates its addressable market is around $29B in S-1🤣 ). For comparison, the revenue of Alphabet, Microsoft and Facebook in latest fiscal year as of this writing were around $162B, $143B, $71B, respectively. Don’t worry, $700M compounds at 20% for 25 years still can’t eat the world economy😏.

User Base Compounding & Potential Revealed when Doing Comps

In terms of user base, in CY2Q20 Unity has 1.5M monthly active creators which include non-paying creators and paying creators (the metric is basically monthly active user, MAU, so I use MAU to refer to the user base of Unity Create Solutions). If Unity’s current MAU of 1.5M grows at 20% CAGR for 25 years, MAU will be around 143M. For comparison, Microsoft 365 (renamed from Office 365) had over 200M MAU in CY3Q19 and Minecraft had 132M MAU in CY2Q20. In terms of user base scale, MAU of 143M for a game engine and beyond in a quarter of century later looks not so ridiculous. There are implications from Office 365 and Minecraft I pick for comparison. First, the adoption of Microsoft 365 is cross industry and beyond commercial use. Second, Minecraft is a “user generated content” “game”. What if a tool for making real-time 3D content becomes so accessible or widely adopted that gamers have the option to generate their own 3D content in a game? What works need to be done to reach this consumerization stage? In gaming, game engine as tech platform might not just help developers make games but enable gamers create content in the games they’re playing. Besides, in AR / VR space where game engine might play as a key tech enabler for apps (content) on the platform and the platform. The product or service enabled by tech platform of game engine has potential to be ubiquitous. (Good stuff: Mark Zuckerberg’s VR / AR strategy and One)

Metrics and Risks

On a side note, Epic Games’ Unreal Engine has a community of 11 million users as of August 2020 (Declaration of Nicholas Penwarden In Support of Plaintiff’s Motion for Temp — Document #17, Attachment #7). Be aware that the Unreal Engine’s community user metric is not comparable to Unity’s Create Solutions 1.5M MAU. Revenue of Create Solutions for 3 months ended in June 2020 was around $55M so the average revenue per user (ARPU) for Create Solutions was around $12/MAU/month. The low ARPU is due to non-paying creators comprising the substantial majority of creator base. While Unity reports financial-related metrics as key metric (number of customers > $100K of revenue; % of revenue represented by customers > $100K of revenue; dollar-based net expansion rate), the most important metrics for a game engine are user/community related metrics even though the freemium model and the long tail of users might make contribution directly from the core product less significant. Revenue concentration in Operation Solutions is not a risk but the under-investment or poor management on the core product.

Some might argue going public would make the company short sighted and eager to please capital market so it would allocate more resources on the segment that is easier to monetize and generate growth. On the other hand, there’re positive impacts from public capital raising and floating the shares. New capital, if allocated thoughtfully, and the public status of the company will kick in the loop shortly after IPO. The reinforcing loop might eventually change the competitive dynamics. The discussion above raises two issues: 1) management/entrepreneurship/control ; 2) how strategic decision potentially impacts competitive dynamics.

Management & Control

When an investor has concern about resource allocation or strategy of the company, he/she is actually concerned about the management team. Does the team have the vision and the leadership to drive the company, especially when the investor believes the business has a very long runway. Everything being equal, I would prefer a company with founder CEO who has meaningful control or influence even though it might be a double-edged sword. For example, Epic Games’ founder CEO is fighting in digital distribution space where he brings in more competition in PC game distribution market and tries to unlock the mobile app distribution market and in-app payment processing market. While the competition generally benefits consumers, the battle between Epic Games and Apple / Google makes mobile gamers not being able to get access to the Fortnite and drags developers using Unreal Engine to develop or support their products on Apple’s OS into a “legal limbo” (I learned the phrase in Epic Games and Improbable’s joint announcement). It’s quite likely Epic calculated the potential harm to its game and game engine businesses before it made the strategic move which led to retaliations and legal battles. The decision brings risk and uncertainty but maybe it is this kind of person who is willing to take this type of self-inflict risk can envision something has enormous value, then create the value and eventually capture the value in the long term.

