A Whole New ($1.5b) World: Epic + Disney

Last week, Disney announced its $1.5b investment in Epic Games (press release, trailer video). This sparked a flurry of conversations about what this means for the gaming industry, Epic Games, Disney’s IP strategy, and the future of the User-Generated Content (UGC) vertical. In short, Disney’s investment is indicative of a broader theme around gaming: this medium is where the attention of 3.3b consumers is (especially for the younger generations) and increasingly so for the more than 100m new gamers who enter the industry every year.

Gaming commands an incredible amount of time and therefore IP holders need to be there. As Bob Iger, Disney CEO, mentioned in his interview on CNBC, some demographics are investing equal to or more time in gaming than they are in movies and TV.

Based on their press release, it seems that Disney is working with Epic Games to create a virtual Disney theme park that invokes nostalgia by referencing elements of their old game Virtual Magic Kingdom, merging past and present gaming experiences. Unlike past IP integrations with Fortnite that have largely been around cosmetic items and skin pack sales, this time is different. We believe this vision of multiple virtual theme parks will unfold due to the size of the Disney investment ($1.5b), the IP integrations they want to make (“Disney, Pixar, Marvel, Star Wars, Avatar and more”), and the visionary image above that they released (showcasing branded islands and worlds; not simply skin integrations). To that end, we believe this partnership is a  significant event; however, it will be immensely hard to execute.

However, the most interesting part of the Disney announcement is not that we will soon be able to play in Star Wars or Frozen-themed worlds (made by the best-in-class creators at Epic Games), but that this investment is timed on the back of Unreal Editor for Fortnite (UEFN)’s massive success in UGC the past 6 months. In short, the enhanced integration of top tier IP adds further fuel to the growth of the UGC vertical of gaming.

As more IP comes into the gaming space, those same IP owners are spending a considerable amount of time pursuing partnerships and integrations with the two leading companies in the UGC space: Roblox and UEFN (Epic Games). However, for game creators, these two platforms are distinct in how they are growing their ecosystems.

Roblox

Roblox (RBLX, $26.7b market cap as of market close on February 16th, 2024) was the pioneering UGC platform that effectively defined the category. Founded in 2004, the company built a platform with tools for creators to build and launch their own games. In March of 2021, the company IPO’d and, as of 4Q23, the company has over 71m daily active users (+22% y/y) and $750m in quarterly revenue (+30% y/y).

Roblox’s growth is clearly shown in the chart below, which outlines not only the growth in DAUs (daily active users) but breaks it out by U13 (under the age of 13) and O13 (over the age of 13). From its inception, the founders envisioned Roblox becoming not just a game platform but a social platform that expanded beyond just kids/youth. The industry has called this process “aging up”, which Roblox is successfully in the process of doing. This is clearly evidenced (chart below) by a relatively stable/growing number of U13 players and a notable acceleration in the adoption by O13 players.

Epic Games (UEFN)

Epic Games (private company, $8.1b in total capital raised to date) are the owners of Fortnite, Unreal Engine, Epic Games Store (EGS), and Rocket League. Disney’s $1.5b investment is rumored (The Information) to be at a valuation of $22.5b, which would result in a 6.6% ownership stake for Disney. If the $22.5b valuation is accurate, this would be a down round to the last few rounds at $28.7b (April, 2021), $42b (November, 2021), and then $31.5b (April, 2022). They join a cap table alongside other large IP holders like Lego (KIRKBI), Sony and Tencent, as well as other top tier investment firms like BlackRock, Fidelity, GIC, KKR, Altimeter and more.

In the past year, Epic launched UEFN, a creation tool and platform that allows for content/game creators to create, develop, modify and launch their own games (which are called “Islands”) on their platform. The launch of UEFN is in direct competition with Roblox, yet they are sharing 40% of revenue with creators vs Roblox who shares 24-29%.

2 Key Differences: Roblox vs UEFN

There are many differences between Roblox and UEFN. Today, we would like to only highlight two of them that we believe are the most significant:

1) Creator payouts: UEFN is sharing 40% of revenue with creators (engagement payout: attracting new players and player retention) vs Roblox who share 24% (in-game purchases) plus 4.8% (engagement-based: also known as “premium” revenue). Roblox has found great success with their model (primarily in-game purchases driven) yet UEFN is going all in on the “engagement model” (mirroring the secondary revenue-share strategy at Roblox).

Takeaway: it is too early to tell whether UEFN’s engagement payout strategy will be fully accepted by creators (we think it likely will over time) while Roblox’s in-game purchases strategy is well-proven and has worked at scale.

2) Platform dynamics: Creators on UEFN get paid out of the 40% pool based on engagement, yet that engagement is calculated to also include Fortnite itself. In essence, creators (usually small) on UEFN are directly competing with Fortnite (a behemoth). This dynamic of the platform owner (Epic Games) effectively competing with the third-party creators on the same platform that they own is something that Roblox has explicitly avoided. To date, Roblox has had the intentional strategy to not be a publisher or own any game IP on their own platform.

Takeaway: we believe there will be friction with the UEFN creator community around the transparency of how “engagement revenue” (UEFN) is calculated. In Roblox, creators have been frustrated by the lack of transparency of how “premium revenue” is calculated, however, it is not as big a sticking point because it is a relatively small portion of revenue. We think the creator community in UEFN will expect a higher standard of transparency in order to trust that Epic Games is not unfairly weighting the payouts towards their internally-owned games (i.e. Fortnite).

New Entrants Are Coming (Quickly)

We firmly believe that the growth of UGC space is going to continue. The success that Roblox unlocked is now front and center for the future of Epic Games with their UEFN strategy. It is worth highlighting that early data shows that UEFN’s recent success does not seem to be cannibalistic to Roblox’s momentum. It is not a zero-sum game, as the UGC vertical is expanding rapidly with more players, more creators, and more revenue.

Looking ahead, we do not believe that the UGC space will be a duopoly. More entrants will emerge from both the startup landscape (where Roblox emerged from) and established gaming companies (like Epic Games). This segmentation across UGC will vary by game genre, aesthetic, audience, revenue share, and geographic concentration. Like we have seen across many verticals of gaming before, the rising tide lifts all boats, new boats are created, and specialization results in better experiences for both creators and players.

Takeaway: Disney’s $1.5b investment into Epic Games shows a major initiative for larger IP integrations into virtual worlds. As further IP integrations emerge, the UGC vertical is a perfect fit for amazing and collaborative experiences between IP holders, game creators, and players. The UGC space has been spearheaded by Roblox to this point but now Epic Games has entered the scene with UEFN, which is off to a fantastic start.

Roblox has a revenue share of 24-29% for creators vs UEFN at 40%, but their models around in-game purchases vs engagement payout is a stark difference in how that revenue is calculated and shared with creators. Additionally, Roblox does not own IP on their platform while Epic Games owns Fortnite (which is effectively competing for engagement alongside smaller studios).

We believe the UGC vertical will continue to expand rapidly and this will attract new entrants from both startups and large gaming corporates.