The industry-wide belief that esports would be a massive moneymaker for everyone in the games value chain turned out to be mostly true only for publishers.

Esports hype promised broad profitability across the games value chain
In reality it mainly benefited publishers, not most other participants
Streaming turned out to be more broadly valuable across the ecosystem than esports itself

“Esports was a really good idea for the publishers and really not that interesting for everyone else.”
David Rosenthal · 1:09:30

#esports#streaming#games industry myths

Hot Take· 1

Hot Take1:58:00

Grading the Apple-Epic Standoff: Who Should Blink?

The hosts argue Apple has more long-term to lose than Epic in the standoff, given developer trust and the risk of being locked out of the emerging 'metaverse' ecosystem, complicated by Tencent's WeChat leverage in China.

App Store generated an estimated $18.3B for Apple last year, ~40% of services revenue
Fortnite's iOS revenue (~$200M) is only a fraction of a percent of App Store revenue
Hosts argue losing Fortnite is worse for Apple's platform reputation than for Epic's business
Tencent's WeChat gives Apple a reason to seek quiet compromise rather than an all-out ban

“I actually think it's worse for Apple.”
Ben Gilbert · 2:09:30

“Well, here's though the other big calculus for Apple to bring back in is 10 cent, right? Like who is the most important company and…”
Ben Gilbert · 2:15:30

#Apple#App Store economics#Tencent#antitrust

Explainer· 3

Explainer22:00

Shareware vs. Publisher-Retail: Why Tim Kept 100% of Revenue

Explains why the shareware distribution model let Tim keep all of his revenue instead of the 10-15% a traditional publisher-retail deal would have left him.

Traditional publisher-plus-retail deals could leave a developer with only 10-15% of revenue
Retailers alone would take roughly 50% of the sale price
Shareware let Tim keep 100% of sales, foreshadowing Epic's later fight over app store take rates

“Whereas this shareware path he kept 100%.”
David Rosenthal · 23:00

“Which is Apple's current argument to Congress.”
David Rosenthal · 22:30

#distribution economics#shareware#publisher model

Explainer42:00

Gears of War: The Red Herring of Publisher Economics

Gears of War 1 produced 88% margins as a Microsoft-published launch title, but sequels revealed the real cost and creative-control tradeoffs of the developer-publisher model.

Gears of War 1 made ~$100M revenue on ~$12M cost, an 88% margin
Sequels saw margins shrink to 30-40% as Epic bore more marketing/dev cost
A creative disagreement over a multiplayer-only version exposed how little control Epic had as a developer under a publisher

“So they're literally making 88% margin on a hundred million dollars in revenue.”
Ben Gilbert · 42:30

“There was an increasing realization that the old model wasn't working anymore, and the new model was looking increasingly like the way to go.”
Tim Sweeney (quoted) · 45:30

#Gears of War#Microsoft#publisher-developer relationship

Explainer46:00

The Rise of Free-to-Play and Games as a Service

League of Legends and Riot pioneer a cosmetic-only free-to-play model that rehabilitates 'free to play' after mobile/social gave it a bad reputation.

League of Legends launched free-to-play in October 2009 as a mod of Warcraft 3/DOTA
Riot's innovation: cosmetic-only purchases with no pay-to-win advantage
Tencent invested in Riot in 2010 after seeing the model succeed, then acquired it in 2011

“What League was and what Riot's big innovation was that you could buy things, but they were just aesthetic.”
David Rosenthal · 48:00

#free-to-play#League of Legends#Riot Games#Tencent

Story· 6

Story08:30

Tim Sweeney's Unusual Path to Programming and Business

Tim Sweeney's childhood, his father's DOD work, discovering programming at 11 via his brother's IBM PC, and undercutting the neighborhood lawn-mowing market as a teenager.

Born 1970 in Potomac, Maryland, youngest of three brothers with a big age gap
Father worked for the DOD mapping agency, giving Tim early access to proto-internet BBS systems
Fell in love with computers after visiting his brother Steve in San Diego at age 11
Quit a $4/hour hardware store job to undercut the lawn-mowing market by 2x, clearing about $25/hour

“It was love at first sight. From that point on, I tried to dedicate all of the time I had free to learning to do…”
Tim Sweeney (quoted) · 13:30

“That's when I came to a really clear realization that by trying harder and striving to find cool business opportunities, you can do far, far…”
Tim Sweeney (quoted) · 16:30

#Tim Sweeney#origin story#entrepreneurship

Story18:30

ZZT: The Text Editor That Became a Game (and a Business)

Tim starts a computer consulting business, then accidentally builds his first game, ZZT, while trying to write a text editor, sold via shareware for decades.

