GamesBeat: Does everyone want to go along?
Sweeney: Some do. [laughs]
GamesBeat: You found a reason to praise Microsoft in a recent talk.
Sweeney: They made a very sweeping statement there. HoloLens and all Microsoft augmented reality efforts will be set up as open platforms, where any developer can create software that any user can install. Anybody can create a store that’s a peer to Microsoft’s own store. That’s a huge thing.
I believe that over the next 10 or 15 years, smartphones and monitors and televisions will be replaced with AR. This will be the platform of the future. It’ll have IMAX-quality 3D graphics supported everywhere we go in the glasses on your head. It defines a completely new set of opportunities for games and game developers.
Microsoft has a stellar piece of technology in HoloLens and an amazing road map of future plans to extend it. They also have a very practical strategy where now — before this technology has been consumerized, the rubber is hitting the road. We’ve seen the adoption of HoloLens in enterprise applications, where professionals are using it as part of their day to day jobs and getting huge benefits out of it. It’s still not a consumer format. But they’re building AR and working on it every day. They’re building toward a future where it’s ubiquitous.
Libreri: AR as a tool is incredibly important. It’s not a fad. It will absolutely get massively accepted and used in the enterprise space.
Sweeney: Microsoft will be a major platform in AR. HoloLens is an enterprise-focused product, but in the coming years there will be a billion-user version of AR. To know now that one of the major platforms will be an open platform for all to participate in, that’s going to make it very hard to launch a closed platform and get publishers and developers to buy into it. They don’t want another walled garden between them and gamers.
GamesBeat: With the store, Valve started out Steam as an alternative of a kind as well. Somehow they came out to be the bad guy. I saw the GDC survey this year where most people think Steam doesn’t earn its 30 percent. How do you proceed with your store, but still remain on the side of openness?
Sweeney: It’s a long arc for the industry. When Valve launched Steam it was really revolutionary. Most publishers took 70 percent and gave developers 30. Valve launched Steam giving developers 70 and taking 30. It was an amazing deal at the small scale at which it launched.
Despite that, remember the first years of Steam? Everyone hated it. They thought it was a virus, Valve forcing this malware onto their PC that made them go through this weird launcher to get to their games. But what Valve did was right. They transformed the PC ecosystem and inspired all the other digital storefronts. As a result, the digital storefront industry is a $100 billion per year market across all platforms worldwide. $100 billion a year selling software online.
The difference between that and Steam in 2004 — operating Fortnite ourselves as a major PC e-commerce platform has shown us that there are now massive economies of scale. Mastercard and Visa and Paypal processing cost maybe 3.5 percent in the western world. CDN bandwidth costs maybe 1 or 1.5 percent. Customer service costs 1 or 1.5 percent. But we see all these 30 percent storefronts, at least in the west. Companies in major developed economies are marking up their costs by a factor of five or six.
Libreri: You don’t even need software developers to build out the infrastructures. In those days the amount of developers that Valve would have needed to work on the infrastructure was high compared to the number of consumers. The scale is totally different these days.
Sweeney: The marginal costs are negligible. That’s why we launched at 12. Epic’s 12 percent is a permanent rake. That’s not going to go up. It’s going to be a profitable business for Epic at those margins. It’s a real business, not just some weird introductory rate or a loss leader. There’s nothing we hate more than companies that charge us for our products in forms that are worse than money. [laughs]
GamesBeat: Are there any things besides the percentage that you need to be aware of to keep the store popular?
Sweeney: For users, there’s a free game we’re releasing every two weeks. Most companies bring users to their product by paying Facebook and Google tons of money to send them their way. We’ve found we can get more customers into the Epic Games Store by taking that money and paying it to developers for permission to release their game for free for two weeks. The developers benefit by getting that money and by building awareness of their games, especially when they’re building a sequel or a new product. It’s valuable to build an audience around your brand. We’re giving consumers a free game, meanwhile, and as a result we’re getting more users into the Epic Games Store more economically than by paying these megacorps, and that’s a good thing.
We have exclusive games in the Epic Store, of course, that are providing unique value and bringing users in. Between all that we’re seeing massive growth, well beyond our expectations. When we gave away Subnautica that brought in 4.5 million users to the Epic Games Store. We have another game that did close to that. Stay tuned on Wednesday for the numbers. We think we’ll be near that. We have a huge influx of users from new games, a huge influx from exclusives. The whole thing is gaining traction. It’s working.
We find that 99 percent of gamers are driven by games. They want great games, and they’ll go where they games go. We find that most Koreans install Steam just so they can play PUBG. Most users who have Origin installed have installed it to play Apex Legends now. Fortnite players install our store because of Fortnite. Metro Exodus players install the Epic Games Store for Metro Exodus.
First and foremost, our industry is about games. There are different specialized desires among people who, say, want everything on Steam. A lot of folks don’t like exclusives. But exclusives are the key to building any new content ecosystem. You see that on console with games like Halo and Gears of War driving Xbox adoption, or PlayStation with God of War. Steam has Counter-Strike. Origin has Apex and FIFA. This is the way content ecosystems are built. We feel it’s a necessary change for the industry, to evolve into better revenue sharing. We have to have new stores come along. We have to have stores improve the economics for everyone.
Giving developers more money right now — to gamers right now it’s a kind of invisible thing. They don’t really care about the deal terms between developers are store. But the secondary effects of that — first of all, many developers make less than 30 percent profit margins. Going from 70 percent to 88 percent is no small deal. In many cases it’s enough to go from a little bit unprofitable to reasonably profitable. The knock-on effects of that mean they’re building better games, and to some extent passing along the savings to customers, because they realize that by lowering their prices, they can sell more copies. At higher revenue shares for them they can make more money by giving consumers a better deal.
Economic competition goes through iteration. The knock-on effects of this are going to be pervasive across the whole digital ecosystem, on everything from prices to selection to quality of games.
GamesBeat: The one thing that surprised me was how Unity’s SpatialOS — it’s a problem I didn’t expect to see. I don’t know if that surprised you as well, or if this is one more area where you have to be vigilant about who’s allowing what in their content agreements.
Sweeney: That surprised us. It might have just been some clueless lawyer somewhere who updated Unity’s terms of service to say that you can only sell through stores Unity approves, and you can only use online services Unity approves. That would basically give Unity the ability, if they chose to use it, to knock out store competitors like Steam or the Epic Games Store. Unity very quickly responded to update their terms of service to remove all that. But it’s starting a useful conversation in the industry. I wouldn’t ascribe any malice to the situation. It was a problem that arose unexpectedly and was quickly corrected.
Developers rely on the ability to use a wide variety of tools and services. It’s renewed our focus on making sure that every component of Epic’s offering is open to everyone and can be interchanged freely. You can use the Unreal Engine for a project on any platform, in any store. It’s completely your choice. You can use our Epic Online Services on any platform across any store for free, including competing stores. You have no obligation to ship on our store. Everything works. You can put games from any engine on our store and use any services you like. Developers are free to mix and match and choose.
That’s the principle our developers rely on in order to make sense of their world. Can you imagine how dysfunctional it would be if you were only allowed to use one physics system on one console and another one on another console? Now you have to build physics twice? That doesn’t work. But that was the situation that was slowly arising with friends and matchmaking and stuff. It’s great that it’s all being sorted out.
These are all valuable conversations. When people dig into the details of contracts and programs, it forces companies to be honest and to stick with practices that are good for everyone.