On July 27, 2019, Fortnite celebrated its second birthday by hosting a huge extravaganza, fittingly dubbed as its first World Cup, and gave away millions of dollars in prizes (over $30 million by some accounts). Kyle "Bugha" Giersdorf, a 16-year-old from Pottsgrove, Pa. won $3 million and the bragging rights of becoming Fortnite's first World Cup champion.
- Fortnite is the most popular battle royale game world wide, and generates huge revenues even though it's offered for free by developer, Epic Games.
- Fortnite leverages the concept of "exclusivity" and merges it with an enjoyable (fun) user experience with a social component to reap immense rewards.
- Fortnite's future plans include venturing into the realm of esports, contemplating the incorporation of a social hub into the game itself, and emphasizing smartphones to unlock the immense, untapped potential of the Chinese market.
Fortnite, created by Tim Sweeney and released through EPIC Games Inc., is a free-to-play video game set in a post-apocalyptic, zombie-infested world. By any measure, it has been a huge success. The game's format isn't exactly out of left field, given that the industry is already ripe with these type of "shooter" games, but it did launch as an underdog with muted prospects. There are variations to the free-to-play business model, but everyone can play a fully functional game at no cost.
Fortnite, unlike its peers, was offered for free, which has proven to be the catalyst that has propelled its stunning, instantaneous, success. In the first 10 months, since its release in July 2017, Fortnite amassed an audience of 125 million players and netted $1.2 billion in revenue. When the Fortnite App launched on iPhone on April 1, 2018, it reportedly made $2 million a day from players on Apple Inc.’s (AAPL) iOS. While other games have netted $1 billion in their first year after launch, Fortnite was the first to do it by releasing their game for free.
While other games have netted $1 billion in their first year after launch, Fortnite was the first to do it by releasing their game for free.
Additionally, for 2018 alone, it brought in revenues of $2.4 billion, according to data reported by SuperData Research. According to TechCrunch, Epic Games, which was reportedly valued at $15 billion in October 2018, grossed a $3 billion profit in 2018. As of March 2019, it has been reported that there are 250 million people playing this game.
Aside from the fact that it’s free, the lure of Fortnite lies in its simplicity in that there is one map and one game mode, with additions that make the user experience much more enjoyable. Whether the multiplayer shooting game is here to stay or is merely a blip that has momentarily captivated the gaming world, one thing is abundantly clear—following the release of Fortnite, the gaming industry, as a whole, must figure out a way to respond to the free-to-play model, or else run the risk of being thoroughly dominated by Sweeney's creation.
The Business Model
What Is Fortnite?
Fortnite is a multi-platform video game, meaning it can be played on computers, mobile devices, or consoles, including Sony’s (SNE) PS4, Microsoft’s (MSFT) Xbox One, and Nintendo’s (OTC:NTDOY) Switch. In the battle royale game mode, 100 players drop onto a storm-torn island and survive, fight, or build their way through a shrinking map to be the last one standing. The game is played, watched, and talked about obsessively by teenagers, celebrities, and athletes alike, which is the type of marketing muscle that allows Fortnite to make money, despite being free to play.
While many popular shooting games, including Activision Blizzard’s (ATVI) Call of Duty franchise, attempt to mimic reality with graphic violence, Fortnite sets itself apart with its inclination towards comic mischief and customizable whimsy. Although players are competing for the coveted “Victory Royale,” they are also given the option to team up with one another. As one analyst put it, Fortnite “is a social experience at heart, encouraging friends to play together.”
But Fortnite fans not only play together, they also watch together. On March 14, a game of Fortnite pulled in 630,000 concurrent viewers on Twitch TV, Amazon’s YouTube-like service for watching competitive video game streams, shattering the previous record of 388,000. Fortnite has since amassed almost 30 million viewers, nearly doubling the streaming service’s runner-up, League of Legends, owned by the Chinese internet company Tencent Holdings. (Tencent Holdings also purchased 40% of Epic Games, Fortnite’s parent company, in 2013.)
The record amount Fortnite amassed in 2018 from an audience of over 200 million players.
How Does Fortnite Make Money?
By the end of 2018, Fortnite had become the highest grossing video game on consoles, according to a study conducted by SuperData Research, a division of Nielsen and a leading provider of gaming market intelligence. However, while most console releases make money from selling a hard copy or digital version of the game itself, Fortnite’s revenue comes entirely from microtransactions.
The monetization occurs when the player wants those additions, dubbed "costumes" and "skins," which they have to buy. Combine this with a unique feature called the "Battle Pass," which costs $10 for a quarterly subscription, and “V-bucks,” and you have the ingredients that propelled Fortnite into a multi-million dollar a day phenomenon. Bear in mind that one can continue to play Fortnite for free, but, invariably, a vast majority of the players feel compelled to pay for the ancillary products that generate vast amounts of revenue for Epic Games.
So, what is the secret behind their success? How have they managed to make money by giving away their product? The answer, with the benefit of hindsight, is that the creators have managed to leverage the concept of "exclusivity" and merge it with an enjoyable (fun) user experience with a social component to reap immense rewards.
Battle Pass, for all intents and purposes, generates the bulk of Fortnite's revenue. The $10 per quarter fee gives the purchasing player “exclusive” access to the game’s system updates, like changes to the map and character features, that the free player will not have. Additionally, it allows the player to buy the optically pleasing additions for a cheaper price than if they were to buy them separately. This is not new. In fact, it is quite similar to buying a grocery store card that allows one to buy a product at a member price that is lower than the non-member price. Again, the concept of membership making one feel that they are “special.”