Let’s look at Unity’s management and shareholding. John Riccitiello, Unity’s President, CEO and Executive Chairman, has roughly 3.4% of Unity before the offering. He was the CEO of EA and co-founded a private equity firm where he served as a Managing Director. Sequoia’s affiliated entities (venture capital funds) and Silver Lake’s affiliated entities (private equity funds) own 24.1% and 18.2% of the company, respectively. Co-founders of Unity, Joachim Ante (CTO of Unity) and David Helgason (Non-Executive Officer Director) own 8.2% and 4.4% of the company, respectively.

My thoughts on management and shareholding: 1) Unity feels like a typical corporate even though one of the co-founders still serves as CTO; 2) CEO previously co-founded a private equity firm and Silver Lake owns 18.2% before IPO? I won’t be surprised if there’s an management buyout in the future; 3) in terms of organization, it’s hard to bet beyond first-rated management and good corporate governance.

Strategic Moves Change Dynamics

It seemed Epic Games’ Unreal Engine was a better bet a month ago if investor had the investment opportunity in both game engines in private market. However, competitive dynamics has changed in the past 30 days as results of strategic decisions. Without those impacts, simple prediction of the competition between two game engines might be: 1) they will not only keep building tech but will do tech roll-up within their ecosystems; 2) both will keep deepening their primary categories in gaming and fighting in use cases beyond gaming; 3) eventually both game engines will try to expand categories to where their game engines are less adopted. The goal is not only to be cross platform but also getting the game engine widely adopted by developers on different platforms.

I would guess the game engine market won’t be a winner-take-the-most in steady state but a concentrated market with dominant players sharing the majority of the market. While path dependency is driving the development of market structure, sometimes strategics move might change the status quo so dramatic that the outcome universe and the probability distribution for each node get updated.

Apparently, Epic Games’ strategic move has changed the “global” status quo. Temporary restraining order only preserves “local” status quo in the short term which is still a limbo for third party developers. While third party developers are probably lock-in in the short term, the switching costs might not be insurmountable in the intermediate term for them. I don’t know how robust Epic Games’ ecosystem is but its recent/on-going dispute with mobile OS platform holders favors Unity. The Unity’s decision to go public should improve its competitive position as well. These events probably won’t change the market sharing characteristic of game engine market but they help right shift the probability distribution of Unity’s market share in steady state.

Unity Runway Summary

  • Professional: first 10 years post IPO
    • Replacing proprietary game engines
    • Incorporating other third party game engines
    • Industry expansion
    • Use case expansion
    • Tech roll-up / adjacent markets
  • Casual / Consumer: last 15 years in 25 years runway
    • App / Content
    • Consumerization

Whether the game engine is for professionals or consumers, low entry barrier, smooth on-boarding, gentle learning curve and strong official/community support are keys to adoption of the tool. While the process might take a very long time, increasing user base will eventually get network effect kick-in and the optionality get larger. At some point, game engine might see boost in adoption and user growth acceleration.

A Scenario for Consumer Adoption

Maybe at some point, there will be a consumerization of game engine which drives the adoption beyond professional use case.

To achieve this, the engine needs to lower the entry barrier, flatten the learning curve, build a smooth on-boarding experience, lay out a roadmap for self-learner, make the experience engaging for casual users, cultivate a vibrant community to support them or even create incentives (financial/non-financial) for them to stay.

A scenario to acquire consumers for game engine is via an application that have user-generated-content feature which leverages the game engine. Game is particularly good application to acquire a user base with favorable demographics. In addition, a game has its own economy which might provide financial incentive to keep gamers using the tool.

For example, players use UI or dedicated tool (it’s the game itself) in Animal Crossing to create their own island. What if a similar game not only provides an easy to use UI to create but provides an option to further enhance the possibility or quality of what gamer can achieve if he/she is willing to learn some features from game engine. As long as the game is engaging and game economy is built to support creation (game engine might take a royalty cut on transaction of UGC), gamers or even younger ones are likely to try the tool. Since the tool is not game/app/use case specific, it becomes a tech platform that connects end-users and game/app/use case and has direct & indirect network effect characteristics. Unlike Epics Games, Unity doesn’t develop games but at least this a path to get adopted by consumer or Unity might acquire a game developer in the future.

