Video game character, Doggo; real person in the foreground
The Balenciaga collab last week, plus the Soundwave Series announced yesterday, plus the Discover mode announced on August 31th, are crystalizing the idea that there’s a lot more to Epic’s free flywheel than previously understood. It is increasingly clear that Epic will be among the top, if not the top, new set of Media companies globally. The NEW Unreal Engine 5 coming later this year will drive NEW markets for Epic - Retail, Events, Music, Entertainment, and ultimately, Advertising (in a new, authentic way). While we have high conviction that NFTs will be everywhere online, it is also becoming more evident that Epic may be an exception, pioneering new markets daily, and also aiming to be settlers in NFTs.
Signum Growth Capital will host an Epic Billboard Brainstorm
on Zoom
on Friday at 430pm ET for anyone who might be interested in joining a fun, end of week discussion with me, Keshav, Chris, Evan and Karen. Please reach out for the Zoom password!
Last week I attended a crypto conference in NYC and found myself near Times Square for a separate meeting. While talking to my friend and fellow video games enthusiast Mark about Epic Games and Fortnite, I happened to look up and see this: Please stop what you are doing, click here and watch. I would say go see it in person, but it is only in London, New York, Tokyo and Seoul.
This digital advertisement is the new Epic Games (Fortnite)<>Balenciaga collaboration in which Fortnite’s Doggo wears a Balenciaga Fortnite sweatshirt and, making use of Epic Games’ Unreal Engine, leans out of the billboard, hanging over the crowd as if they are in a video game. Mind blown.
What is the Fortnite x Balenciaga collaboration? It's a blurring of lines between physical and digital — the more time we spend online, the more we want our stuff to be there too. Our mantra: I want to take my Gucci bag with me from Mario Party to the holiday party! In this case you can buy a $750 sweatshirt in the physical store and take it into the game to wear, or you can just go to the in-game store and buy all sorts of items. The eye-popping pricing is less relevant than the idea that Balenciaga and new consumer behaviors are paving the way for a store like Target or Walmart to establish a digital presence in Fortnite.
What we can buy at the Balenciaga store, which can be logged into the game for additional surprises:
The Doggo sweatshirt pictured in the billboard $750
Fortnite branded Balenciaga hat $395
Fortnite branded denim jacket $1290
What’s NEW?
This is the Fortnite free flywheel that we have been talking about since it was laid out in a Harvard case study in 2019 (below). In addition to exploring the technology behind the Balenciaga fabric herein, we lay out—lights, camera, action— NEW TAMs for the Epic Flywheel. By the way, I found this great description of a flywheel from Dhruv Bhatia on Quora -
A flywheel is basically nothing but a storehouse of energy. It has a very high moment of inertia, which is why once it gets into motion, it is almost as though it is in perpetual motion.
Thesis: NEW Unreal Engine 5 will drive NEW Total Addressable Markets (TAMs) in the Epic Flywheel
Retail - so large that we don't need to quantify it. If there is a Balenciaga store today there will be an entire mall tomorrow.
Events - DJ Travis Scott Case study - “Astroworld” his 56-stop physical tour grossed approximately $53.5 million, making Astroworld the #1 ranked tour in revenues ahead of artists like Kanye and Jay-Z. Profitability of the tour, however, is uncertain given the shows featured extravagant additions, like real roller coasters. Five short Fortnite concerts, on the other hand, grossed roughly $20 million.
Music: The Soundwave Series announced yesterday (10.1.21 kickoff) gives us a glimpse into the future - think artists from all over the world performing picture-in-picture within Fortnite while users continue gaming. Spotify are you reading this?
Entertainment - the Soundwave Series will be a part of the recently introduced "Discover" mode, launched August 31st. It isn't full of content yet, but it looks a lot like Netflix. Reed Hastings, you were right to express your fear of Fortnite in 2019. We all remember being shocked to see you outbid Paramount at Sundance many years ago. Now Epic is coming!
In the near term, players will access retail, entertainment, events and music through Fortnite, but imagine a world in which Discover is the portal and all activities, including Fortnite, are accessed through it?
All of these roads lead to Advertising - While it is extremely unpopular to discuss the possibility of in-game advertising, we would argue that metaverse hang out spaces full of events, music and entertainment wouldn’t be authentic without advertising. It is a well-known fact that billions of dollars of TV advertising spend continues: industry estimates for Global TV Ad Spend over the next four years are $158 billion, compared to the last four years at $157 billion. Behavior has changed but spending has not.
