Epic Games

We go deep behind the "epic" story of a plucky game developer from Cary, North Carolina (by way of Potomac, Maryland) which, after bootstrapping for its first 22 years, has quietly morphed into an $18b juggernaut that may become the most important technology company for the next evolution of the internet. And oh yeah, its founder, CEO and controlling shareholder? He cares more about land conservation than he does about money, he's beholden to no one and has the firepower of China's biggest internet giant behind him, and he's willing to stare down Apple, Google and anyone else who doesn't support his vision of an open and equal-opportunity internet future in a fight to the death. You'll want to buckle your seats for this one!! Sponsors: Vanta: https://bit.ly/acquiredvantaServiceNow: https://bit.ly/acquiredservicenow26Legora: https://bit.ly/acquiredlegoraStatsig: https://bit.ly/acquiredstatsig26 More Acquired! Get email updates https://www.acquired.fm/email with hints on next episode and follow-ups from recent episodesJoin the Slack http://acquired.fm/slackSubscribe to ACQ2 https://pod.link/acquiredlpMerch Store https://www.acquired.fm/store! © Copyright 2015-2026 ACQ, LLC New! We're codifying our own Playbook notes and takeaways from each episode and posting them on our website. Check it out: www.acquired.fm/episodes/epic-games http://www.acquired.fm/episodes/epic-games Links: MTV Cribs, "Tim Sweeney Edition": https://www.youtube.com/watch?v=lRGUKMKadJ8Carve Outs: Ben's "3 part carve out": https://www.youtube.com/watch?v=bErPsq5kPzE - original video demo of Unreal Engine for filmmakinghttps://www.youtube.com/watch?v=gUnxzVOs3rk - Feb 2020, video on "The Volume"https://ascmag.com/articles/the-mandalorianDavid Asimov's Foundation Series: https://www.amazon.com/Complete-Asimovs-Foundation-Foundations-Prelude/dp/B01EFDEMS8Sources: (available on Journal at https://usejournal.com/app/space/journal:space:project/7efa6d43-a601-4784-8e36-1edda2b1b451 )

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Ben Gilbert?

  Yeah, I actually have on some Zoom calls been listening to Spotify in the background of my headphones, but it makes the video calls so much better.

• 0:08David Rosenthal?

  That's so good. Just like low in the background, you've got Spotify going? That's amazing.

• 0:12Ben Gilbert?

  It's like, nice of you to join me in the club for our meeting.

• 0:17David Rosenthal?

  That's really smart.

• 0:31Ben Gilbert?

  Welcome to season seven, episode three of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert.

• 0:40David Rosenthal?

  I'm David Rosenthal.

• 0:42Ben Gilbert?

  And we are your hosts. Now, for everyone new to the show, and for everyone who's been with us for a while, it's been a while since we introduced ourselves. So we wanted to tell you a little bit about who we are. I am the co-founder of Pioneer Square Labs in Seattle. We are a startup studio and early-stage venture fund, and my background is primarily in founding companies and product management.

• 1:03David Rosenthal?

  And I have been a longtime venture capitalist. I'm currently an independent angel investor and advisor to startups based in San Francisco. So I come at things from the venture and investing side.

• 1:16Ben Gilbert?

  Most importantly, we are excited to be with you today as peers and practitioners in the industry, diving into stories that I think we all talk about at the water cooler when that was a thing.

• 1:26David Rosenthal?

  The Zoom cooler.

• 1:27Ben Gilbert?

  The Zoom cooler, exactly. Well, today, we will explore what happens when an idealist has full control over a product with perfect global product market fit, unbelievable economics, and has the leverage to shape the world to his idealistic will, even potentially at the expense of his own business. Today, we talk about Epic Games, makers of Fortnite and the Unreal game engine. You probably know of them since Fortnite is an absolute international phenomenon, the most played game in the world, and for parents out there, the way Gen Z hangs out with each other. Or because they are currently the most credible threat to the world's largest company,

• 2:08Ben Gilbert?

  Apple. Not to mention, of course, the incredible amount of attention Fortnite consumes is a threat to Facebook's advertising business model. Netflix cites it to their investors as the number one threat. And Epic is really the primary US ally of the quiet Chinese giant, Tencent. But their ambitions expand far beyond any of this, and we can't wait to bring you the full story today. And for the bootstrappers out there, this may just be the most successful bootstrapping story of all time, going 22 years from founding before raising a dime of investment. So strap in.

• 2:43David Rosenthal?

  Incredible. Can't wait to dive into this one.

• 2:46Ben Gilbert?

  Well, as always, if you love Acquired and you want to hone your craft of company building, you should join the community of Acquired Limited Partners. You'll get access to the LP Show, where we dive deeper into the fundamentals of company building and investing, in addition to our monthly LP calls, where we talk with all of you directly, and of course, our book club and the Zoom calls that we have with the authors. Our most recent episode on the LP Show was on the fundamentals of venture capital, discussing how VC firms make their investment decisions. So tune in if that's of interest to you as a founder or active or aspiring investor. If you aren't already a limited partner, you can click the link in the show notes or go to acquired.fm/lp and all new listeners get a seven day free trial.

• 3:28David Rosenthal?

  We realize too, while we're introducing and explaining ourselves here, it's been a while since we've talked about why we call this thing the Limited Partner Program. It's because limited partners are the folks that give capital to VCs and venture firms and make everything possible. And that's what you guys are for us, too. You are super special. Everyone who is an LP, we thank you. And if you want to become one, can't wait to have you.

• 3:52Ben Gilbert?

  Yep. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF, then everyone would nod and you're done. But in an AI-first world, that doesn't hold up anymore.

• 4:13David Rosenthal?

  Yep. Your risk surface changes every week now. A vendor turns on an AI feature, or someone writes in a new model without telling IT, and your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote-unquote "shadow AI" running with no security review at all.

• 4:34Ben Gilbert?

  Right. And that's where Vanta comes in. They're the leading agentic trust platform, meaning they've built the thing that closes the gap. And the way that they close that gap is Vanta Agent. Think of it as a GRC engineer, that's Governance, Risk and Compliance, except that it's software and it doesn't sleep. It finds the issues, drafts the fixes, and cuts the time that you'd spend on vendor assessments in half.

• 4:55David Rosenthal?

  In half! Which is exactly why more than 16,000 companies today run on Vanta. Companies like Ramp, Cursor, and Snowflake all stay audit-ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

• 5:14Ben Gilbert?

  And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here, and literally hundreds of Acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at vanta.com/acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off, and just tell them that Ben and David sent you. All right, listeners. Time for our episode on Epic Games.

• 5:46David Rosenthal?

  Woo, let's dive in. Before we do, we owe a lot of thank yous on this one, on the research to a whole bunch of people who have written a lot and done a lot of great reporting and analysis of Epic, Apple, Tencent, everything going on here. Three in particular, I wanted to call out, though. One is Matthew Ball and Jacob Novak, who wrote just an awesome six-part primer on Epic and all the dynamics around the company. We'll link to that in the show notes. Definitely go read that. Second is the gaming website Kotaku did this wonderful interview with Tim Sweeney, the CEO and founder of Epic back in 2011, when I think he was

• 6:30David Rosenthal?

  inducted into the Gaming Hall of Fame. So many of the quotes that we're going to use from Tim, direct quotes in this episode are from that interview. And then finally, this is so fun, I finally get a chance to use my favorite non-tech industry podcast out there as a source for an acquired episode.

• 6:47Ben Gilbert?

  You've been waiting for this forever.

• 6:49David Rosenthal?

  I've been, Ben knows, I've been wanting to do this forever. Wizard and the Bruiser, such an awesome podcast. It's like basically acquired for nerd history.

• 6:59Ben Gilbert?

  Then what are we?

• 7:01David Rosenthal?

  We're business nerd history.

• 7:03Ben Gilbert?

  Yes, they're more game nerds, I suppose, more business nerds.

• 7:05David Rosenthal?

  Yeah, games and like anime and stuff. They did a deep dive episode on Epic last year, which was super helpful, jumpstarting our research. So thanks, guys, as always.

• 7:15Ben Gilbert?

  And for everyone, we've put all of our links to every source that we use in the show notes, so feel free to peruse those. And a special shout out to Griff in the Acquired Slack at acquired.fm/slashslack, who recommended the Matthew Ball piece that really got us started sort of down the rabbit hole of researching this in the first place. So awesome to have listeners help us do some of the research.

• 7:35David Rosenthal?

  Always great. All right. So we're going to get to all of the high drama here around Fortnite, Tencent, Apple, the lawsuits, et cetera. As always on Acquired, we start way back, and I think it's particularly important here because I don't think you can understand really what's going on or Epic without understanding the man who is its founder and CEO, Tim Sweeney. So who is Tim? He was born in the year 1970 in Potomac, Maryland.

• 8:08David Rosenthal?

  He was the third of three brothers, but his older two brothers were much older. So one was 10 years older than him and the other one was 15 years older. So while he was the youngest of three brothers, he, uh, he was probably almost kind of like an only child for a lot of his life. I mean, by the time he was, I guess, would have been in elementary school, both of his brothers were probably in college or out of college at that point.

• 8:31Ben Gilbert?

  Yeah, and I think he, he started programming super young, right? Like he was a 11-year-old game programmer?

• 8:36David Rosenthal?

  Yeah, so it's all wrapped up in this. So his dad worked for the Department of Defense. He worked at the mapping agency as part of the intelligence unit where they were creating military maps from satellite imagery, uh, kind of doing, um, like Palantir and Skybox type stuff like way back in the day before those companies. So early on, young Tim realizes two things about himself. One is that he loves tinkering with like the guts of how things work, like both mechanical and, uh, as we will soon see, computers and technical things. Two is he also actually loves business. Uh, and this is a pretty rare combination.

• 9:16David Rosenthal?

