Epic Games – Party time.

Epic embarks on a trip around the Digital Life Pie.  

• Epic Games is not resting upon the massive success and cash generation from Fortnite but is instead putting this money to work to build what may become a fully-fledged ecosystem in its own right.
• On top of its recent purchase of Psyonix (see here), Epic is also buying Houseparty which is a video chat app that allows up to 8 people to share a single conversation.
• Houseparty has been around for a while but has fallen on hard times as it has failed to expand its user base much beyond 10m MaUs and may now even be seeing declines.
• However, there is nothing wrong with the technology that underpins the service which is what I think has spurred Epic’s interest.
• Houseparty represents an opportunity as, while the technology is good, no one is really using it at scale meaning that the company can be acquired reasonably cheaply.
• This will save Epic Games from building a video chat system itself which is an obvious place to go now that it has so much traction with Fortnite.
• Fortnite already has 250m users and is still growing and on top of games, is showing signs of potential to spread its appeal to Media Consumption (see here).
• This acquisition raises the possibility for Fortnite to also move into the Digital Life segment of Instant Messaging and would encourage its players to spend more time within the environment rather than communicating outside.
• Consequently, I suspect that the first step for Epic Games will be to take the technology and integrate it into Fortnite to make communication between players easy and seamless.
• If I assume that Fortnite gains traction in both Media Consumption and Instant Messaging (that is a big if), then its coverage of the Digital Life Pie would increase from 22% where it is today to 64% putting it ahead of both Apple and Google.
• This would put it in second place behind Tencent globally.
• It is still very early days but Fortnite is increasingly showing the potential to leverage its popularity in Gaming to drive engagement in other services.
• This is how a single service becomes a fully-fledged ecosystem which is exactly the strategy that Google took during the early days of the internet.
• The problem with this strategy is that it can be extremely expensive, but Epic has excellent cash flow coming from the popularity of Fortnite which it is investing heavily in driving its proposition forward.
• Epic Games has also shown impeccable strategy since Fortnite began to show real traction and it is currently challenging both Google Play’s dominance on Android and the Steam Store’s dominance on PCs.
• There is still a long way to go but if there is a company in this space that is worth watching at the moment, it is this one.