Currently, real-time 3D content is created by professional. Maybe in ten years some consumer will start making those content casually because the adoption of game engine has reached something like Microsoft’s Office.

Basically, the thesis is based on game engine will play an important role as a tech/tool platform in society in the future. It’s a bet on the long term development of technology and society.

To value the opportunity, people use comps (Public Comps is a convenient tool), add imagination and borrow ideas delivered through excellent story telling. In addition, Unity is a rare listed pure play for those who wants to get exposure (or they can get some exposure on Epic Games via Tencent). Thus, the stock is a good candidate for a boom-bust pattern. If the stock price busted for whatever reason, my bet is it would be acquired by strategic buyers (they don’t even have to wait for the bust) or be took private by PE firms (the company might already have one potential buyer in-place😏). While I assume the company has 25 years runway, I even doubt the company will still be a standalone or public company in 5-10 years.

For those who want to pick a reference adoption pattern, maybe check Carlota Perez’s Technological Revolutions and Financial Capital to come up with broader theme or doing comps on tech products to decide which one shares similar characteristics. I’m more interested in the adoption of English being taught in curriculum in Non-English speaking countries. Not sure whether my human language analogy makes sense🤪.

Next post: Unity – IPO Note

Epic Games – 1 Month post Store Launch Update

I’ve been procrastinating for a while on the update of early reaction Epic Games’ disruptive pricing on game / app storefront space and the ecosystem approach to the gaming industry.

With more news coming in, I finally decide it’s time to give update as we have seen some development in terms of storefront and ecosystem.

[1] Two developer / publisher jumped on the bandwagon:

[1.1 Saber Interactive’s Decision]

Below are few sentences in the article I find interesting:

Saber has already announced that our upcoming co-op game World War Z will launch as a PC-exclusive on the Epic Games Store. (Editor’s note: A Saber representative said Epic is not paying the company or giving it an advance to put World War Z on the store, but “there are incentives for the PC version being released exclusively there versus Steam.”)

Epic Games provides incentives which might be less financially linked for developers to put games on Epic Games Store as exclusive. This is supply side acquisition in addition to attractive pricing probably due to less features or functionalities on the platform which is still in early stage.

Epic is the first company tо have a real chance to break what has amounted to a virtual pricing monopoly by the major digital game distribution platforms.

Discord is also trying building up a game storefront from user side by leveraging the embedded Discord and it provides even more aggressive pricing on supply side. Why was Discord not mentioned here? Are there any distinctive features in Epic Games Store  or in the ecosystem that Epic Games is building?

While Steam provides a whole host of services and features that have been built over the years and upon which many developers have relied, the reality is that for many developers these features are unnecessary. Many game makers already provide much of that functionality on their own; in other scenarios, players either don’t need those features or have broadly opted to provide them on their own using third-party services.

Obviously a strong feature set is important for a platform in the broadest sense, but for companies like mine, paying for features we don’t need and that our end users don’t want ultimately means compromises on development and unnecessary costs passed onto consumers.

I understand that some developers of course do need and/or enjoy these features, and for them the new Epic platform might not yet be a viable option.

It seems that STEAM is up-selling distribution with a bunch of services bundled and charging distribution fee of 30% rake. Maybe STEAM can un-bundle those services providing them as add-on and charging a reduced distribution rake for suppliers doesn’t need services. The first problem of un-bundling is pricing. What price tag as a rake STEAM is going to attach on distribution and add-on features. It might create other problems that some developers would ask for refund if they did’t use those services. And when the service is un-bundled, it will become much easier to do comparison between platforms. While Epic Games Store might lack some features and provide features that are less polished as of now, those features are likely to be added to the platform later. If Epic Games Store sticks to 12% rake only, basically those added features will be free for developers. It will be hard for products with price tag  to compete with free products. Of course caveat is that those free products are good enough to compete. What do you think Epic Games will do? I expect Epic Game Store would follow product/feature improvement trajectory. It’s just a matter of time that most features on Epic Game Store will be added and good enough for smaller developers to rely on. As Epic Games has abundant resources, it won’t take long time for Epic Games Store to reach a state that its supplementary  features can compete with established platform.