  Like he becomes a just fantastic engineer and a fantastic business mind. But he doesn't love business for the money. I mean, this is a man who really does not have a lot of use for money. Um, he lives in North Carolina. He's not married. He doesn't have kids. He doesn't hang out with celebrities. Yeah, he's like bought a few fancy sports cars and a nice house and stuff, but you know, he mostly, he's talked about this to the Wall Street Journal. He mostly eats Bojangles fried chicken and drinks Diet Coke. He wears cargo pants that he probably buys for about 20 bucks. And what he does is he basically writes code and, um, works on Epic. And, uh, that's what he cares about in life, which is, it's just so refreshing, like seeing

• 10:01David Rosenthal?

  that and this man who's running such an important internet company versus all the other larger-than-life tech CEOs out there.

• 10:07Ben Gilbert?

  You say he loves business. He's more of a business engineer. Like, he's not a mogul. He's not leveraging every component of his business to give him the most cash. He's like excited about what business gives you the potential to do in the world. And by pulling all the levers, I mean, it really isn't bringing an engineering mindset to the business or a tinkerer's mindset.

• 10:30David Rosenthal?

  Yeah, and he's now taken most of his wealth and has been applying it to land conservation in North Carolina, which is just so different than you see from so many people these days.

• 10:42Ben Gilbert?

  One more point to just like paint the classic computer engineer that is Tim Sweeney is David, you and I both watched this video from, I think, 2008 where they interview Tim. And he's got his sports car and his nice house. And he's like, here's my dining room. Here's my dining room table. I've never eaten at it, mostly kind of go to Burger King. It's like everything you would sort of expect from like an awesome video game programmer, not a CEO worth, I don't know, four or $5 billion.

• 11:11David Rosenthal?

  Totally. All right. So how did he get this way? Well, Ben, as you mentioned, when he's really young, like five or six, he starts tinkering around and disassembling like lawn mowers and then building them up into go karts and racing them around. I feel like his parents must have, by this point in time, just been tired of like raising little kids for so many years. They're just like, all right, Tim, do whatever you want. And then a couple of years later, when he's about nine or 10 years old, a video game arcade pops up pretty near his house. This is like 1980 timeframe. So this is kind of Nolan Bushnell, like height of Atari, you know, just after Pong, but like Space Invaders was a thing. And Tim becomes super fascinated by this arcade.

• 11:55David Rosenthal?

  And eventually his parents get him an Atari 2600 at home. But it's not so much because he loves playing the games, although he thinks they're interesting. He's interested in how they work and in particular, like how the cabinets work. So he talks about the Atari 2600 that he got. He's like, yeah, like I liked playing some of the games, but it was a pretty crappy machine compared to the cabinets. Like, he wanted to know how these things work. Then... A little bit after this time, after he started getting into games and this being his first exposure to computers, he goes out to visit his oldest brother Steve, who had moved to San Diego and was working on a startup in the computer industry there at that time. Remember, this is like 1981, 1982, so kind of just at the start of the

• 12:40David Rosenthal?

  PC revolution. And Steve had bought a bunch of brand-new IBM PCs that they were using at the company. And so he shows young 11-year-old Tim how to use these things, how to program it in BASIC. And Tim's like, "That's it." He's found his calling in life. And he has this great quote, "You're trying to build a go-kart. You can spend months on something like that, and it never quite works right, but the computer would do exactly what you say. I could write in just a few hours a really impressive program. It was the ultimate machine to tinker with. It was love at first sight. From that point on, I tried to dedicate all of the time I had free to learning to do more with computers."

• 13:22Ben Gilbert?

  Which, for anyone who's a programmer out there knows, the computer always does exactly what you're telling it is both a gift and a curse. Because if it's doing the wrong thing, it's just running the instructions you put in there.

• 13:33David Rosenthal?

  So Tim goes back home from visiting Steve in San Diego, and Steve must have been seeing the gleam in his kid brother's eye. So he buys, the family back in Maryland, an Apple II. And this becomes Tim's obsession. He starts making games and other programs for it. And he estimates that over the next couple of years, he would spend the canonical Malcolm Gladwell 10,000 hours teaching himself how to program. And this is what's so cool. Because remember, his dad works for DoD. He has access to early, early proto-internet networking-type stuff. So he goes on BBS systems from the Apple II, and he starts asking questions and learning from folks there, everything he needs to know about

• 14:18David Rosenthal?

  programming. So he's completely self-taught. And he makes a few games during this time, but he never really shares them with anybody. So then, a little bit later in high school is when he discovers his second passion for, for business. As Tim tells the story, it's when he gets a summer job at a hardware store. The wage that he's earning at the hardware store must have been minimum wage at the time, $4 an hour. And he's working there and he's just, he kind of realizes, he's like, wait a minute. No matter how hard I work here, or how well I do, I'm only going to earn $4 an hour for the summer. Like, this is the very programmer, engineering mind, like, working at this here. He's like, there's got to be a more optimal way I could use my time. Not because I really

• 15:02David Rosenthal?

  need the money, but just like, I could do better. So what he decides instead is, he sees that there are a bunch of lawn mowing businesses operating in the neighborhood. You know, it's summertime, cutting the grass in Maryland. And he goes around and he asks them, and he's like, hey, asks these families, how much are you paying your lawn mowing services? And they're like, oh yeah, we usually pay like 100, 120 bucks for mowing the lawn. And Tim's like, bingo. So he quits his job at the hardware store and he undercuts the market by 2X. He charges all the families in the neighborhood 60 bucks to mow their lawns. He runs the math and figures he's using his dad's tractor, that he's pulling in about 25 bucks an hour.

• 15:45Ben Gilbert?

  That feels like an insanely expensive lawn cutting for the time in...

• 15:50David Rosenthal?

  I know. These must have been pretty big lawns.

• 15:52Ben Gilbert?

  Yeah, no kidding.

• 15:54David Rosenthal?

  Either that or very high willingness to pay.

• 15:57Ben Gilbert?

  Yeah, fast growing lawns.

• 15:58David Rosenthal?

  Yeah, indeed. He has this great quote. He says, "That's when I came to a really clear realization that by trying harder and striving to find cool business opportunities, you can do far, far better than wage earners, who I was when I was working at the hardware store. At that point, it became really clear to me that there were big opportunities in the world."

• 16:18David Rosenthal?

  Super cool. So as we said, he ends up going to the University of Maryland nearby, close to home. He's not a particularly great student. He's spending all of his time, you know, on his Apple II and BBS systems. And he decides to study mechanical engineering because, you know, they have a computer science department there, but like, he thought that would be a waste of time. Like, he already knows how to program. He's gonna learn like, more interesting stuff. And he actually ends up learning a lot of math, he says.

• 16:44Ben Gilbert?

  I was gonna say, the math and the physics here seem like they'll come in really handy.

• 16:47David Rosenthal?

  Seem like they'll come in handy, yeah. On the side, though, he kept his lawn mowing business going. And then when he goes to university, he says, you know, I might wanna try and do something even more lucrative. You know, I'm an engineering major here. I really have this skill with computers that not a lot of people have at the time. What if I start doing computer consulting instead? So he starts a company. He calls it Potomac Computer Systems. And he goes around to, you know, families and businesses and helps them set up databases and the like. And that's kind of going okay. But there's part of that, or maybe unrelated, he eventually gets a 286 IBM computer. And we've talked

• 17:27David Rosenthal?

  about this on a bunch of episodes, but like, that 286 was like, that was the canonical Intel chip that was, would really unlock the PC market and take it majorly mainstream.

• 17:41Ben Gilbert?

  Yeah, I mean, this is the thing we talked about on the Intel episode, that was their business when their business of memory got destroyed.

• 17:48David Rosenthal?

  Indeed. So Tim realizes this, that there's all of a sudden, a pretty big install base out there. And so even though he kind of likes programming on the Apple II better, he sees all these other 286 IBM and IBM compatible PCs popping up. And he says, hey, there might actually be an even better business, rather than selling my time for dollars, that I could build around selling software for this nascent PC market. So he decides to do it. And he's like, okay, what software am I gonna write? To start writing software, I need to use a text editor on the IBM PC to actually write the software. And this is like, pre, you know, for those listeners out there who are engineers or familiar with

• 18:31David Rosenthal?

  engineering, pre like Vim and Emacs days. There's no good text editors. So he's like, oh, great. I'm gonna write a text editor first for other software developers. Sensing a theme here. So he sits down, he starts trying to do it, but he gets distracted and he keeps thinking about how he could, instead of writing this text editor, he can make it into a game. He has this quote, he says, "I realized, hey, you know, I could make each character on the screen have a collision and I could have the cursor be a game character and I could turn this text editor into a little game. Similar to Atari Adventure, I based it on rooms. Each screen full of text became a room. I had different graphical characters represent different gameplay behaviors. Suddenly you could build a text

• 19:14David Rosenthal?

  document and hit the play button in this editor and now you're up and running with your game." So he calls this game ZZT.

• 19:23Ben Gilbert?

  I didn't realize ZZT was the thing that was first a text editor. I knew that was his first game, but wow.

• 19:28David Rosenthal?

  It was, it was his first game, but this is what's so cool. And it really just kind of foreshadows everything to come with Epic. Because he started working on it as a text editor and like he was just describing in that quote, you know, you can kind of design a room in the text editor and hit play and then you can kind of play the game. He ships ZZT as a game with, well, he actually did it as shareware. So the first room was free and then you wrote to him and you paid to get the floppy disks with the other three rooms that were part of the game.

• 20:01Ben Gilbert?

  Of course, he would mail you.

• 20:02David Rosenthal?

  He would mail you. Yep. Which is pretty awesome in and of itself. But because it was an editor itself, anybody who had the game could then make their own rooms and could also press play on their own rooms.

• 20:14Ben Gilbert?

