Sony’s $250 million investment in Epic Games on Thursday, July 10, wasn’t exactly shocking. The two have been close partners for years, and in May, Epic showed the first Unreal Engine 5 footage running on a PlayStation 5.
What was surprising was how small a stake Sony got for its money.
A quarter of a billion dollars bought Sony a 1.5% ownership interest in the company behind Fortnite and so many other franchises. Eight years ago, when Tencent invested $330 million, that company picked up a 40% share in Epic.
The disparity between those ownership stakes shows just how big and how fast Epic has grown. The developer/publisher, right now, is valued at about $17.9 billion. To put things in perspective, Take-Two Interactive Software, the company behind Grand Theft Auto, the biggest video game of all time, has a market capitalization of $17.4 billion.
Epic has become an absolute beast.
The deal between Sony and Epic won’t result in any sort of PS5 exclusivity. Instead, it’s a continuation of Sony’s recent diversifications (which, in some ways, started with a partnership with Microsoft to collaborate on cloud-based gaming solutions).
“Sony is proactive in investing [or] acquiring firms that can both benefit its existing operations (E.g. [the] Insomniac acquisition for $229m) or drive future growth,” said Daniel Ahmad, senior analyst at Niko Partners on Twitter. “This is an example of the latter.”
For Epic, it’s the next step in its evolutionary growth.
From humble beginnings …
Epic has grown from a company that focused on software (such as 1994’s Jazz Jackrabbit and the Unreal franchise) to one that also licenses its graphics engine (one of the industry’s two most-used), a game distributor with Epic Store and a game services company via Epic Online Services.
It’s a studio that’s looking to the future of not just gaming, but entertainment — and that’s a big part of what lured Sony on board. Music events have already taken place within Fortnite. Unreal Engine was used to create effects in The Mandalorian and the most recent season of Westworld. And the Epic Store, with its very favorable equity split for publishers could well tempt film and music companies in the future as yet another distribution platform.
But any company that’s growing that fast in that many directions and has its fingers in that many parts of the entertainment industry is bound to attract attention. And it makes itself a tempting takeover target.
Any company has its price, of course. Microsoft’s purchase of the seemingly unbuyable Minecraft developer Mojang in 2014 and Facebook’s buyout of Oculus that same year both made that clear. Epic, though, would be a complicated purchase.
“Strategically, it would be about value creation and value destruction,” says P.J. McNealy, CEO of Digital World Research.
In other words, if Activision were to buy Epic — and no longer license the engine to EA or Ubisoft, that would create value for its games (which would benefit from the engine’s advances), while destroying some of the financial value of the licensing model.
Anyone making a run for Epic, though, would have to navigate the interests of a disparate number of companies, with different interests. Among Epic’s stakeholders are venture capitalists including KKR, ICONIQ Capital, Smash Ventures, aXiomatic, Vulcan Capital, Kleiner Perkins, and Lightspeed Venture Partners; Disney; Endeavor Group (which owns everything from talent agencies to UFC); and Tencent.
Then there’s Tim Sweeney, who is still believed to still be Epic’s majority shareholder. He’s the wild card. And the founder of Epic, and his team, have made it very clear in the past year that it’s them, not the investors, who guide the course of the company.
“Everything we do is with our team, and the final point of conversation when it goes up to the top is Tim. And Tim does not take any orders from Tencent. Believe me,” said Epic Store lead Steven Allison at 2019’s Game Developer Conference.
But who could afford Epic at this point, even if a sale was possible? McNealy says the most viable candidates are the tech giants who, so far, don’t really have a stake in the traditional games business. And it’s likely that all of them have at least considered it at some point.
“If you’re a major platform beyond video games, such as Amazon, Apple, Facebook, or Samsung, you’re going to need to check the box of video games and/or streaming content and maybe even a store,” he says. “We’re in the environment where people are in acquisition mode because they want to build a portfolio or add to their technology. It would be reasonable to assume that all of those companies would be looking at Epic.”
Whether suitors successfully court the company or Epic remains independent, one thing is certain: Sweeney and his team have quietly managed to move a critical part of the game industry’s power away from the west coast to a North Carolina suburb. And it’s not likely to shift back anytime soon.
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