What seems to be happening at Epic Games
Epic Games CEO Tim Sweeney inspired us in 2016. First, we read a Dean Takahashi commentary about how Tim had referenced the Metaverse, citing Neal Stephenson’s book Snow Crash, and then we listened to Tim Sweeney himself. Takahashi explained, “Sweeney is unique, in that he has been a graphics wizard for the past couple of decades and he enjoys both predicting technology’s path and thinking about its ramifications.”
The word metaverse is so unusual and while there are many definitions out there, we also took our best shot at describing it. Many tend to describe the metaverse as a “hangout” game, using Minecraft and Roblox as examples; we believe it will expand well beyond games in the future.
Our metaverse definition - the human, multi-sensory understanding of authenticity. The reason we say “multi-sensory” is because as humans, when we perceive something using multiple senses, our memories of that event are stronger, and it is more likely that we will remember an experience as real. The most prevalent example that we all experienced during COVID was Zoom. How many times have you met someone in person, only to have to double check and ask, “Wait - have we only met on Zoom?” The multi-sensory nature of Zoom meetings makes them as authentic in our mind as real meetings.
Where is the metaverse? Where normal daily activities can be conducted between people who could be anywhere in the world— working, playing, and communicating as if they are in the same space.
NFTs will be a major component of the metaverse
Back to 2018, when we couldn’t stop thinking about the idea of NFTs and their impact on the future of gaming, I happened upon an advertisement for TopShop picturing a real (we think) woman. It dawned on me that I had just seen a similar picture of a top selling skin for girls in Fortnite. Max and I wrote about it here - The physical economy has goods and services that relay clout and status. Think Gucci, Chanel, and Ligne Roset furniture. Why won’t the digital economy, in a world being eaten by software, have a similar niche for status symbols? As millennials continue to own fewer physical goods and spend more time online, this trend will only continue.
Source: Fortnite, Topshop
The more time we spend in any online space, the more we will want our “stuff,” including our digital identity, to be with us. Buying and selling items in game has been happening for decades, but true ownership of those items was not allowed by the game publishers. In the case that a publisher decides to shut down a game, the items disappear, regardless of how much money has been spent by any one person.
We are looking forward to catching up with William Entriken, whom we met in 2018 shortly after he finalized the ERC-721 standard, at NFT.NYC in November to understand how his thinking might have evolved. Back then our thesis was, and still is, that in a more decentralized world we will spend an increasing amount of time online, which will lead to more purchases of digital items (e.g. skins) to demonstrate our identity and status in these metaverse spaces. For all of these purchases, we are going to want to show our true ownership, and with blockchain technology, this will be possible, but maybe not as a part of Epic’s metaverse.
Being first with a goal of being last?
Epic Games has ~350 million accounts and ~25 million DAUs— incredible numbers compared to any online environment. It may be the case that Fortnite is just showing us the way in terms of behavior, but it may also be the case that they will be the last to incorporate NFTs into their technology. They are pioneers in creating worlds within worlds and the more the Fortnite ecosystem expands (see below), the more Epic can keep players within its own environment. Eventually, it too will be decentralized, but as long as they keep it interesting for players, in terms of giving them control to create their own environments and to freely roam between environments, Epic may be pressured to change last. Being last is a win in gaming due to the value of the IP which they own. While it may seem counter-intuitive, being a pioneer enables them to stave off the disruptive forces of blockchain and keep enviable margins within their own ecosystem.
On the creativity and freedom points, two driving mantras of Signum Growth Capital are at play here -
Developers to the Front of the Line; Creators to the Front of the Line
Creativity & Collaboration will drive new jobs in-game (Play to Earn)
On this point, Epic has a Support-A-Creator program. Creators apply for the program and if accepted, they can earn at least 5% of the value of in-game purchases made using their Creator Code. Players declare their support for a Fortnite Creator in-game by entering the Creator’s code via the “Support-A-Creator” button. For Epic Games Store games, Creators can share referral links on their channels or promote their Creator Code to their supporters, to get credit for sales of those games.