  Yeah. So waving my hands around of things to pay attention to in the future here is get started playing this game for free and pay later. And then thing two being, hey, this game is editable.

• 20:26David Rosenthal?

  Yep. This is when he decides, hey, I probably need a different name for this business besides Potomac Computer Systems.

• 20:34Ben Gilbert?

  And something that makes us sound like a really big company, like a big, important, you know?

• 20:39David Rosenthal?

  Yep. Like we're, we're on the same level as, you know, id Software is just getting started around this time and they have a really cool name. Why don't we call it Epic Mega Games? And of course by we, I mean Tim, because it's just him.

• 20:53David Rosenthal?

  He releases ZZT and it does pretty well. Like, he doesn't make a ton of money, but he sells a few thousand copies. Incredibly, they would keep selling the game until 2013.

• 21:04Ben Gilbert?

  What?

• 21:05David Rosenthal?

  Yeah, this is incredible. I found it in the research. So Tim's dad, Paul, ended up taking over distribution of the game. It was still just sold through this shareware model of like right to Tim and...

• 21:17Ben Gilbert?

  Well, and shareware was really big in like, I mean, I remember it from the early 90s, I guess the mid 90s, where you'd go to like, uh, software swaps or you'd go to like user groups. Uh, or like we were part of Mac Users of Delaware and so we'd go to the MUD meetings. People would demo and you'd swap software there or you'd sell software there. Cause there's no internet to go find software. So you needed to like discover it in some way from other nerds who were writing shareware.

• 21:42David Rosenthal?

  Yep, totally. And, you know, the reason shareware was attractive, especially to an indie software dev like Tim at the time was your other alternative was to try and go the retail packaged software model. Well, so to do that, you had to go get a big publisher like Electronic Arts, uh, was just kind of getting started at this time. And we did our episode with Trip on the beginnings of that industry. You know, he was thinking about it like Hollywood, like you needed these big budgets and like fund these studios. And then you had the relationships with the retailers to get the boxes into retail stores. The retailers would take 50%, you know, when all was said and done.

• 22:21Ben Gilbert?

  Which is Apple's current argument to Congress.

• 22:24David Rosenthal?

  Exactly, exactly. When all was said and done, you know, if Tim had gone the traditional publisher plus retail model, he would have only been making, you know, maybe if he was lucky, 10, 15% of the revenue, uh, that he would be seeing out of the game. Whereas this, this shareware path, he kept a hundred percent.

• 22:44Ben Gilbert?

  Pretty cool if you can get the discovery and distribution.

• 22:46David Rosenthal?

  Indeed, indeed.

• 22:48Ben Gilbert?

  And process the payments and do all the other very expensive things involved in, I feel like I'm Apple over here peddling.

• 22:53David Rosenthal?

  Oh, I know. Well, that's, it was lucky for Tim. He had his dad to, uh, you know, process the payments, i.e. open the checks and package up the floppy disks in, in mailing envelopes and send them out. So ZZT does pretty well. They, like I said, they sell a couple thousand copies of this. Tim starts looking around and one thing that he has always been really good at is observing what's going on in the market. Now, I mentioned id Software a minute ago and folks who know their gaming history know that. It was John Carmack and John Romero and would eventually ended up, end up making Doom, which we'll talk about in a minute.

• 23:30Ben Gilbert?

  And Quake, right?

• 23:31David Rosenthal?

  And Quake, yes, after Doom. But before Doom, id had released a game called Commander Keen, and it was a 2D side-scrolling game. It was a pretty big graphical leap forward versus the like, literally text editor-based games like ZZT. And so Tim saw Commander Keen out there and he said, hmm, okay, that's interesting. I should do something like that. What's a twist I could put on it? Well, what if I do it with a female protagonist? And so he basically cloned Commander Keen, but called it Jill of the Jungle instead.

• 24:06Ben Gilbert?

  I love it.

• 24:07David Rosenthal?

  Now, but because it was a 2D side-scrolling game, it wasn't just text-based. It needed actual like artwork and assets in the game. Tim wasn't capable of doing that just on his own. So he needs to recruit people. And he ends up recruiting some really great folks that he meets, you know, on bulletin board systems, again, online on this proto-internet. Folks like Cliff Blazinski, who is a 17-year-old high school student and applies to be a programmer at this big mega-company Epic Mega Games, ends up becoming one of the first employees. Cliff, known as Cliffy B, would go on to become legendary and super-important for Unreal

• 24:51David Rosenthal?

  and then the Gears of War series. He recruits this really great talent. And then he also realizes like, okay, you know, I want to make this great game. I need the talent to make the games. But, you know, I also need some talent on the business and distribution side here because I'm trying to build a big company. And who was the big company, of course, at the time, it was id. So he calls up id and he starts talking with their president at the time, Mark Ryan, who was handling all of id's distribution and publishing.

• 25:20Ben Gilbert?

  I didn't know he was the president of id.

• 25:22David Rosenthal?

  Yeah, he was the early-

• 25:22Ben Gilbert?

  He recruited away the president?

• 25:24David Rosenthal?

  Yeah, he was the early president of id.

• 25:27Ben Gilbert?

  Wow.

• 25:27David Rosenthal?

  So at first, they're talking about like, well, maybe id could publish Jill of the Jungle. But then Mark ends up-

• 25:35David Rosenthal?

  Falling out with Carmack and Romero, leaving ID, and Tim says, hey, I've got an even better idea. Why don't you come join us here at Epic and you can be our head of distribution and publishing? And so he recruits Mark, who yeah, had been president of ID to come join this company. Remember, Tim is-

• 25:53Ben Gilbert?

  That's a crazy career move for him. Like, he's president of one of the biggest game companies in the world at that point. And to go and take anything less than that title is wild.

• 26:01David Rosenthal?

  Totally wild. He became vice president at Epic, which he was-

• 26:06Ben Gilbert?

  As in play, what, three or two or something? Yeah.

• 26:08David Rosenthal?

  Indeed. So he comes and joins Tim. Remember, Tim is like a junior in college at this point in time. And he's got Cliffy B working with him, who's a senior in high school.

• 26:21David Rosenthal?

  But they put out this game and it does really well. And then Cliffy B starts working on a few other games that also do really well. Next thing you know, they're selling quite a good bit of software through this shareware model and doing quite well. And so Tim ends up dropping out of college in his final year and they go full time on the business. So they're selling these games. They're all still 2D side scrollers. But there's another pretty big revolution that's about to come in the nascent gaming industry here. And it's gonna come-

• 26:57Ben Gilbert?

  What year are we in?

• 26:58David Rosenthal?

  So we're now in like the early 90s, like 91, 92. So pretty quickly after that, ID and John Carmack start talking about this big project that they're working on. And it's a game that's going to be called Doom. And I have to assume, you know, almost no matter what age you are, if you're listening to this show, you've heard of Doom, played some version of it over the years. But it's easy to forget, and I had kind of forgotten until doing this research, just how revolutionary-

• 27:33David Rosenthal?

  This game was at the time and it got

• 27:35Ben Gilbert?

  Was it the first 3D game?

• 27:36David Rosenthal?

  It was the first 3D game, like before Doom. You know, everything looked like a Super Nintendo style game. And Doom was the first game and it ran, this is crazy. It ran on just these commodity 286, 386 Intel PCs. And it ran on DOS, but the Carmack was able to get a fully 3D world rendered and working.

• 28:01Ben Gilbert?

  Just amazing feats of computer science because this well predates graphics cards or anything that's sort of optimized to do this. It's just like an unbelievable amount of trigonometry and math.

• 28:11David Rosenthal?

  And, and John Carmack used all sorts of crazy programming tricks to make this work. And so it comes out and like, this becomes like the Fortnite of its day. Cause it was also distributed via shareware. So.

• 28:27Ben Gilbert?

  When you say the Fortnite of the day though, like let's paint this clear. For this tiny constrained market that was video games, it owned that market. But we're nothing like the hundred plus billion dollar video game market of today.

• 28:39David Rosenthal?

  No, I mean, for reference, you know, Fortnite has 350 million registered players at this time. Doom ends up having a few million copies that it both sells and distributes via shareware in those, in those first couple of years. Ultimately, I think it would get to 10 or 20 million copies. But no video game had ever approached anything like those numbers before. So Tim and Epic and Mark are like, okay, cool. Well, this is where the industry is going. We got to skate where the pugs go in here. We need to work on a similar project. And so they do, they start getting to work on the project. They're going to call their 3D shooter Unreal.

• 29:21David Rosenthal?

  But the problem was that they quickly find out is just like we were saying, the things that John Carmack did to make Doom run were just like huge feats of engineering. And it was this massive proprietary advantage that it had. So anybody like Tim and Epic that was trying to get a competing product out there, it was just going to be nigh impossible. But this doesn't deter Tim. He starts thinking about an idea. He's like, huh, okay. Well, I know that it spent all this time and effort working to make Doom work.

• 29:57David Rosenthal?

  They work on other projects and Ben, you mentioned Quake, that would be the successor to Doom that they would, that they would come out with. They're rewriting the wheel each time they come out with a new game. Like John did all this work to make Doom work, but they have to recreate a whole lot of that each time they're making another game. So they have this lead, but it's not like they're going to keep just like churning out game after game after game and nobody else is going to catch up. I can take my time, build a engine similar to, you know, what Doom has, but if I make it a little more extensible, then I can use this engine and pump out a bunch of content

• 30:40David Rosenthal?

  internally, like and not have to go through all these hoops each time that it is having to go through. So he's like, okay, cool. We're going to invest the time upfront to do this.

• 30:48Ben Gilbert?

  A parallel here is in sort of Jeff Bezos speak, the it's, uh, Tim is working on a system that uses primitives, building blocks rather than sort of starting from zero each time. And because you sort of build from primitives and assemble building blocks that are sort of modular and you can build on top of each time, you sort of get compounding value out of each piece of work that you put in.

