- Epic Games' Fortnite has 200 million users and has generated revenue reported at $1 billion.
- The world's most viral video game is Epic's cash cow today but its Unreal Engine, which powers Fortnite and many other games, is a key to the Cary, North Carolina-based company's recent $15 billion valuation.
- Unreal Engine, which has 7 million users from the game design and enterprise community, is positioned to take Epic into many sectors, from architecture to medicine and car manufacturing.
Epic Games' recent $15 billion valuation has generated skepticism — even an explosively popular game like Fortnite can't grow a user base forever. Fortnite does have 200 million players and they have brought in an estimated $1 billion through so-called in-game microtransactions, where players pay for cosmetic upgrades, according to Nielsen company SuperData. But the world's most viral video game is generating so much cash it is allowing Epic to push into areas that may ultimately become as important to its long-term value.
A big reason Epic attracted $1.25 billion from venture and private equity leaders Kleiner Perkins and KKR is a bet that the gaming engine behind-the-scenes, called the Unreal Engine, that has turned Fortnite into a household name will become critical to technology across many sectors of the economy, from architecture to medical research and car manufacturing.
"In a way, the Unreal Engine is to Epic Games what AWS is to Amazon. Both companies monetize the proprietary infrastructure used to support their core businesses. Over time, these infrastructure offerings have become core businesses of their own," said Jud Waite, senior analyst at CB Insights, which studies the start-up marketplace.
Game engines like Unreal are the software that developers use to build their creations, offering tools that help render graphics and control actions in a game's environment such as collisions. Epic Games originally developed the engine for its Unreal series, then spun those development tools out into Unreal Engine.
The Cary, North Carolina-based company, founded in 1991 in CEO Tim Sweeney's basement, has been a force in gaming and computer graphics for many years. Fortnite has been the best marketing tool yet for Unreal Engine's technological developments, particularly the cross-platform capabilities that allow the game to run on smartphones to high-end PCs. A key competitive advantage from Fortnite's scale and success is how Unreal designers can use feedback to upgrade the engine, Waite wrote in a September report.
The game's success also allows Epic to experiment with new ways to make money, from a proprietary game store it just launched to esports, which Waite said should not be underestimated when thinking about long-term value. "With the success of Fortnite and other titles, the Unreal Engine has been able to experiment with new monetization structures and strategies," Waite said.
Today, Epic's revenue doesn't come directly from charging other companies to use the Unreal Engine — it is free. Epic takes a 5 percent cut of all gross revenue on applications (primarily games) created using the engine once they make $3,000 per quarter. As an example, Epic is earning money from Fortnite's main competitor, PlayerUnknown's Battlegrounds, developed by South Korea's Bluehole using the Unreal Engine. The company has some arrangements with game studios who may pay a custom fee rather than the royalty agreement, though Epic declined to name studios with which it has custom deals.
The standard royalty model makes Unreal more accessible to hobbyists or even enterprise users looking to get started with the engine. In all, more than 7 million people currently license Unreal Engine 4 for both gaming and enterprise use, according to Epic data.
Venturing beyond gaming isn't new for Epic.In 2007, architecture firm HKS used a previous iteration of the Unreal Engine to produce a virtual environment of the new Dallas Cowboys stadium that clients could virtually walk through. But as the technology advances and more industries incorporate high quality graphics, Epic's reach is spreading. Since releasing the latest version, Unreal Engine 4, for free in 2015, the company has grown an enterprise team that supports architectural visualization and other non-gaming markets. There are dozens of Epic employees who are now dedicated to supporting non-gaming markets, an Epic spokeswoman said.
"Computer graphics became powerful enough to make photorealistic images in real time," said Epic CEO Tim Sweeney, a turning point that occurred a few years ago and opened up the possibilities for many more applications.
Investors have taken notice. Epic's $1.25 billion funding round in October added to funding already provided by Chinese internet giant Tencent, which took a 48 percent stake in Epic for $330 million in 2012. The company is now valued at almost $15 billion.
One such use case went viral this past September. As Hurricane Florence ravaged the Eastern seaboard, dangerous storm surge towered over a meteorologist – only she was safe inside a studio. Through technology from The Future Group and Unreal Engine, The Weather Channel mapped real-time water levels.
While consumers have been slow to adopt the often clunky and expensive virtual reality hardware, enterprise applications in the corporate world are on the rise. This augmented and virtual reality space is a key area to watch for Epic and its main game engine competitor Unity Technologies.
"They're the ones powering that technology – it's clearly a good opportunity," said Carter Rogers, principal analyst at SuperData.
Sweeney said a particularly "interesting and surprising" new area for Epic is medical research. UK-based Pharmaceutical research firm C4X Discovery recently starting using Unreal Engine technology to visualize and manipulate 3-D molecules in virtual reality, with the potential to let scientists collaborate remotely in the virtual environment.
Epic does make money from its enterprise effort when customers opt for paid support service that includes onsite visits and access to a community of developers within Epic who designed the Unreal Engine and third-party developers who use the engine and are experts. But most enterprise users of the Unreal Engine are using the free version, and that makes sense at a time when industry-wide monetization of augmented reality and virtual reality solutions remains elusive. Blippar, an early darling in the augmented reality start-up field that raised over $130 million in venture capital and was once valued over $1 billion, announced it was folding this week.
Epic's position is that visual content will continue to move in the VR direction, but it is still the early days for the enterprise market and Epic needs to focus on building out features and proving that a pipeline of technology within the Unreal Engine will add value for corporate customers. The company needs to provide foundational learning for companies interested in placing their clients in a VR environment.
Epic's relationship with the large developer community that uses the Unreal Engine stood out to Brad Twohig, who led Lightspeed Venture Partners' participation in Epic's latest funding round.
"Even on the industrial side, having such a robust developer community enables much faster software development and progression of the platform," said Twohig, adding that there are not many enterprise AR and VR platforms that have scaled to what Epic says is millions of Unreal Engine users. "I think it's a pretty uniquely positioned product," he said.
Several car manufacturers including Audi, BMW and McLaren recently attended an Unreal Engine enterprise technology event Epic held in Germany.
Sweeney predicts that enterprise users of Unreal Engine will overtake game users by the end of 2019, and ultimately, he thinks industry-specific and entertainment uses will converge as part of a bigger digital industry. "The thing that really interests me is seeing visual assets crossover between different media," he said, giving as an example a model created in an architectural firm that could be dropped into an entertainment experience.
"You start seeing how that [enterprise side] can also inform their consumer business," Twohig said. "If you're able to collaborate and model in real-time on creating a jet engine in their software, imagine what consumers can do with it."
—By Erica Yee, special to CNBC.com