Epic Games. – 30/70 obsolescence.

Epic challenges the 30/70 revenue split.

• Not content to disrupt the status quo on Android (see here), Epic’s moves against Valve are bearing fruit sending a strong signal that the traditional 30/70 platform developer split is now obsolete.
• Epic has launched its own app store on PCs to challenge Valve and is beginning to win some big-name exclusives much to Valve’s chagrin.
• Rather than rest on the laurels of the huge success of Fortnite, Epic Games is using the proceeds and the market power that the game generates to break the existing status quo in the platform developer relationship.
• The terms of this relationship were set by Apple over 10 years ago when it took a 30% cut of the revenue earned by a developer in order to meet the costs of running the app store.
• Google, Epic and other platforms have followed suit and this has become an industry standard.
• Back in 2007, this was a reasonable deal to strike as the market was nascent and Apple’s intention at the time was to have the app store break even and no more.
• The idea was to use the stickiness of the app store to drive loyalty to the hardware which has worked spectacularly well.
• However, now that apps and services on mobile devices have become a trillion dollar industry, the notion of a 30% cut for the platform provider is open to question.
• This is because the platforms are now so large, that a 30% cut dwarfs the costs of running the platform making the app stores a big profit centre.
• However, because each platform outside of China is essentially controlled by one player (Apple, Google and Valve), no one has been able to get a foothold until now.
• Fortnite is so popular that users will download the Epic Games store onto their devices in order to get access to it which has given Epic the opportunity to disrupt the status quo.
• Both Google (see here) and Valve (see here) are affected by this and in Valve’s case, this is almost certain to result in it having to cut its revenue share to 12% to match Epic.
• Valve currently offers more functionality for users and has a bigger community, but I think that Epic will catch up given its clear strategy to move from content to communities (see here).
• The net result is that competition is beginning to emerge for app distribution on both PCs and Android devices which means lower prices for users and higher revenues for developers.
• The one hold-out is Apple which has complete control of the platform but once a new split becomes the norm, Apple is likely to come under withering pressure from developers to fall into line.
• Having the best quality app store is a core part of the iOS proposition and so it is in Apple’s long-term interest to keep developers happy.
• However, it may take a while as Apple cannot be seen to have given in too easily.