• 31:10David Rosenthal?

  Yep. So he starts working on it and he's not shy about what he's doing. He's trying to build hype for the game for Unreal. He's talking to game magazines and the like. A pretty incredible thing happens. Other developers start coming and studios start coming to Tim and Mark and saying, hey, I hear you're working on this engine. We would also love to make 3D type games and compete with it in Doom. Would you be willing to license it to us? And Tim says, uh, yes.

• 31:44Ben Gilbert?

  Whoa. And this is before they released Unreal, like that he was hyping this so much that they had demand for the Unreal Engine before Unreal came out?

• 31:53David Rosenthal?

  Yes. In fact, I believe some of the first games that were made by third parties on the Unreal Engine came out within like, you know, a few months or a year of Unreal itself.

• 32:08Ben Gilbert?

  Oh, wow.

• 32:10Ben Gilbert?

  Crazy.

• 32:11David Rosenthal?

  Yeah, totally crazy. So it turns out this was a really big idea because these dynamics were not only not going to get easier in the industry, the dynamics of the bar, the technical bar to build video games, that bar was just going to keep going up and up and up and up exponentially in tandem with Moore's Law. And so without a tooling system like this, you would quickly become completely locked out, no matter how good you were of being able to actually build a game.

• 32:40Ben Gilbert?

  One of the takeaways there is like the timing to create a game engine is so perfect because before that, you couldn't really create a game engine. And after that, you would be so woefully behind that you better be creating a game engine for like a whole new paradigm, because it would be foolish to start building a PC based game engine five, 10 years after Tim did.

• 33:03David Rosenthal?

  Yep. And it turned out, you know, almost like in a much bigger way than what Tim saw when he tried to do, started working on Jill of the Jungle. Somebody who's a really, really great technical engineer, game developer, programmer, who could build an engine or parts of an engine like this, isn't necessarily always going to be the right person that can have a great creative story idea, game design, you know, content. And so if something like this didn't start to exist, the creative people would just be totally locked out of the industry, or would be relegated to working only within super big companies that had

• 33:46David Rosenthal?

  a engineering side of the house and a creative side of the house.

• 33:50Ben Gilbert?

  That makes sense. Now, listeners, I want to pause for a moment and say, we keep saying Tim. And, you know, today Epic is like a 2,000 person company. And it's almost appropriate to say Tim when the company makes decisions today. It was especially true at this point because it was still less than like 15 people. And there's a very small operation going on here. And Tim was absolutely making the strategic decisions about what the company would be and what it would do.

• 34:17David Rosenthal?

  Yeah, and not only was it a small operation, it was a remote operation. So they didn't even all like live in Maryland together. They were communicating via, you know, early, you know, early internet technologies here. So finally, after just about five years of working on this, in 1998, Unreal comes out. And along with the official unveiling of the Unreal Engine for game developers. And Unreal itself is a big hit, but also games that are built on it. So games like Deus Ex, which people might remember, use it. And then a few short years after all of this comes out,

• 34:58David Rosenthal?

  there's a major change in the gaming industry, which is after many years of talking about it, Microsoft finally enters the picture with the launch of the Xbox in 2001. This does a whole bunch of stuff. You know, one, it inserts a huge, you know, amount of weight and marketing muscle behind gaming. Two, it massively expands the console market because of that marketing weight behind it.

• 35:29Ben Gilbert?

  Which was previously just the original PlayStation and N64. You know, you had previous versions of Nintendo before that and the Atari 2600, but you didn't have like, I mean, it was really just the PS1 was the PS1 and the N64 were really the only, and the Dreamcast were the only predecessors before Microsoft entered that that console market.

• 35:50David Rosenthal?

  Indeed. And really, though, it was it was two separate parts of the market because Sony and Nintendo were the only viable players. Sony was where all the third-party developers went. Nintendo had terrible onerous royalty terms with with third-party developers because they really sold their systems based on their first-party titles, stuff that they were making in-house like Mario and Zelda.

• 36:12Ben Gilbert?

  Nintendo's attitude has always been we're both the best at the technology and the best at the creative gameplay. And so the systems are for our games. And sure, if you want to let us have most of the economics, then you too can develop for our system.

• 36:24David Rosenthal?

  But they're mostly a vertically integrated company. Microsoft came out, though, now all of a sudden they're duking it out with Sony for developers. So as a developer, on the one hand, that's good because now you've got two companies competing for your favor and willing to, if you're good and making, you know, have the promise of making good content, willing to give you good deals. But really, if you want to access the whole market, you want to have your title on both systems, on the PlayStation and on the Xbox. Well, unless you're using an engine like Unreal, that's almost impossible to do. You're going to have to build from the ground up.

• 37:07Ben Gilbert?

  Full dual development teams.

• 37:08David Rosenthal?

  Full dual development teams. Well, it turns out that this is a problem that Unreal can now really help with and solve. Because they can have, you know, under the hood, it's not quite as easy as just like check a box to deploy to PlayStation.

• 37:24Ben Gilbert?

  Right, once run anywhere has been promised many times and has been successful zero of them. So.

• 37:31David Rosenthal?

  I mean, these days it's pretty close, but it's so much better.

• 37:34Ben Gilbert?

  Tell that to a React Native developer.

• 37:36David Rosenthal?

  It's so much better even then than having to have two full, separate development teams. So, once this happens, they start getting some really huge games and franchises start moving over to building on Unreal. So like the Tom Clancy games, Splinter Cell, Rainbow Six, those games, Bioshock, Mass Effect, Borderlands, these are all in the kind of early 2000s, early to mid 2000s. They're coming over building on Unreal and then being able to sell pretty quickly. They might do an exclusive with Sony or Nintendo for six months or whatever that that platform gets first. But then they're able to access the rest of the market and go to the other half.

• 38:18Ben Gilbert?

  Right. And so by this point, Epic is a technology company. Like, they make games and they make this game engine, which is a huge component of the game's value chain, but they're a technology company rather than a first and foremost game company. And so when you ask sort of Tim to describe the history, he described, we have Epic 1.0, which was Potomac Computer Systems. We have Epic 2.0, where we sort of realized that, oh, yeah, this, this technology company builds a game engine. It's the, the PC gaming sort of revolution of the late 90s to about 2005. And then David, exactly what you're talking about now, this is what he calls Epic 3.0, where the massive proliferation of the sort of console wars allowed us a neutral third party that can dramatically bring your costs

• 39:01Ben Gilbert?

  down and your efficiency up in developing a game, like, full steam ahead on consoles, we will be an essential part of building that business.

• 39:10David Rosenthal?

  Yep. And, and they do keep building some games in-house as well, but they're thinking about it kind of like, like Amazon and AWS. Like, they're the first and best customer for the technology that they're building as part of the engine. You know, they do Unreal Tournament, they do Unreal Championship, they do other games, but they're really-

• 39:27Ben Gilbert?

  I love how East Coast that just was. Did you say Unreal Tournament?

• 39:32Ben Gilbert?

  That is like, that is like how an East Coaster says tournament.

• 39:35David Rosenthal?

  Oh, my gosh. You know, I never even like, noticed that. Growing up, I would say orange. Jenny has taught me to say orange.

• 39:43Ben Gilbert?

  What's the Nintendo character?

• 39:45David Rosenthal?

  Mario?

• 39:46Ben Gilbert?

  All right, there you go. I've got some New York friends that say Mario.

• 39:48David Rosenthal?

  Ah, yeah, yeah.

• 39:50Ben Gilbert?

  Anyway, we, we digress.

• 39:53David Rosenthal?

  We digress. Appropriate digressions, though. So by the mid 2000s, like we're saying, for a bunch of reasons, the big part of the gaming market is really in consoles, and specifically, it's in Sony and Microsoft with the PlayStation and the Xbox. And the PC gaming industry still exists, but it's gotten really tough because piracy has become rampant, not to mention, you know, Microsoft is now putting all of their weight in gaming behind the Xbox, not so much on PC gaming. So Tim, once again, kind of sees that this is where things are going, and decides, hey, you know-

• 40:34David Rosenthal?

  What if we tie up with Microsoft, we're gonna be launching a new version of the Unreal Engine, Unreal Engine 3.0. Microsoft is coming out with their next generation hardware, the Xbox 360 at the time. Yep. And we might be able to get some really good marketing dollars here from them if we're a launch or near-launch exclusive title with the 360.

• 41:00Ben Gilbert?

  And Microsoft's effectively, in this relationship, the publisher and Epic is the developer?

• 41:05David Rosenthal?

  Yes. I believe that. I believe that is correct. And so Epic develops this game called Gears of War, which most listeners will probably be familiar with, becomes...

• 41:18Ben Gilbert?

  It's the game where you could push that one button and put your back against a wall and look around a corner. Like that. So it's so funny how so many games had this like signature move and they like, that was amazing. That was in every commercial. That was in every demo. And you first played the game, like that is the thing that you wanted to try and do.

• 41:33David Rosenthal?

  And this thing sold so many Xbox 360s. And so as a result of all of this, the thing is, this kind of becomes a red herring for the company. So they end up making, Epic ends up making $100 million of revenue on Gears of War. It cost them $12 million. And I believe that's 12 million across development and marketing, because Microsoft was handling so much of the marketing budget. And so...

• 42:03Ben Gilbert?

  Wow, I'll make that bet all day.

• 42:05David Rosenthal?

  Totally. So they're literally making 88% margin on $100 million in revenue. You know, they had been successful in lots of dimensions up to this point, both on the technology and the game side, but this is a whole nother level.

• 42:20Ben Gilbert?

  Why ever be your own publisher? I mean, it's great if you're the developer, you only, someone else is gonna spend the money, you just have to develop the game. It's great. Like, why ever change?

• 42:30David Rosenthal?

