Epic thinks EGS could make up 35-50% of the PC gaming market by 2024

Last month, a filing in the Epic v. Apple court case showed the public just how much money Epic has been throwing around to secure exclusive “guarantees” and offer free games in an effort to establish a market foothold for the Epic Games Store (EGS). Now, a new filing in the case gives a detailed breakdown of how that money was spent over the first 11 months of the Epic Games Store’s existence (through October 2019).

While this version of Epic’s Review of Performance and Strategy is a bit dated now, it still gives the clearest public indication yet of how Epic sees huge upfront spending on free and exclusive games as key to attracting new users to the EGS. Epic hopes its investment will help to eventually make the EGS a self-sustaining, profitable storefront with a significant share of the PC gaming market.

How to make money with free games

In the first 10 months of the EGS’s existence (through September 2019), Epic spent roughly $11.6 million to distribute just over 104 million free copies of 42 different titles, the filing shows. The “buyout price” paid from Epic to the publisher for each individual title varied, but the middle half of titles (25th to 75th percentile) cost $80,000 to $350,000 each. Two of the free games in the bunch were worth at least $1 million to Epic—Mutant Year Zero ($1M) and Subnautica ($1.4M)—while offering free copies of the three collected Batman: Arkham games cost Epic $1.5M total.

Epic measures how many individual downloads each free game attracted, but the company’s real measure of success for a free-game giveaway seems to be how many new Epic accounts came to the service for that game. Epic linked 5 million new accounts to its free-game program through September 2019, meaning it spent about $2.37 per new account. Games like those in the Batman: Arkham series and Subnautica were unsurprisingly big attractors for new EGS users, but titles like Slime Rancher, Overcooked, Hyper Light Drifter, and World of Goo brought in surprisingly high numbers of new EGS users as well.

In the EGS’s first 10 months, the vast majority of users coming to the store for free games were complete freeloaders who didn’t spend a dime on the store. But about 291,000 of them (5.34 percent) became paying customers, and those who did spent an average of $36.30 each on the Epic Games Store in that time. Add it up, and you get about $10.6 million in EGS revenue that is pretty directly attributable to “free” games.

$11.6 million.

Amount Epic spent acquiring free game giveaways in the EGS’s first 10 months.

Viewed in the short term, the whole free-game idea seems like a horrible deal for Epic. Through September 2019, the company essentially paid $11.6 million for free games and only got $10.6 million in revenue from new users attracted by those games. The trade looks even worse when you consider that Epic keeps only 12 percent of that spending, or roughly $1.3 million.

But a single 10-month slice doesn’t capture the whole story here. Epic reasonably assumes that many of those 291,000 new paying customers will keep spending money and that some percentage of 5 million totally cheap (thus far) users will eventually spend money on the EGS now that they have accounts.

Epic notes in its planning document that a storefront like Steam brings in about $3 in average revenue per active user every month. Even if many of the EGS’s new paying users don’t stay active, the ones who do could eventually make up for the cost of the free games that brought them in the first place.

Only on EGS

Free games aren’t the only way Epic is trying to attract new users to its store, of course. The company is also paying millions of dollars in “minimum guarantees” to attract exclusive games to its store.

Some of those exclusive EGS deals seem to be paying off quite well. A chart of daily EGS revenues in the store’s first 10 months shows significant spikes around the exclusive launches of Metro Exodus, The Division 2, and World War Z early in the year. Then comes Borderlands 3‘s exclusive launch in September, causing a huge revenue spike well above any the store had yet seen and driving about $82 million in total EGS revenue in September. For context, that single month beat the $78 million EGS brought in during the entire previous nine months.

Borderlands 3 also shows how these kinds of exclusive deals don’t actually have to be costly for Epic in the long run. That’s because minimum revenue guarantees are only there as a backstop if the game doesn’t bring in that much money in sales on its own. If the game sells well, Epic uses that EGS revenue to recoup the guaranteed money it paid upfront and ends up ahead of the game.

In Borderlands 3‘s case, the $80 million in sales Epic guaranteed upfront was already recouped within the first two weeks of sales, making Epic whole again rather quickly (though Epic paid an additional $35 million in marketing and other non-recoupable fees). In fact, Epic made $9.2 million from its usual 12 percent revenue cut in that first two weeks of Borderlands 3 sales and brought in roughly 800,000 new users to the EGS store to boot. Not a bad deal, all told.

$80 million.

Amount of sales revenue Epic guaranteed to secure EGS exclusivity for Borderlands 3.

Of course, not every exclusive game can be Borderlands 3. In 2019, for instance, Epic paid roughly $542 million in minimum guarantees to attract exclusive titles that it projected would earn just $336 million in recoupable income over their lifetimes. The $206 million difference in those two numbers is Epic’s actual expense for attracting those exclusives (and the new users that come with them) for the year.

Eventually, as the base of EGS users for those exclusive games grows, Epic expects it will eventually start recouping 100 percent of its new minimum guarantees, fully recovering the upfront costs it uses to attract exclusives. But how quickly that happens depends on a few things.

Aggressive growth or “winding down”?

The most interesting part of Epic’s 2019 EGS forecast concerns the two distinct futures it sees for the storefront. In one of those scenarios, the company continues an “aggressive pursuit” of exclusives, making guarantees of $469 million annually for 34 exclusive titles in both 2023 and 2024. In the other scenario, Epic starts winding down its exclusive guaranteed payments, paying just $80 million for two exclusives in those years.

Epic’s projections under each of these scenarios show just how important it sees exclusives to driving the EGS’s growth. Under the aggressive model, with dozens of exclusive games each year, Epic thinks it could reach about 125 million total users and 50 million monthly active users by 2024. That number could go down to 90 million users and 33 million active users if “Steam competes,” presumably by lowering its revenue cut to be closer to Epic’s 12 percent.

Under the “wind-down” model, however, Epic stops paying for exclusives relatively quickly, and the Epic Game Store plateaus at around 58 million total users in 2024. Active users actually start shrinking after 2020 in this scenario, deflating to 16 million monthly by 2024.

Under the aggressive scenario, Epic thinks the EGS could be responsible for anywhere from 35 to 50 percent of the PC gaming market by 2024, depending on Steam’s reaction. That would be a huge success, considering estimates currently place Steam at roughly 75 percent of that market.

But if Epic stops paying for exclusives and winds down, the company sees EGS market share peaking at around 20 percent before falling to about 8 percent by 2024. That’s not nothing, but it would be a disappointing slice after Epic laid out hundreds of millions of dollars for its own foothold.

Epic’s thinking on the future of the Epic Games Store may have changed in the 18 months since this projection was first created, of course. To be sure, the numbers the company released publicly in 2020 suggest that the EGS might be growing much faster than was projected the year before (though it’s hard to compare internal projections like this to public-facing statistics directly).

In any case, going forward, we’ll be keeping an eye on how many new timed exclusives show up on the Epic Games Store as a possible sign of whether Epic is staying “aggressive” or may be starting to “wind down” the EGS.

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