Epic Games Secret Sauce: TECHNOLOGY - THE UNREAL ENGINE
Unreal Engine is what is referred to as a game engine. Unity (NYSE:U) and Epic Games have built the two most prominent engines used for game development today. We would argue that these engines are comparable in importance to the operating systems of Apple (iOS) and Google (Android). Even though these platforms are called “game engines” because of their roots, they will serve a multitude of industries outside gaming and entertainment. Unity is known for its mobile prowess and ease of use, while Unreal Engine is famous for its incredible graphics, lighting, and high-quality renderings which most resembles real life (think “triple A” or high-end games). The Fortnite<>Balenciaga billboard shown earlier is an incredible demonstration of the Unreal Engine.
Unreal Engine 5 - Coming Soon!
It is only going to get better. The company’s biggest product cycle to date is coming later this year: Unreal Engine 5 (UE5). The full release of UE5 is expected in late 2021 or early 2022. The demo of UE5 released in May of this year went viral, and explained to nearly 16 million viewers the technology that allows Epic to create lifelike, movie-quality graphics with lighting.
The MetaHumans demo gave us another perspective on UE5. Hint: she is not real -
Back to the Fortnite<>Balenciaga billboard: it was created using the Unreal Engine, so it is not only a cool thing to witness, it is a demonstration of the tech and its potential use cases for executives and creatives in companies outside of video games——think automotive, industrial and healthcare. In fact, according to our checks, even though the Unreal Engine is being given away for free (again, Epic’s free flywheel) demand for this technology is very strong in companies that aren’t normally viewed as tech companies and certainly don’t have anything to do with video games. Tim Sweeney and the team at Epic Unreal Engine are bringing a taste of what is possible to real-life people as they walk down the street.
According to the UE site, the billboard uses real-time ray tracing and physically-based lighting materials, along with the sun's position and the time of day, to create the most realistic Doggo possible. We have had the honor to get to know many employees at Epic and have heard the excitement in their voices when they describe the possibilities with this technology.
We are dealing with a luxury clothing brand, so, not surprisingly, creating realistic fabric weaves, material qualities, and textures that matched the real-world fabric while also staying true to Fortnite’s design was cited as the biggest challenge. The solution: scan data and CAD models provided by Balenciaga allowed the Fortnite team to replicate the complex construction of the real-world items.
See demos of lighting, fabric details etc here
Epic Games Free Flywheel
(as described in Harvard Business Case in 2019)
The Game - Fortnite and others - Free to Play
The Tech - Unreal Engine - Free (or at least in line with competition) to Develop
The Distribution - Epic Store - Free or cheaper than all of the other distributors (12% commission versus Apple, Sony, Xbox, all others at 30%)
My friend Matthew Ball did a great report in May 2020 on Epic and also created this nice graphic which details the flywheel:
NEW Components of the Epic Games Flywheel Worth Highlighting
Back to the description of a flywheel above, when the storehouse of energy hits the moment of inertia, it is likely already in perpetual motion. We have been talking about these ideas for a while, but billboard brainstorms like this help us get them on “paper”. In addition to a resurgence in retail activity as outlined above, there are several other areas that are worth exploring.
EVENTS
The DJ Marshmello concert kicked off events in Fortnite in Feb 2019, (see our commentary that we were writing instead of watching the Super Bowl), and there have been many concerts and events since this time. In December of 2019, Star Wars Director JJ Abrams surprised lucky players by arriving in-game and announcing the movie Star Wars: The Rise of Skywalker with a clip of the film. Lucky players who happened to be there walked away with one of several colorful lightsabers for their Fortnite character.
One can imagine all types of events that could occur in the backdrop of a game, which only encourages players to be there, ready to check out whatever might surprise and delight them.
DJ Travis Scott is a great case study.
Astroworld - According to RapTV, Travis Scott’s “Astroworld” 56-stop tour from 2018 to 2019 grossed approximately $53.5 million, or just under $1 million per show. It was an extremely unique concert with ferris wheels and a functioning roller coaster. It ranked #1, ahead of Kanye West ($52.8 million), JAY-Z ($48.7 million), Kendrick Lamar ($40.7 million), J. Cole ($25.2 million), Post Malone ($20.9 million), Future ($19.9 million), Childish Gambino ($19.5 million), and Chance the Rapper ($17 million).
Clearly DJ Travis did not need Fortnite given his success. Still, five relatively short (nine minute) Fortnite concerts attracted at least 28 million unique addresses. After these concerts, Travis’ social media registered an increase of 1.4 million followers, and subsequent ticket sales for Astroworld were up 419%. These five short Fortnite concerts grossed roughly $20 million, including merchandise sales, Forbes reported in, “How Hip Hop Superstar Travis Scott Has Become Corporate America’s Brand Whisperer”. While it isn't free to produce an online concert, it certainly must be more profitable than a 56 locale tour with roller coasters and the like.