  I mean, I remember, I was just coming into, graduating college and getting into media investment banking at the time. And people were thinking like, oh man, games are gonna be like Hollywood. Like, this is Hollywood movie style money. The dynamics are really similar here. This is gonna be great. It turns out, though, that Hollywood is actually not that good of a business and an industry. And why is that? It's super capital intensive. So Gears of War I was kind of a red herring for a bunch of reasons. You know, it was a launch title with 360. Microsoft handled so much of the promotion and marketing. When the Epic ends up doing Gears of War II and then Gears of

• 43:14David Rosenthal?

  War III, their economics, like the games sell roughly the same amount, maybe not quite as much in terms of revenue, but their margins end up shrinking significantly down to like 30, 40%. And they're having to tie up all this huge amount of capital in the investments in developing these games and then marketing them. And so Tim and Epic kind of realized, like, huh, this is not as interesting as we thought it was.

• 43:42Ben Gilbert?

  Time to get out. And also, started to show the tension between this sort of developer publisher model. And for folks who haven't listened to the EA episode, or where else, we talked about this on the Activision Blizzard episode, you know, the developer is the creative. It's almost like, think about it as the director on down on a movie set, where you're the one sort of having the brilliant ideas and executing on them. And the publisher is the investor. They're sort of funding the money, they're doing the marketing, they know how to businessify your creative efforts. And so, the issue is, when push comes to shove, like it did with, what was it, Gears of War, I think after maybe Gears of War III, Epic wanted to do a multiplayer only version. They said, look, we think multiplayer gaming

• 44:24Ben Gilbert?

  is the future. Hint, hint, you know, or nudge, nudge to where they are today. And online is, you know, right around the corner, starting to become a thing. And so...

• 44:33David Rosenthal?

  And Microsoft was like, no, we don't care. We want to have more 360s.

• 44:39Ben Gilbert?

  Exactly. And so, it was basically a stalemate at that point. And Microsoft was the publisher. Microsoft was the money behind it. And so, you know, they, they won.

• 44:49David Rosenthal?

  So we're now right around like 2009, 2010 timeframe. And Tim has a quote, he says, there was an increasing realization that the old model wasn't working anymore and the new model was looking increasingly like the way to go. So what is the new model? So two things happen right around this time that totally lay the groundwork for what Epic is today. The first is in October 2009, a little company in LA, a little startup in LA launches a game, if you could call it that. It's really a mod on a mod of an existing game.

• 45:30Ben Gilbert?

  This is a mod of Half-Life 2?

• 45:32David Rosenthal?

  Uh, no, no, no. I'm talking about League.

• 45:35Ben Gilbert?

  Oh, yeah, yeah, yeah. So the mod of Warcraft III is the mobile online battle arena game of Dota, or was it Defense of the Ancients?

• 45:48David Rosenthal?

  Yep.

• 45:48Ben Gilbert?

  And of course, uh, there's a lot of controversy over if this is idea theft or if this is above bar. But you have this very similar looking game that I think you're referring to, David, being started by a plucky startup in LA in 2009.

• 46:02David Rosenthal?

  Yep. And that company is Riot Games and that game is League of Legends. And so what is League? I mean, it's, it's a MOBA massively online battle arena, but it really represents a completely orthogonal path and kind of a throwback away from this Hollywood-ification of the games industry and back to small lean development teams, taking a concept and iterating on it without having to invest, you know, tons and tons of development resources and in particular, tons of marketing resources. It's distributed 100% online.

• 46:44David Rosenthal?

  It's a mod of an existing game engine that's out there.

• 46:49Ben Gilbert?

  Ripoff.

• 46:52David Rosenthal?

  I didn't say that, but it means that it can get to market so much faster. And then the other big innovation that they have is they don't charge for it. It's, it's free, free to play. Now, free to play, that term had gotten a really bad name in the industry because mobile games had taken that up and free to play really meant, yeah, you could play it for free. But if you wanted to make any progress in the game or win, you'd have to.

• 47:20Ben Gilbert?

  And, and this was just starting. I mean, that it got a really bad name in sort of that 2012 to 2014 era in this era. Cause the iPhone was 2007, the App Store was 2008. So it wasn't quite the sort of dirty backwater. Uh, social had given it a bad name before mobile gave it a bad name. So the free to play stuff on Facebook was.

• 47:39David Rosenthal?

  It was, you know, the Zynga type stuff and, and, you know, Zynga was, well, probably in many ways, not the worst offender in this regard, but, um, you know, all of the games that you had to pay to make any progress in. What League was and what Riot's big innovation was that you could buy things, but they were just aesthetic, uh, they were just virtual goods. They didn't actually help you succeed in the game in any way, shape or form. They just gave you personality.

• 48:11Ben Gilbert?

  Yeah. So it was, it was still free to win, but you could pay for other things.

• 48:15David Rosenthal?

  Yep. And this ends up coming to be known as games as a service, which we'll get into in a second. The other big thing that happens that Epic was directly a part of was in September 2010, Epic demoed onstage at an Apple keynote, a demo of the Unreal Engine 3 running on iOS.

• 48:35Ben Gilbert?

  Oh, that's right. I forgot about that. And that actually was the beginning of these like really long sort of distracting demos at Apple keynotes of games where like every time they're showing off some new graphics technology, but you're watching it over some stream and you're actually not sure what the new thing is. And so you're like, okay, they're showing off, okay, this time it's metal and it's an Apple in-house technology and Craig's all excited about it, but. Okay, good. I'm glad someone else made another cool game that takes advantage of some hardware feature I don't understand. I always have beef with those being an Apple Keynotes, but I get that it was a leap forward.

• 49:10David Rosenthal?

  Well, it was a leap forward because A, you could bring, you know, this incredible console quality, graphics and gaming technology to mobile. But it was even more important for the industry in terms of enabling cross-platform deploying and development and then ultimately online play of games. So Epic now is right in the middle of all of this because if you have a game as a service like League of Legends or any other, you know, free-to-win type game.

• 49:43Ben Gilbert?

  Importantly, that's fully distributed digitally. So you don't, there's no more box software. It is being distributed over the internet.

• 49:49David Rosenthal?

  Yep. You want to get that in the hands of as many players on as many platforms as possible. You know, game developers always wanted to do this. They wanted to be on Microsoft and on Sony. But at the end of the day, they're selling box software and like, that's fine. But when you're no longer selling box software, you're monetizing based on engagement of players, maximizing your total pool of players is really important. And what are the, by far at this point and then going forward, the vast number of computing devices capable of playing games out there? They're mobile devices.

• 50:27Ben Gilbert?

  Yeah. So it's, it's the number of devices got multiplied by, I don't know, 10 for the, the sort of accessible market of games or maybe more. But importantly, and I think the other thing that is really relevant to this argument that you're making about having a more direct relationship with those customers and wanting to reach as many customers as possible is they're now all on internet-connected devices. So rather than your only chance to monetize being every time you ship a new disc to a store and they buy it, you have an opportunity at any given moment to monetize as long as there's payment systems in place. The thing that digital distribution basically enabled was the idea that going back to the

• 51:09Ben Gilbert?

  very beginning of what made Epic Epic, that they could give something away for free. But then since you had an always-on relationship with that customer, you could figure out your monetization down the line.

• 51:19David Rosenthal?

  What this does to the industry. Is it kind of makes it like the SaaS industry? You know, you'd gone from expensive to develop capitalized software that required years of development time and was big and monolithic. You know, your Oracle or your a lot of Microsoft software or your, you know, that type of thing to all of a sudden, you know, developers, just like software developers, are empowered to do small little things that solve a point, you know, niche problem, deploy it on best in class infrastructure like AWS out there. Use something like Stripe to accept payments.

• 52:01Ben Gilbert?

  Don't we wish?

• 52:01David Rosenthal?

  Yeah, don't we wish? Get it out there and be used and build real businesses with great economics. So the same thing starts to happen in the gaming industry. And of course, who was the pioneer in doing all of this? And in the middle of all of it, not just on their own, but then with Riot? It's Tencent.

• 52:22Ben Gilbert?

  Yep. Yeah, I mean, this is really interesting because Riot is pioneering this in the United States. Tencent had already sort of done it with the, uh, the ability to do microtransactions on, on their early games in China, something that they were definitely ahead on. And as soon as Riot started to succeed in it very early, I think it was pre 2011, maybe, maybe 2010, Tencent invested in Riot.

• 52:48David Rosenthal?

  Once Tencent saw Riot succeeding with this model in the West, they first invested in Riot, I think in 2010, and then they bought the company in 2011. So Tim sees all this going on and in, he wants to move epic in the direction of becoming essentially the, you know, AWS plus Stripe, enabling this future, you know, renaissance in independent creators and game developers.

• 53:17Ben Gilbert?

  And the current state of their business, sort of, they had sold Gears of War, the full franchise, all the IP, everything to Microsoft.

• 53:24David Rosenthal?

  Not quite yet.

• 53:25Ben Gilbert?

  Okay.

• 53:25David Rosenthal?

  First, he starts talking to Tencent and agrees in 2012, for the first time ever, to sell any equity in Epic Games, he sells a 40% stake in Epic to Tencent for $330 million. So valuing Epic at just under $1 billion, which was kind of crazy at the time. People were like, this is nuts. This is a, you know, video game technology developer that, you know, is having bad economics with their big franchise Gears of War. Like, what's going on here?

• 53:58Ben Gilbert?

  And I think the thing that people didn't realize at the time was even ignoring the games as a service bet, how stable the platform business was. Like, one of the things that I want to mention later in Playbook, but we need to talk about now, is gaming is classically a hits-driven business, and what you have with the Unreal Engine is a smoother on that. And since more and more, I mean, that business has just grown steadily since its inception, and you now have this massive, steady business underneath your more spiky, hits-driven games business.

• 54:30David Rosenthal?