Founded Potomac Computer Systems as a college-age consulting business
Set out to build a text editor and ended up turning it into the game ZZT
Distributed via shareware: first room free, mailed floppy discs for the rest after payment
ZZT kept selling copies all the way until 2013

“Suddenly you could build a text document and hit the play button in this editor, and now you're up and running with your game.”
Tim Sweeney (quoted) · 19:30

#ZZT#shareware#early Epic

Story30:00

Building Unreal Engine Ahead of the Market

After watching how hard it was for id Software to make Doom work, Tim decides to build an extensible engine instead of a single game, and licenses it before Unreal even ships.

Doom's proprietary engineering tricks made competing head-on nearly impossible
Tim chose to invest time upfront in a reusable, extensible engine instead
Studios began requesting licenses for the Unreal Engine before Unreal itself was released

“We would also love to make 3D type games and compete with it in Doom. Would you be willing to license it to us?”
Ben Gilbert · 32:00

#Unreal Engine#id Software#game engines

Story1:03:30

Fortnite Battle Royale's Overnight (After Six Years) Success

Three internal Epic game projects flounder for years until PUBG's 2017 breakout prompts a two-month pivot that becomes Fortnite Battle Royale.

Fortnite, Paragon, and Unreal Tournament reboot all struggled for years starting in 2011-2012
PUBG launched March 2017 and popularized the battle royale genre on PC
The dormant Unreal Tournament team pivoted to build Fortnite Battle Royale in about two months
Launched September 2017: 10 million players in two weeks, 125 million in six months

“Within two weeks, they get 10 million active players.”
Ben Gilbert · 1:07:30

“Within six months, they have 125 million active players.”
Ben Gilbert · 1:07:30

#Fortnite#PUBG#battle royale#product pivot

Story1:18:30

Epic vs. Apple: The Fortnite Payment Rebellion

Epic pushes a direct-payment update to Fortnite in August 2020 to bypass Apple and Google fees, triggering immediate delisting, a viral 'Nineteen Eighty-Fortnite' parody video, and a lawsuit.

August 13, 2020: Epic adds a discounted direct-payment option for V-Bucks, violating store policy
Apple and Google immediately delist Fortnite from their app stores
Epic releases a 1984-parody ad casting Tim Cook as the villain
Apple threatens to revoke Epic's entire developer account, endangering Unreal Engine access for all developers, before a court partially blocks that move

“So Apple and Google immediately delist Fortnite from their app stores.”
Ben Gilbert · 1:19:00

“This is a major escalation here.”
Ben Gilbert · 1:20:00

#Apple#App Store#antitrust#Fortnite

Story1:34:30

The Unreal Engine Goes Beyond Games: The Mandalorian

Unreal Engine's real-time rendering technology is used to build the virtual production 'volume' that filmed The Mandalorian, replacing green screen with dynamic, camera-synced digital backgrounds.

Disney Plus series The Mandalorian was largely filmed on a soundstage surrounded by screens rendering backgrounds in real time
Lighting on actors was generated from the Unreal Engine's rendered environment above the set
The technology enables high-end filmmaking at a fraction of the traditional cost and timeline

“that series was basically made in the Unreal engine”
David Rosenthal · 1:35:00

#Unreal Engine#The Mandalorian#virtual production

Takeaway· 2

Takeaway55:00

Epic's Three Strategic Moves After the Tencent Investment

After Tencent's 2012 investment, Tim executes three moves: expanding Unreal into full infrastructure, exiting console publishing, and making the engine free.

Move 1: Expand Unreal Engine beyond graphics into full live-ops/payments infrastructure
Move 2: Sell the Gears of War franchise to Microsoft in 2014, exiting console publishing
Move 3: Drop the Unreal Engine licensing fee entirely in March 2015, switching to a 5% revenue royalty

“In March 2015, and this was this was like super ahead of the curve. Epic stops charging a licensing fee for the Unreal Engine, makes…”
Ben Gilbert · 57:30

#Tencent#strategic pivot#Unreal Engine pricing

Takeaway1:36:30

Tencent's Investment: A 60% Annualized Return

Tencent's 2012 purchase of 40% of Epic for $330M grew to roughly $5.4B in value by Epic's 2018 funding round, illustrating Tencent's exceptional investing track record.

Tencent bought 40% of Epic for $330 million in 2012
By the October 2018 round at a $15 billion valuation, that stake was worth about $5.4 billion
That implies roughly a 60% annualized return over six years
Framed as still smaller than Tencent's returns on investments like Meituan and Pinduoduo

“That's now worth 5.4 billion if I did my dilution math right there.”
Ben Gilbert · 1:37:00

“It took them six years to turn 330 million into 5.4 billion, which I think is a 60% annualized return on that money.”
Ben Gilbert · 1:37:00

#Tencent#venture returns#Epic valuation

Frameworks in this episode

Primitives & Compounding Iteration Model

Seven Powers Framework

Zero Marginal Cost / Zero Distribution Cost Model

Insights & moments

⚡Myth Buster· 1

The Esports Myth That Never Paid Off

◆Hot Take· 1