What’s Next for Events - the Soundwave Series
Yesterday, Epic Games announced the Soundwave Series is coming to Fortnite on October 1st, 2021.
The Soundwave Series is a set of musical performances featuring artists from all around the world. Unlike DJ Marshmello or DJ Travis Scott shows, players will be able to experience music from each artist through an in-game, interactive experience.
The Soundwave Series will be a part of the recently introduced "Discover" mode on Fortnite, in the creative section. This initiative will mark the launch of the new picture-in-picture feature in-game which will allow gamers to watch the concerts during a typical battle royale match instead of needing to get to a specific location to listen! This new feature supports Epic's narrative of making Fortnite more than just a game; the concerts playing picture-in-picture keeps players locked in the Fortnite Universe instead of needing to use another service like Spotify for music.
ENTERTAINMENT
Discover Mode in Fortnite launched on Aug 31st. Currently, it isn't full of content but it is starting to look a lot like Netflix. We remember being surprised by Netflix and Amazon when they showed up at Sundance to bid against Paramount and other studios for TV and movies. This new product launch begs the question, “When will Epic show up and surprise us?” As a preview on what this may look like, check out this YouTube Video on UE5 in film.
Remember back in January 2019 when Netflix CEO Reed Hastings said, “We compete (and lose to) Fortnite more than HBO in capturing consumer screen time.”
RETAIL
The Fortnite<>Balenciaga Collab is likely only a glimpse of what we will see in the future. Why wouldn’t we be able to access almost any store from the game?
On September 20, 2021, characters in Fortnite (Ramirez, Doggo, and others) expressed themselves in a whole new way with help from the Balenciaga Fit Set.
What we can buy at the Balenciaga store, which can be logged into the game for additional surprises-
The Doggo sweatshirt pictured in the billboard $750
Fortnite branded Balenciaga hat $395
Fortnite branded denim jacket $1290
What we can buy in the Fortnite Balenciaga store, inside the Fortnite game-
Unchained Ramirez Outfit 1,500 V-Bucks
Shady Doggo Outfit 1,200 V-Bucks
Fashion Banshee Outfit 1,500 V-Bucks
Game Knight Outfit 1,200 V-Bucks
Logo Lugger Back Bling (included with Unchained Ramirez)
Skate Pocket Duffle Back Bling (included with Game Knight)
Everyday Sleekpack Back Bling (included with Fashion Banshee)
Camo Carrier Back Bling (included with Shady Doggo)
Speed Sneaker Pickaxe 800 V-Bucks
Parasail Purse Glider 800 V-Bucks
Signature Look Wrap 300 V-Bucks
The Look Emote 300 V-Bucks
If you don’t want to watch the video version, I have pasted pictures of Doggo’s positions below.
ADVERTISING
Advertising dollars continue to be spent on TV even though behavior shifted years ago. The below chart illustrates Statista’s industry estimates for Global TV Ad Spend over the next four years of $158 billion, compared to the past four years of $157 billion. Behaviors have changed but spending has not.
Imagine all of those ad dollars flying out of rectangular, plastic wall hangings onto empty living room sofas where families once sat. Will Fortnite lead the way in finally driving TV ad dollars to find a home with real eyeball engagement?!
ADDENDUM
Epic v Apple Battle - We won't go into the case too deeply here but it is worth noting the wide array of conflicting headlines emerging from the Epic v. Apple trial— likely more a result of PR spend than anything else (how can we trust paid media?!)
Examples of headlines -
It is likely best to read what Tim Sweeney himself has said about this.
Also Some Key Reference Points:
It was reported in the lawsuit filings that 2.5 million of the roughly 25 million DAU for Fortnite played exclusively on iOS before the two companies’ legal battle began, and Fortnite is now no longer available on iOS. Fortnite had 116 million users on iOS, 73 million of whom only ever played the game on iOS.
Playstation is the biggest market for Fortnite, accounting for 46.8% of all revenue, and has likely picked up some of the 2.5 million players over the last year.
PlayStation’s July 2021 highlights Fortnite as the second most downloaded F2P game across PS4 and PS5, ahead of Warzone and Apex Legends. This suggests that they aren’t struggling to bring in new players as well keep older players invested.
As for other consoles, Fortnite was a launch title for the Xbox Series X and S, meaning that it has hit yet another new platform.