  Yep. So with this investment from Tencent, Tim maintains majority control of the company. And he says, all right, we're going to refocus the entire company around this vision of the future. We're going to do three things. One, the Unreal Engine is now our most important product and piece of technology, and we need to add much more to it. It's not going to be just about the engine for creating the game. It needs to be all the infrastructure to run these games and run live ops and do payments and do all of these things. Funny aside, at the time, I was actually, when I was at Madrona, we were venture investors

• 55:14David Rosenthal?

  in a company called PlayFab in Seattle. Which was an independent startup that had the same vision of, we're going to build the infrastructure layer for operating these games as a service and be like... Unreal or be like Unity, their competitor, which we haven't mentioned yet. It just turned out PlayFab ended up getting acquired by Microsoft. It turned out that Epic and Unity were going to do these things themselves as well. And it was going to all be part of the platform.

• 55:41Ben Gilbert?

  Yeah, and there definitely was industry speculation at that point that those things would be not really part of game engines, that they were sort of a separate factorable thing. We'll talk about this, but Epic has Epic Online Services today. There's a lot that sort of lives in that middle ground of like, is it part of the engine? Or is it really more part of an online service? But Epic obviously had not only the relationships with developers, but the ability to bundle things that might not have used to be considered part of an engine, but sort of add more and more and more to that sort of ball of yarn, where it was no longer just physics, but it was physics and characters and AI and the way that they'd interact and all sorts of things to help with the live ops of your game.

• 56:20David Rosenthal?

  Yep. So that was one. Two, as Tim says, we're going to rationalize the console business. I don't want to be in that anymore. We're going to sell the Gears of War franchise to Microsoft. So they do that in early 2014. The Tencent investment was in like late 2012. And then three, to make all this work, we need to have a thousand flowers blooming out there of people developing on the creators and developers and game makers developing on the Unreal platform. Well, we can't anymore be charging people a SaaS fee to use our platform because that's going to lock out, you know, the kids in high school who are building stuff at GameJams.

• 57:03Ben Gilbert?

  Right. Incentives are powerful. If you charge money for something, less people will do it.

• 57:07David Rosenthal?

  Yep. So in March 2015, and this was, this was like super ahead of the curve. Epic stops charging a licensing fee for the Unreal Engine, makes it completely free to use and develop on. And remember, you know, Unity is out there as well, which is a competing third-party game engine.

• 57:29Ben Gilbert?

  Mostly focused on mobile.

• 57:30David Rosenthal?

  Mostly focused on mobile, but you could use it for lots of things.

• 57:34Ben Gilbert?

  For sure, but simpler, newer, amazing for 2D stuff, lighter, more accessible. But you're not going to go build the most amazing 3D first person shooter PC game with it.

• 57:46David Rosenthal?

  On Unity, no. They're still charging a SaaS fee. Unreal now is completely free. You're getting like this, literally the stuff that Gears of War is developed on for free. And instead, the business model is switched to a 5% royalty on revenue that you would earn on your games after publishing. That's like a pretty good deal. I mean, if you think about the amount of fixed costs you'd have to capitalize to do this, it would just be huge. Even your ongoing operating costs to run technology would be more than 5% of your revenue.

• 58:22Ben Gilbert?

  Totally. You'd have to be massive for it to make more sense for you to build your own game engine now than use Unreal, which is exactly the strategy. And when you look at who develops their own proprietary game engines, it's only the Activision Blizzard of the world, the Riot games, but very large publishers that you know of. So like think Blue Hole for Player Unknown's Battleground, which of course we will definitely talk about later. Like lots of big cross-platform 3D games from big studios that just aren't quite as big as like Activision Blizzard or Riot, use Unreal instead of developing their own proprietary thing.

• 59:01David Rosenthal?

  Yep. So those are the three big moves that Epic makes after the Tencent investment. And they are all just like so spot on and like really enable them to become, you know, the AWS plus Stripe plus, plus, plus, plus in the industry.

• 59:21Ben Gilbert?

  Stripe doesn't feel right yet. Like Stripe to me would be like the Epic Games Store.

• 59:27David Rosenthal?

  Yes. Well, they're laying groundwork for all that.

• 59:30Ben Gilbert?

  Yeah. Yeah. Like, so, okay, to put it in Tim's parlance, Epic 3.0 was consoles. Epic 4.0 is free to play, games as a service, digital distribution. But exactly what you're talking about, David, is this is like incredibly robust primitives that serve as the horizontal layer to make games. And so they've stepped back from we're a game maker, except.

• 59:53David Rosenthal?

  Except, okay. So just like Amazon, though, you know, they still have this view of like, "Well, we can be the internal kind of first and best customer to show what's possible with these tools." You know, and we have this rich history of making great games that people love. So they decide that they're gonna spin up three teams internally to start working on Epic's new tools to build new games from Epic that are gonna run on this Games as a Service free-to-win model. So the first that they start working on is a reboot of Unreal Tournament. The second is a MOBA that's gonna include Gears of War-style kind of

• 1:00:35David Rosenthal?

  action elements. It was called Paragon. And the third was gonna be a whole, brand-new IP that was gonna combine elements of Minecraft and crafting with a tower defense-type dynamic. Those games were popular at that moment in time. And they had a really cool name for it. They were gonna call it Fortnite.

• 1:00:56Ben Gilbert?

  Well, we just got $330 million, and boy, are we gonna spend it, is the way that I hear that.

• 1:01:01David Rosenthal?

  Yep. Well, so spoiler alert, just like a lot of times when a company gets $330 million and has like the core, you know, economic engine of the company, but then they have other projects that they wanna work on, those other projects don't go so well. So none of those three games work at all.

• 1:01:21Ben Gilbert?

  Yeah, and if you, yeah, it's interesting you say none of the three. I'm excited to talk about that. The other sort of thing to think about here is, this is a company with a bootstrapped culture. They'd always been starved for resources. They'd always been few people. They'd always been cleverly figuring out what's the right partner, or what's the right way that, you know, we can only make a game when we're sure that it's gonna be worth it for us. And now they've got so many resources. I mean, this is exactly what we talked about on the Eventbrite episode with Julia and Kevin, like, raised a bunch of money, and there's lots of things that seem like good ways to deploy that capital, because you can sort of conceptualize why it all makes sense. But then you become this, like, large organization.

• 1:02:03Ben Gilbert?

  There's, I don't want to call it infighting, but conflicting views about what the future should be. There's people who are sort of vying for political power that's saying, you know, no, my game's the most important game. And it results in churn and it results in, this happened basically all through Epic's history, but they bought companies. Some worked, some didn't. They bring in these studios. Sometimes they'd end up writing them off. It just increases all of that sort of fervor and churn around trying to do a bunch of stuff.

• 1:02:31David Rosenthal?

  Yep. And remember, what was Epic and Tim really, really good at? He was good at looking at what was succeeding in the market at that given moment in time. Remixing it a little bit to make it fresh and then putting it back out there quickly. You know, that's what he did with ZZT. That's what he did with Jill in the Jungle. That's what Unreal was after Doom. And that's not what they're doing with these three projects here. It's unclear that the market really wants them. So they operate for years in development of each of these games.

• 1:03:08Ben Gilbert?

  So started in 2011, 2012.

• 1:03:11David Rosenthal?

  Yep. And going all the way through 2017. And then basically a miracle happens. So you mentioned Player Unknown's Battlegrounds. Tell us a little bit about Player Unknown Battlegrounds.

• 1:03:25Ben Gilbert?

  Yeah. So rewind to 1999. There is a book released in Japan called Battle Royale. Or at least that's the English translation of it. In 2000, this is made into a very popular Japanese movie. It is sort of basically inspired The Hunger Games. Think about a battle on an island, a bunch of children. I think it's a fight to the death. It's a little dark, but basically you want to be a

• 1:03:48David Rosenthal?

  Seriously dark.

• 1:03:49Ben Gilbert?

  Last person standing. And there's a variety of different games and different sort of anime series that through the early 2000s are sort of based on this Battle Royale concept. There's early games, there's Daybreak, there's in the end of the 2010s or mid 2010s. There's this game H1Z1 that's starting to incorporate this Battle Royale concept into a game. In, is it 2017 that Battlegrounds comes out?

• 1:04:12David Rosenthal?

  Yep, March of 2017.

• 1:04:14Ben Gilbert?

  And we will henceforth refer to it as PUBG Player Unknown's Battlegrounds comes out and it is a smash hit. It is like this notion of there's a fixed amount of time and there's this circle that is contracting and it's going to bring everybody closer and closer and closer together and you have to be the last person standing and the action's fast paced and it's sort of a pretty short amount of time that each game lasts. It's not these 50 minute MOBA style games. It is like get in, enjoy the action, get out, even if you win, it's not that long of a game. It is really fun and boy, does it skyrocket off the charts, especially because David, exactly as you're saying,

• 1:04:55Ben Gilbert?

  digital distribution, it is free to win, it is leveraging these sort of in-app purchase like adornments that you can buy for your character skins, but it's pretty like realistic, like the violence is actual violence, like it is so it is a war game.

• 1:05:11David Rosenthal?

  It's dark, it's realistic. Also though, when it first comes out, it's in beta, it's built on Unreal, you know, it's not a big team, it's not Activision that's making this, it's, you know, an indie dev.

• 1:05:23Ben Gilbert?

  Right. Raise your hand if you heard of Blue Hole before this podcast. It's like unless you're in the industry, you haven't heard of Player Unknown's parent company.

• 1:05:32David Rosenthal?

  No. And also in these early days, it's only on PC, I think.

• 1:05:38Ben Gilbert?

  I think you're right.

• 1:05:38David Rosenthal?

  It was not yet cross-platform. And again, you know, with, with especially with a game like this, you want the more, as many people as possible playing it, you want your friends playing and not all your friends are going to have gaming PCs in just like a literally epic move. The company and Tim see this happening, realize that these internal game projects are not getting any traction.

• 1:06:04Ben Gilbert?