In Fortnite, players have the option to spend money on in-game currency, called “V-Bucks,” which can be used to make in-game purchases. Although “Bonus Deals” incentivize players to purchase higher quantities of the in-game currency, the exchange rate is roughly one USD to 100 V-Bucks.
The key to Fortnite’s business model is that players cannot use V-Bucks to buy anything that will actually affect their performance in the game, which has proven disastrous in the past. Instead, the currency is used to purchase cosmetic skins, dances, and pre-released game modes, which range from 200 to 2,000 V-Bucks ($2 to $20).
Many accessories in the Fortnite shop are available on a limited-time basis, prompting players to purchase coveted items before they disappear from the virtual store. "On the revenue side, [Fortnite has] done something that's really unique, which is come up with a perception of exclusivity," said Michael Pachter, an analyst at Wedbush Securities. "If you see another player in a leopard skin and go to the store and see it's no longer available, you think, 'Shoot, I've got to move on it next time.'"
This is where the social aspect of Fortnite intersects with its finances. In a study of 1,000 Fortnite players by LendEDU, nearly 69% made in-game purchases, averaging $84.67 each. All of that commerce translates into some of the highest rates of revenue-per-user in the industry and operating margins north of 50%, according to analysts.
Playing Fortnite for free would be fun for a while, but one suspects that whatever sense of accomplishment the user gets from playing would probably diminish quickly. But by purchasing “costumes,” “skins,” “Battle Passes.” and "V-Bucks," players enhance their user experience, which appears to add to their sense of achievement and compels them to continue playing. Once they buy a Battle Pass, and are exposed to the “rewards” that it offers, they are loathe to going back to playing the free version. Aside from the psychological enticement of “exclusivity,” the prospect of unlocking more content for their avatar appears to be what gives the user enjoyment, and they are willing to continue paying for this.
How Has Free-to-Play Affected the Gaming Industry?
In May, Fortnite generated $318 million in revenue for North Carolina-based Epic Games, according to SuperData, beating out Electronic Arts' FIFA 18 and Blizzard Activision's Call of Duty: WWII, which charge for downloads and other in-game purchases. However, according to BTIG analyst Brandon Ross, Fortnite may end up benefiting its competition because it has drawn new players into a genre that previously struggled to expand beyond its core audience.
“There is a need in the space for innovation in the shooter genre,” said Ross, adding that Fortnite’s cartoonish style demonstrated that there is a demand from non-gamers and more casual gamers. “There were people who wanted to be a part of what was going on in gaming,” he said, "and just needed the barriers to entry to be removed." Even so, Fortnite became a national and global phenomenon so quickly that industry leaders, such as Take-Two Interactive Inc. (TTWO), and Electronic Arts Inc. (EA), have not been able to offer much in the way of competition.
Recently, Blizzard Activision announced the development of a Fortnite-style, Battle Royale game mode for its newest release, Call of Duty: Black Ops 4. While the video game giant appears to be following in Fortnite’s footsteps, it is sticking to a familiar business model in that Call of Duty will cost $59.99 and offer in-game purchases. This led many gaming analysts to upgrade Activision Blizzard after reviewing positive responses to the game mode.
What this suggests is that many in the analyst community attribute Fortnite’s success to its innovative game mode rather than its business model. So, as long as Fortnite continues to be innovative then it should continue to dominate. But what happens if that spark of creativity wears out? What if the release of new skins, new dances, and new features does not translate to the expected amount of microtransactions that are the foundation of Fortnite's profitability?
Epic Games seems to be wary of just such an outcome and has made efforts to diversify the Fortnite experience in order to stay ahead of its competition. This can be seen by the frequent updates to keep the game interesting, venturing into the realm of esports, contemplating the incorporation of a social hub into the game itself, and emphasizing smartphones to unlock the, heretofore, immense, untapped potential of the Chinese market.
There is mounting evidence that Fortnite mania has peaked which, in and of itself, should not come as huge shock. What would have been shocking, possibly even disconcerting, is if it had been able to sustain its popularity, which reached fanatical proportions following the release of a free "battle royale" version in 2018. Data for the highest earning games in the month of June 2019, released by Superdata, shows a significant drop in Fortnite’s profits in relation to both its past performance as well as its competitors.
The key challenge for any product is to keep its existing customer base while trying to attract new customers. In the gaming industry, this is especially true given the fickle nature of the players, mostly younger with limited attention spans, who are always on the lookout for the "next big thing."
A more ominous sign can be seen in Superdata's June 2019 data. Fortnite made $203 million in May 2019 and retained its number one spot in the "console" category. However, in the very next reporting cycle it relinquished that as well to FIFA 19, further proof of its reversion to the mean, albeit at the upper end. Superdata provides context by citing that "console continues to face headwinds on in-game spending, partly due to the decline in Fortnite."
This drop off in revenue could just be a one-of occurrence or could signify something more alarming for Epic Games. The most obvious conclusion is that there is a decrease in the number of players and/or their spending is declining. The consensus appears to be that Fortnite, for all its success, lacks variety, especially when compared to its main competitors. So far, the foray into esports has not translated into real value, and Epic Games has not indicated that it will adopt a more traditional business model.
While it has slipped, Fortnite it is still considered to be a cash cow for Epic Games, but whether it continues to be a consistent moneymaker going forward will largely depend on whether it can be successful in adapting to a quickly changing marketplace.