Playbooks

1. Good companies find gold in a rush. Great companies sell jeans and pickaxes to everyone who pans. The best companies sell jeans, pickaxes AND find more gold than anyone else.

Epic's two-part business model of the Unreal Engine plus Fortnite (and other games and experiences) is like AWS plus Amazon's consumer facing businesses: not only do they create and sell the infrastructure that powers a whole industry, but as their own "first and best" customers they can use its features most effectively and inform their own future roadmap of what to build.

2. "Games as a Service" (embodied by titles like Fortnite, Roblox, Minecraft, League of Legends and Honor of Kings, etc) is a revolution that's unlocking value on the same order of magnitude that SaaS did for software.

Much like SaaS apps, GaaS experiences can be built by small teams with a creative insight, in a capital-light fashion on open, best-in-class infrastructure that's cheap to rent (Unreal Engine or Unity). They can be designed to address initially small or niche-seeming use cases and desires (e.g. Battle Royale), but then adapt and scale elastically when they strike a rich vein. And perhaps most importantly they monetize via ongoing subscription and virtual economy revenue that aligns with actual user engagement, vs one-time upfront fees on boxed software.

3. Zero (or low) marginal cost businesses are special opportunities.

• Anytime you can sell something for a significant price that costs you little/nothing to create incremental copies of — e.g. Fortnite skins — you have the potentially to do very, very well.
• People sometimes forget, but this dynamic also existed before the internet: the media business (both content and distribution) was perhaps the best and most consistent industry of the 20th century from a Return on Capital perspective. There's a reason Warren Buffet called Tom Murphy and Dan Burke of Capital Cities the best capital allocation team of all-time — they were playing on a field tilted in their advantage.
• That said, the internet has brought this dynamic to MANY more sectors of the economy, and its next iteration (the metaverse) will extend it to even more.

4. Capital scarcity creates a forcing function for disciplined and effective capital allocation. Capital abundance often leads to undisciplined and ineffective capital allocation.

• Epic created immense value during its 22 years as a bootstrapped company. While its first $330m capital raise from Tencent in 2012 has ultimately led to even more value creation, the first ~4-5 years post-investment saw the company almost lose its way with multiple long, costly and undisciplined game projects for which actual market demand was unclear.
• When the company ultimately re-captured its mojo with Fortnite, it was by going back to its roots with a fast-follow project built by a small team in response to clear market demand — with a unique twist that made it special.

5. Retaining "control" — over your distribution, your margins, your product decisions and ultimately your company — allows you to build the biggest possible platform in the long run.

The old saying that "you can't build a really big company on someone else's platform" is usually true. Multiple times along its journey, Epic and Tim chose to go the harder, longer, and riskier "independent" route vs. relying on publishers, retailers or (now) app stores.

6. Iteration is the in-practice implementation of compounding.

Iteration is a standard dogma in startups and engineering (e.g. "agile", etc.), and compounding is a standard dogma in (value) investing. In practice they're two sides of the same coin: the small iterations that Epic does year in and year out — on both the Unreal Engine and Fortnite + other GaaS experiences — compound to create extraordinary value. Or put another way, within operating businesses like Epic, dollars don't just compound on their own. Retained earnings need to be re-deployed every day to build that next feature or service that future developers (and non-developers!) can build on top of.

Links

• MTV Cribs, "Tim Sweeney Edition"

Carve Outs

Ben's "3 part carve out":

• Original video demo of Unreal Engine for filmmaking
• Video on "The Volume", showing how the Mandlorian was filmed
• Deep technical dive on filming The Mandalorian

David: Asimov's Foundation Series