  Yeah, the Unreal Tournament team, I think they sort of knew at this point that that wasn't going to ship. By the way, like the title Fortnite inside of Epic started in 2011, so it's been six years of development.

• 1:06:15David Rosenthal?

  Yep.

• 1:06:16Ben Gilbert?

  And, and you have this, this other team here, this Unreal Tournament team that I think had already given up at this point, that it was like clear that it was not going to ship. Paragon is Taking a crap ton of resources to make that a reality. That's the internal status of the company when PUBG hits.

• 1:06:31David Rosenthal?

  PUBG hits. So within two months, the Unreal Tournament team hops over into the Fortnite assets. And remember, they're all developing on the Unreal Engine, so they all know how to work with the assets and the code here. And they build and launch a new mode of Fortnite called Fortnite Battle Royale. That is a Fortnite graphic cartoony take on this Battle Royale concept that PUBG has just taken massive. They ship it in September 2017. Within two weeks, they get 10 million active players. This is bonkers. Like 10 million players is probably what Doom got in the whole life of the game.

• 1:07:15David Rosenthal?

  Within six months, they have 125 million active players. Incredibly, you know, there's some dynamics here, like you mentioned, Ben, that like there's less violence. It appeals to kids more, especially it appeals to parents more who are willing to let their kids play this.

• 1:07:29Ben Gilbert?

  Yeah, like when you die, the drone comes and scans your body and whips you away. Like it's, and I don't think that's the right terminology, but like you're, you're not bleeding out in the street the way you are in PUBG.

• 1:07:37David Rosenthal?

  Yep. But unlike PUBG, which is only on PCs at this point, because of all of Epic's resources, they immediately deploy it cross-platform, PCs, consoles, mobile devices, all within the first few months of launching. Sony actually would be a big holdout. Sony would let Epic release it on the PlayStation, but wouldn't allow PlayStation players to cross-platform play with other platforms because they wanted to keep everything in-house in the PlayStation Network. Epic eventually convinces Sony, they're like, hey, you can't keep this cat in the bag here.

• 1:08:12Ben Gilbert?

  I think they may have even gotten to 125 million users before launching mobile. Like it was a, I don't know, maybe that's wrong, but I remember it was this smash hit phenomenon. And it wasn't on mobile yet. Like, that was the craziest thing is, and the games industry was, it absolutely turned on its head at this point because everyone was just told esports is going to be this massive moneymaker, which it ended up not being. Like, it was-

• 1:08:36David Rosenthal?

  You were building an esports company at the time, right?

• 1:08:38Ben Gilbert?

  Yes, I was very deep in this at this time with Taunt. Esports was a really good idea for the publishers and really not that interesting for everyone else. Streaming was interesting for lots of players in the value chain, but the interesting thing about being in that industry in that moment was PUBG went from nowhere to being dominant. And we all thought, wow, here is this new arrival of this thing that's going to be a fixture along with, you know, Activision Blizzard's games and Riot's games. And then like, a few months later, boom, Fortnite blows it out of the water and just steals share like crazy and then goes to even bigger, newer heights. And it was the craziest thing. You're like, God, like, the fervor in this industry right now of what, you know, is going to be the staying power franchise is crazy.

• 1:09:23Ben Gilbert?

  And I want to reflect back on the launch a little bit because Fortnite did launch its original game built by the original team, Fortnite Save the World, that basically didn't work. It came out, PUBG came out, PUBG won. Like, this thing was not a Battle Royale game-

• 1:09:41David Rosenthal?

  It wasn't a fight because Fortnite wasn't playing the same game.

• 1:09:43Ben Gilbert?

  Right, but what it was talking about, it was like this, yeah. And the craziest thing was internally at Epic, when you said they started working on the Fortnite assets, like, what that actually looked like was copying the codebase that a whole other team, it was basically Laying Fallow, the Unreal Tournament team, takes that forked codebase, rebuilds the whole thing using the gameplay mechanics of PUBG and launches it. You then have this fascinating internal struggle of trying to figure out, how do you combine these two teams, one of which poured six years of their lives into getting it 95% of the way there but got the core gameplay mechanic wrong, and the other of which spent the last

• 1:10:25Ben Gilbert?

  few months working on a new project, having fresh eyes, not being clouded by all the baggage of previous decisions and haggling made over the last six years that has this smash hit. And all anybody out in the world cares about is- Fortnite, like I don't, anything lower level than that or internal politics don't care about. And so you have to figure out as a company, how do you, when you know you just have this thing that's magically captivated the world, how do you throw all of your resources at it and bring everyone together in kumbaya to say like, we as a company are doubling down on this thing as our thing, along with our other thing, the technology platform

• 1:11:03David Rosenthal?

  of the Unreal Engine. It's not even the business model of the company. The business model of the company. And Tim's, you know, he's really gotten religion at this point in time. The mission is build the tools, be the AWS and Stripe and, you know, live ops for all developers to make games. This is, I think, just like such important backdrop to what's going on now, because now we'll run through what's happening. But Tim, again, like, he's just viewing this like, this is a windfall. This is awesome. This means I get more firepower and more ability to play offense in getting my ultimate

• 1:11:41David Rosenthal?

  vision to come true here. So, like we said, Fortnite, Battle Royale, major cultural phenomenon. Estimates are that they made $2.5 billion in revenue in 2018 alone. So it launched in September 2017, 2018, $2.5 billion in revenue. October 2018, Epic raises their first non-strategic capital raise. They raised $1.25 billion from KKR, Disney, and several other investors at a $15 billion valuation.

• 1:12:15Ben Gilbert?

  Quite the step up.

• 1:12:16David Rosenthal?

  Quite the step up, quite the step up. In December 2018, they launch Fortnite Creator Mode, which is almost bringing like Roblox-type elements into Fortnite of letting people create and ultimately monetize their own designs, levels, experiences. In doing so, at the same time, they launch the Epic Game Store. So this is now bringing forward all of this future that Tim wants to come to bear and would ultimately set the stage for this confrontation with Apple and Google. The Epic Game Store, they're gonna sell their own games online, Fortnite,

• 1:12:56David Rosenthal?

  Fortnite Currency, V Bucks and other games and third-party games in the Epic Game Store. Of course, you can do this on PCs and on the web.

• 1:13:06Ben Gilbert?

  Totally. The opportunity is compete with Steam. I mean, Steam's been doing this forever and frankly, the knock on Valve is those guys haven't had a hit in forever. They're just taking a vig or a rake on all these other games that they basically have a monopoly on PC game distribution.

• 1:13:22David Rosenthal?

  Yep, and they're taking a 30% cut.

• 1:13:24Ben Gilbert?

  And Epic had such a hit with Fortnite where they were like,

• 1:13:29Ben Gilbert?

  "We had the advantage of never needing to be in your store and always going direct. So now we have this direct channel to all these customers. Like, we should leverage that."

• 1:13:37David Rosenthal?

  Yep. So what did they launch the store with? They launched the store with a 12% cut of revenue. So they undercut Valve by 18%. And then the kicker is if you build your game on the Unreal Engine, the 5% revenue fee gets baked into the 12%. So they're literally unreal. Epic is saying, "You get the engine, you get the live ops, you get the distribution in the store and the payment processing that comes with that for a maximum fee of 12% of your revenue."

• 1:14:19Ben Gilbert?

  It's wild. I mean, it is really, let's even ignore the lack of double dipping on that 5% from the Unreal Engine. That 12%, the way that Tim talks about it is basically a cost-plus pricing model, where he says, "Look, I think it's gonna take 5%, 7% to run the store and we don't need to make more than 5%. We think Apple and Steam are getting away with highway robbery. And so we're just basically gonna make sure that at the maximum, we make 5%. Oh, and if you're really trusting in us and building on our full stack, we're not gonna charge you twice." Like, it is, it is the exact opposite of what every other CEO in the technology industry these days is doing.

• 1:14:58David Rosenthal?

  It's not like Google says, "Hey, if you use GCE for your infrastructure, whatever you spend on that, we're gonna give you credits in AdWords."

• 1:15:10Ben Gilbert?

  No, no, we'll give you a reduced price if you buy more from us, but we're certainly not going to say, yeah, yeah, we'll give you, you know, core assets for free.

• 1:15:17David Rosenthal?

  Totally. 2019 is basically the clash between Valve and Steam and the Epic Game Store. And Valve responds, they cut their take rate to 25%, but they're going back and forth. But really, this is setting the stage for what would happen now this year.

• 1:15:39Ben Gilbert?

  One other conflict that happened previously too is with Google, where Epic basically said, "Look, like, we're not going to go through Google Play anymore because Android, you have this nice open platform, you brag about it being an open platform, we are going to have people download the APK, where they're just going to sideload and install the app directly." What Epic and all of the people who want to play Fortnite on Androids realizes, there's a litany of, "Oh my God, you're about to get your phone hacked" dialogues that come up between downloading that app and getting to play it, and every time there's an update. And so this is actually something that Epic walked back from and eventually did list on the Google Play Store, because Google, as Tim calls it, has a fake open ecosystem where

• 1:16:21Ben Gilbert?

  despite getting to proselytize about how the App Store is not the only way, or the Google Play Store is not the only way to launch on their platform, in reality, it is.

• 1:16:32David Rosenthal?

  So then this year, Epic decides to take this fight directly to, as you say, not just Google, but the other Tim, Tim and Sundar. I wonder how much the timing of this, clearly, Tim had been thinking about this and plotting this move for a while, but this was the first year where you start to see some cracks, not just in the game developer sentiment about these App Store take rates, but among other software developers, there's the whole "hey" controversy with Basecamp around Apple and the 30% cut that they're taking on. Hey, email software.

• 1:17:15Ben Gilbert?

  So Apple has this very silly rule where they say either you're using our payments infrastructure, or if you choose to use your own, there can be no link or reference to it in the app. And hey, basically linked to their website or something like that and thus violated App Store policy.