Check the following thread:


It’s been noted for years, even by Valve itself, that the state of product visibility and discovery on Steam leaves a lot to be desired, and this often comes at the cost of developers. While Steam has my utmost respect for what it’s achieved in terms of influence and functionality, the sentiment among indies seems to be a growing fear their games will be lost in a rapidly expanding ocean of both legitimate and junk/spam titles. For a competitor to come onto the scene and offer — for a much smaller fee — a curated experience complemented by PR support that helps ensure visibility among players and influencers is huge, even if it doesn’t add up to as impressive a list of features available at launch.

Visibility and discoverability are issues that distribution platform will face when it become more crowded. Not sure what kind of curation the platform will implement. I think Nintendo Switch’s eShop is facing similar issue but I haven’t read news about that recently.

[1.2 Partnership between Epic Games & Ubisoft]

The Division 2 on PC also will be available for purchase online from the Epic Games store and the Ubisoft Store following the release of the game.

“We entrust Epic to deliver a smooth journey for our fans, from preordering the game and enjoying our Beta to the launch of Tom Clancy’s The Division 2 on March 15,” said Chris Early, Vice President of Partnerships. “Epic continues to disrupt the videogame industry, and their third party digital distribution model is the latest example, and something Ubisoft wants to support.”

As I mentioned in my initial analysis: “If this platform can provide benefits similar to operating their own storefronts/launchers while saving fixed costs in operation, probably having in-house distribution channel might be hard to justify economically”, Ubisoft just took the first step to explore how to leverage a lower-priced distribution platform in tandem with its own store. In the short term, integration is required but in the long run the platform might be able to offer modulized features to replace the infrastructure of in-house store.

[2] Unexpected saga gave Epic Games a opportunity to show its ecosystem commitment:

[2.1 Epic Games’ Swift Reaction and its Ecosystem Approach]

No particular comments on this event. However, the new flow shows that Epic Games is prepared to make swift decision with financial resource signaling the market their commitment to ecosystem approach.

It seems positive feedback loops and reflexivity have kicked in and thing will start to gravitate in way favorable to Epic Games master plan. In the perspective of path dependence, these early stage, “small” events in the history all have similar chance to play as determinants in the following development.

~ My related Posts ~

Epic Games’ Epic Battle on Storefront Space

Gaming-related Platform Ecosystem Competition and the Financing behind

Entering a market where existing platforms have network effect working

Networks can still be beaten

Epic Games’ Epic Battle on Storefront Space

The Wall Street Journal reported that Epic Games will challenge mobile app store business model dominated by Google and Apple. But what factor differentiates Epic Games from incumbents whose network effects are working in this case? The answer is disruptive pricing on the supply side of storefront (12% rake on revenue that apps generate). This is not surprising as Epic Games has already adopted the strategy at its Epic Games Store since December 2018 when it launched the online storefront. Basically gaming online storefront and app store share the similar business model of digital distribution.

WSJ also reported that Epic will start selling games (if you can distribute app game, of course you can distribute other apps) for Android devices where the ecosystem is more open (Epic distributes Fortnite at its launcher bypassing Google Play).

So what will Google react to that disruptive pricing? Mostly likely Google will wait and see until it senses that Epic’s storefront has the potential to become de facto app store on Android devices.

Analyst suggests that if Google decides to reduce the rake on Google Play, the move might force Apple to adjust rake on App Store. There might be a chain reaction but this is different from the competition on PC/Mac gaming storefront. Basically the customer bases between iOS and Android are different. The difference will determine whether Apple will follow the move, when to follow, and the magnitude in rake reduction if it follows.

Below is the chart illustrating how Epic Games’ disruptive pricing might impact game digital distribution (and more). Disruptive pricing will have less impact on closed ecosystem in the short term. That said, in the long run, closed ecosystem might be indirect influenced by another open ecosystem (Google Play’s move might have impact on App Store) and a functionality that makes the ecosystem less closed (Epic Games is rolling out cross-platform services in 2019). Enabling cross-platform will commoditize access devices for games potentially playable across platforms. Consoles with special form factors or strong exclusives will face less pressure from cross-platform. This might be the reason why Sony is reluctant to cross platform.

Disrupt_Pricing_DigiDistrWhile some industry analysts predict Steam will maintain its game storefront dominance, at least in 2019, my posts on game storefront competition analysis has showed that Epic Games and Discord’s potential to gain market share and disrupt the digital distribution space if they systematically execute strategies in their playbooks. Don’t be surprised if the competition landscape changes much faster than you think.

~ My Related Posts ~ 

Gaming-related Platform Ecosystem Competition and the Financing behind

Entering a market where existing platforms have network effect working

Networks can still be beaten

Gaming-related Platform Ecosystem Competition and the Financing behind

On December 21, 2018, it’s reported that Discord raised US$ 150M at a valuation of US$ 2.05B, bringing total funding to date to US$ 279.3M as of this writing.

The timing is particularly interesting because the online storefront price competition on supply side among STEAM, EPIC Games and Discord has heated up since Discord’s “Series E” funding round (Crunchbase classification) in April 2018.

Chart below shows the 2018 timeline of competition on online storefronts and more among STEAM, EPIC Games and Discord.

Storefront 2018 timeline

I have already done some analysis on online storefront supply side pricing and competition in my previous post (Entering a market where existing platforms have network effect working). So in this is post I’d like to briefly discuss implications on the financing side (my speculation only as no access to inside information).


The financing round in April 2018 was to further build the core product and to launch Discord Store. At that time, the next round of financing probably was structured as growth funding for the user acquisition on supply side or demand side of Discord Store and for subscription service. EPIC Games Store’s adoption of disruptive pricing not only forced Discord to follow similar pricing level but also probably had impact on the commercial terms of subsequent financing. Lower pricing means it takes longer for cac to recover and longer to reach profitability.

Thanks to  Discord, Discord Store might not have to spend a lot on demand side gamer acquisition. Discord Store might focus more on the supply side developer acquisition.

[EPIC Games]

EPIC Games had huge financing round in October 2018 that it raised US$ 1.25B making it 2018 largest venture round in the U.S.

The capital raised might go into various area such as technology, esports, online storefront build-up & scale-up and cross-platform online services for developers… In storefront segment, unlike Discord Store, EPIC Games Store has to put more efforts on demand side gamer acquisition.

TechCrunch reported that EPIC Games has generated US$ 3B profit in 2018. If it is the case and the accounting “profit” is not far away from cash flow, that means EPIC Games has US$ 4B+ cash from internal and external to grow its business. The scale is so large that it makes me feel the likelihood for EPIC Games to successfully execute an ecosystem strategy is quite high and that the next round of financing for the company will be the IPO which might be sooner than expected.

[Side Note]

Does the two percentage points difference between EPIC Games Store and Discord’s rake  matter? Business with positive feedback loop(s) tends to have increasing return overtime making market gaining process path-dependent. However, the only thing we can  infer from being “slightly” price attractive on the supply side in the short run is that it might help a little bit but it’s unlikely to be the only determinant since the competition is dynamic and firms are solving different problems and focusing on different things in the ecosystem when building up storefronts. This might be obvious but in fact it indicates the market structure might be market-sharing with some concentration rather than winner-takes-all (or most). This also helps us make prediction: incumbent’s market share will fall significantly due to the competition from new entrants. In other words, while network effect is strong, it can still be beaten.

~ My related Posts ~

Entering a market where existing platforms have network effect working

Networks can still be beaten

Entering a market where existing platforms have network effect working

The title of this post is very generic because I observed or studied cases in different industries that new entrants want to penetrate markets where incumbents already have their network effect working.

By leveraging its resources or capabilities, new entrants might be willing to acquire “users” (depending on dynamics of business, platform might want to focus on particular side of users) by providing monetary subsidy or aggressive pricing.

Digital Distribution in Gaming (PC/Mobile)

If we put the recent “price war” between distribution platforms chronically, it looks like below:


On December 1, 2018, Steam announced it would introduce tiered revenue split mechanism based on revenue level to its long-time 30% rake on games sold on Steam.

  • “When a game makes over $10 million on Steam, the revenue share for that application will adjust to 75%/25% on earnings beyond $10M”
  • “At $50 million, the revenue share will adjust to 80%/20% on earnings beyond $50M”
  • “Revenue includes game packages, DLC, in-game sales, and Community Marketplace game fees”

Some smaller developers think the adjusted mechanism is still in favor of larger publishers and developers who are more likely to hit those revenue thresholds.

Charts below illustrate STEAM rake schedule and overall rake on game revenue.


Steam Overall Rake

Not every developer/publisher on the supply side of the platform are equal, STEAM clearly wants to focus on those with hit games and hopes their pipeline can keep network effect working.

As shown in the announcement about the new revenue share tiers posted on STEAM community:

It’s always been apparent that successful games and their large audiences have a material impact on those network effects so making sure Steam recognizes and continues to be an attractive platform for those games is an important goal for all participants in the network.

Our hope is this change will reward the positive network effects generated by developers of big games, further aligning their interests with Steam and the community.

The rationale behind is the characteristics of the digital distribution platform without control of gaming experience access: Power law and long tail on revenue distribution across suppliers, and multi-homing on both consumer and supplier sides.

Two underlines in the quote above need some discussion:

  • Large audience / traffic certainly brought by marquee suppliers certainly benefit smaller suppliers. However, making the the platform attractive to marquee supplier will never be a goal for smaller suppliers. There is not much smaller supplier can do besides focusing on their own games and audience.
  • Actually, the adjusted revenue sharing system does not “further align the interests with STEAM and community” but just reduce the likelihood that marquee suppliers leave the platform. All other other things being equal, the new revenue sharing system will make marquee suppliers more likely to distribute their games on this platform rather than starting their own storefronts/launchers or moving to other platforms permanently even though they have choice to multi-home. More audience a developer has, the more economics of scale it can enjoy: bargaining power on 3rd party digital distribution or even internalize the digital distribution.

Steam Revenue

On a separate note, you can see different attitude toward developers on different type of digital distribution platform. Just look at Nintendo eShop. I know it’s console gaming, I know it’s Nintendo (with access platform supported by its strong 1st Party IP) but the point I want to make here is consumer bases / communities on the demand side for each platform are not created equal. The attitude toward existing suppliers in term of pricing somewhat reflects its consumer base behavior which is path dependent for established digital distribution platform. For emerging digital distribution platforms, besides leveraging its existing resources/capabilities/credibility…, they tend to solve chicken-and- egg problem from the supply side. Emerging platform can gain some initial traction by securing some exclusives or timed exclusives. As shown below later, financial incentive might be the easiest way to get the ball rolling. In the longer term, platform might go deeper in demand and supply side ecosystem or facilitate communication between two sides. As multi-homing is one of characteristics that digital distribution platforms share,  building lock-in factors in the ecosystem without increasing frictions might be a key to success.

The last question on the move to change revenue sharing scheme is:


[EPIC Games Store]

On December 4, three days after STEAM’s new revenue tiers got revealed, EPIC Games announced they would launch EPIC Games Store outlining several principles. Among those principles, the most eye-catching one is:

All Developers Earn 88%

In other words, the rake on this emerging storefront is only 12% for all size of developers compared to STEAM’s tiered rake system where 20% rake is the limit (overall rake is approaching 20% when gross revenue get larger).

Rake comparison

As the chat above shows, the pricing to distribute on EPIC Games Store is so attractive to all size of developers that the tendency to multi-home is inevitable. The exclusives or timed exclusives might be limited due to limited initial consumer base which represents relatively small addressable market compared to established distribution platform. Pricing aggressively is a way to secure enough initial supply and attract other suppliers later on.


By covering the 5% engine royalty for sales on the Epic Games store, out of Epic’s 12%, EPIC makes effective rake 5% higher for games using UE4 on competing distribution platforms.

This revenue split might look attractive to those who distribute their games using UE4 (not sure if any exists) at variable cost higher than 7% of gross revenue. If this platform can provide benefits similar to operating their own storefronts/launchers while saving fixed costs in operation, probably having in-house distribution channel might be hard to justify economically.

Leveraging own capabilities and being competitive on pricing are probably not enough to beat existing network effect so EPIC Games takes ecosystem/community approach reflected in principles shown in the announcement.

  • Have a Direct Relationship With Players
  • Connect with Creators
  • Developers Control Their Game Pages
  • All Engines Are Welcome

Within 10 days, EPIC Games went one step further with the announcement of their 2019 Cross-Platform Online Services Roadmap.

At Epic, our goal is to help game developers succeed. Throughout 2019, we’ll be launching a large set of cross-platform game services originally built for Fortnite, and battle-tested with 200,000,000 players across 7 platforms. These services will be free for all developers, and will be open to all engines, all platforms, and all stores. As a developer, you’re free to choose mix-and-match solutions from Epic and others as you wish.

Market Dynamics

It seems the STEAM’s new sharing revenue tiers was an attempt to preempt EPIC Games Store. However, it’s quite likely the the rake gap is so large that STEAM’s move cannot reduce the multi-home tendency.

There are other emerging platforms who might be agile enough to follow the price war in short period time.

So, Chain Reaction?


On December 14, 2018, 10 days after EPIC Games Store released its disruptive rake, Discord suddenly announced that they had figured out it doesn’t cost 30% to distribute games in 2018 so it decides to reduce their rake from 30% to 10% from 2019.

Turns out, it does not cost 30% to distribute games in 2018. After doing some research, we discovered that we can build amazing developer tools, run them, and give developers the majority of the revenue share.

So, starting in 2019, we are going to extend access to the Discord store and our extremely efficient game patcher by releasing a self-serve game publishing platform. No matter what size, from AAA to single person teams, developers will be able to self publish on the Discord store with 90% revenue share going to the developer. The remaining 10% covers our operating costs, and we’ll explore lowering it by optimizing our tech and making things more efficient.

Discord let all users have access to store beta and new Nitro subscription options in October 2018. It’s unlikely that a company has venture capital firms on its cap table to roll out some major business / features without strategic simulation and operational / financial modeling. So it’s not about how much it costs to distribute games but how much storefront wants to monetize or subsidize (the new market dynamics and second underlined sentence in the quote increase the likely this likelihood) on distribution. Apparently, it’s a strategic move driven by market dynamics.

While having some advantages on the consumer side and strategy on the ecosystem, Discord still needs to at least match the rake to make their platform relevant on the supply side in this kind of price war if it has resources to do so and being supported by capital providers. Discord stated 10% rake is enough to cover “operating costs” but what’s its role in unit economics and at what scale are unclear.

Maybe we can borrow some strategic perspectives from venture capitalist.

Charts below show the rake and net revenue comparison among three platforms.

Rake 3 Comps

Rev 3 Comp

~ The Platform Being Disrupted ~

Certainly, the pricing offered by emerging platforms is disruptive. However, the reason why STEAM might be being disrupted is that if the cost structure /organization is built on 30% rake, it will be very difficult for the platform to overcome internal frictions to take timely, bold counteractions.

The introduction of revenue sharing tiers might be an early indication. It’s very interesting to see how long it takes for STEAM to make next move.

When it comes to competition among platforms, defender or passive side generally doesn’t have luxury to adopt wait-and-see strategy.


*    *    *

Digital Payment in Japan

This is basically a game of user acquisition by subsidy among fragmented, multi-homing platforms.


On December 4, 2018, PayPay launched a 20% rebate program with total allowance amount of 10B Japanese Yen subject to certain T&C. The amount was used up by December 13, 2018.

[LINE Pay]

On December 14, one day after PayPay’s program ended, LINE Pay launched a similar 20% rebate program from December 14 to December 31, 2018 without limit subject to certain T&C.


Mercari is planning to launch its own digital payment service next year. It definitely can learn something from user acquisition wars between PayPay and LINE Pay. With its C2C marketplaces, hopefully Mercari might be able to adopt a more sophisticated, less cash burning way to launch service.

The case of digital distribution platform shows “your margin is my opportunity” and “network effect can still be beaten.” This is one of major risks that Mercari’s C2C marketplaces might face in the future.

~ Related Posts ~

Epic Games’ Epic Battle on Storefront Space (follow up post)

Gaming-related Platform Ecosystem Competition and the Financing behind (follow up post)

Networks can be still be beaten

Mercari (4385.JP) – Initial Analysis