• 1:17:32David Rosenthal?

  But it's all the same spirit here, right? Of like,

• 1:17:35Ben Gilbert?

  Right. Pay us 30% or have this gross and horrible user experience where people have no idea how to sign up for your thing.

• 1:17:43David Rosenthal?

  So while all this is going on, cracks are starting to form in the developer sentiment with Apple and a little bit Google. Now Epic is here sitting on not just the biggest game in the world, but kind of the biggest like cultural phenomenon and on par with TikTok, you know, social networking experience as well. It's a pretty big point of leverage with these ecosystems. And so finally, on August 13th, 2020, Epic pushes a new version of Fortnite to the iOS App Store and the Google Play Store that offers a permanent

• 1:18:27David Rosenthal?

  discount on V-Bucks, the in-game currency in Fortnite, if you buy directly from Epic, which I believe you could do now in this new version of the app.

• 1:18:39Ben Gilbert?

  So you actually still can if you have the app on your phone.

• 1:18:41David Rosenthal?

  Oh, if you still have that version of the app. Wow.

• 1:18:44Ben Gilbert?

  Yep.

• 1:18:44David Rosenthal?

  So Apple and Google immediately de-list Fortnite from their App Stores.

• 1:18:49Ben Gilbert?

  And then they said, you need to upload a new version that doesn't include this.

• 1:18:53David Rosenthal?

  Yeah. Right. And Tim said, nope, not gonna do that.

• 1:18:57Ben Gilbert?

  Yep. So then, then the pitchforks come out. Then Apple says, well, you know, you knowingly, and obviously like this comes right on the heels of the antitrust controversy. Epic really deeply prepared for this and thought, thought this through. And they released this unbelievable video, this free Fortnite video where you've got Tim Cook as the evil sort of IBM-like character from the original 1984 commercial. Epic is sort of this, they're coming And to swing the hammer and throw it at the evil IBM Tim Cook character. It is, it is like

• 1:19:27David Rosenthal?

  It's all Fortnite characters. It's so good.

• 1:19:30Ben Gilbert?

  Deepest dagger you can stab at the Apple executive team and really make them feel like the villains in this story. And so, you know, the pitchforks continued to come out. Everyone's escalating. Apple says, we are going to ban your developer account.

• 1:19:45David Rosenthal?

  Yeah, this is a major escalation here.

• 1:19:48Ben Gilbert?

  Yeah, this is, if you don't submit an updated version of Fortnite to the App Store that doesn't violate our terms and services, we are going to ban your developer account. And what that means, if you really dig into it, is we are going to make it so that you can no longer distribute new versions of the Unreal Engine to your developers that they can compile in their code and then submit to the iOS or Mac App Stores. And so they're basically saying, look, all iOS and Mac App Store, we're just going to break the ability to use Unreal Engine if you're a developer on those App Stores. And so, you know, they've, now they've got a two-front war. There's a Fortnite war and Apple has dragged the Unreal Engine into this. And of

• 1:20:30Ben Gilbert?

  course, this goes to the courts. There's an injunction filed. The most recent couple of pieces of information that we know are that a judge for at least the next month has said, Apple, this thing that you've done of bringing the Unreal Engine into this, like, you can't put a little ticking time bomb on Epic and say that you're going to break their developer account that deeply to the point where Unreal Engine won't work for all of these game developers anymore. Like, that's one step too far. The thing that you can keep haggling about is whether Fortnite needs to submit a new version that doesn't violate your policies and has only a transaction with Apple that pays the 30% cut. That's still in fairgrounds to fight about. So, Apple, you can

• 1:21:10Ben Gilbert?

  keep Fortnite out of the App Store for anyone who wants to download it now. They didn't mandate, I don't believe, that you have to keep letting the existing version of Fortnite work on people's phones, but it is. I expect that Apple has a very powerful kill switch at their disposal. So we will see if Apple decides to stop allowing the existing version of Fortnite with the payment That's on 100 million plus phones or tens of millions of phones. I don't know how many to break, but that is sort of the state of where things are today.

• 1:21:41David Rosenthal?

  Yeah. And just right before we went to record, Epic hit back and announced that existing Fortnite instances running on Apple devices are going to lose access to the next Fortnite season and cross-play ability. So they're no longer going to be able to play with friends that are on other platforms, whether that's Android or a console or PC. So, man.

• 1:22:07Ben Gilbert?

  When tech giants clash, customers lose. But I think we will, we will get to that more, more ingrained. David, do you have anything else in history and facts here?

• 1:22:17David Rosenthal?

  I think that is quite the epic story for history and facts.

• 1:22:21Ben Gilbert?

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• 1:22:35David Rosenthal?

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• 1:22:59David Rosenthal?

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• 1:23:17Ben Gilbert?

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• 1:23:33David Rosenthal?

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• 1:23:49Ben Gilbert?

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• 1:23:59David Rosenthal?

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• 1:24:10Ben Gilbert?

  Okay, so our next section in many episodes is is called acquisition category. There wasn't an acquisition here. And David and I have thought a little bit about what we're trying to accomplish with this category. And we actually think that it's best described by a book that we're obsessed with and have had an LP call with the author of and just really think is brilliant of the seven powers. So what are the seven powers? They're basically the ways that and I'm gonna, Hamilton, if you're listening, I'm gonna butcher the definition here, but they're the ways that a leader in a category can earn outsized profits versus all of their competitors. It's basically what what's the thing that makes your business

• 1:24:53Ben Gilbert?

  powerful versus your competitors? And I think this really gets at the core, David, of like, what and why we want to dissect what the core essence of a business is?

• 1:25:04David Rosenthal?

  You know, there's so much going on here with the technology platforms, the evolution of the games industry in real time, and then this Fortnite phenomenon. What is the power that Epic has? So there's seven categories of power, obviously, in the seven powers that Hamilton identifies: counter positioning, scale economies, switching costs, network economies, process power, branding, and cornered resources. Most companies that have power have one, maybe two of these. I actually think Epic has three powers that are concurrently going on here.

• 1:25:45David Rosenthal?

  I would say they have scale economies because the scale at which you need to operate your infrastructure to power a game like Fortnite or PUBG or any of the other large games that run on Unreal, you need a huge amount of infrastructure. And then to amortize that infrastructure cost such that you're able to sell it essentially at 5 to 12% of your end customer's revenue, nobody else can match that.

• 1:26:18Ben Gilbert?

  No, it's the same way that Netflix draws its power by having the largest subscriber base. It has the sort of lowest per subscriber cost to produce content.

• 1:26:27David Rosenthal?

  Yep, or AWS, same deal. Then I think there's the switching cost, right? Like, that might be the most directly powerful here. Like, if you're PUBG or you're any game that's built on Unreal, you have no choice except to continue running on Unreal. You're not going to spin up something on your own. You could maybe try and switch over to Unity, but that's going to be very, very difficult and not going to have the same types of features that you need.

• 1:26:55Ben Gilbert?

  We've sort of leaned on this a few times, and obviously it's a private company, so the financials aren't public, but it's fair to assume that the Unreal Engine on its own does about a billion and a half dollars a year in revenue. So like, this thing that lots of developers are like pretty locked into because they committed and it was a good decision to. Like, we're not saying that, you know, they should have picked anything else because basically if you're building a mobile game that's really pretty simple, you should be using Unity. And if you're building a broader cross-platform 3D complex game, especially one that requires meaningful physics, you should be using Unreal. And so they're generating this, I don't know, one, two billion, call it a billion and a half dollars alone from that engine business.

• 1:27:38David Rosenthal?

  You know, that's the 5% of revenue that they're making. So you know, multiply that by 20 to get the amount of revenue that their customers are generating. So those are the two, I think, powers that apply to the core technology, Unreal Engine and online services and all the infrastructure part of the business. But then with Fortnite, they also have this network economy, right? And this is where cross-platform becomes so important. Fortnite on iOS without cross-platform is so kneecapped. Like, you know, imagine you're a kid or anybody who hangs out with their friends on Fortnite, whether that's playing Battle Royale or in Creator Mode or

• 1:28:23David Rosenthal?

  attending like the concerts that are on in there. I mean, Travis Scott hosted a concert that-

• 1:28:28Ben Gilbert?

  Marshmello.

• 1:28:29David Rosenthal?

  And Marshmello had 14 million people attending. Now, interestingly, it's not like there was one room with 14 million people. They were, it was limited, I think, to 50, actually, for the Travis Scott concerts. You want to be in the instance with your 49 friends. You don't want to be with 49 strangers. Now, if all of a sudden, if most of your friends are not going to be playing on an iOS device, they're going to be on a console, they're going to be on a Switch, they're going to be on an Android device, now you can't play with them, that like hugely removes the value.

• 1:29:04Ben Gilbert?

  David, I think this is a good time to bring in the other pillars of Epic's business. So of course, we've talked about Fortnite. That on its own is somewhere between a billion and $2 billion a year in revenue right now. You got the game engine, that's another billion to $2 billion a year in revenue. You have the App Store, or I guess, what do they call it? The-

• 1:29:22David Rosenthal?

  Epic Game Store.

• 1:29:23Ben Gilbert?

  Epic Game Store. I think it's losing money right now because of the amount of marketing dollars that they're pouring into it and deals that they're doing to get games on there exclusively. So there's a lot of sort of dollars that they're pouring in to make that a successful thing on its own. They started with a huge head start because they converted all of the Fortnite launchers into Epic Game Stores. So suddenly, I can't remember how many- And it was, but overnight there was millions and millions of, of people that suddenly had the Epic Game Store and now had other games in there. And if you want to deep dive on the Epic Game Store, you should go read the Matthew Ball piece that we have linked in the show notes. It's awesome. But then there's this fourth pillar of the Epic Online Services, which is not a huge business for

• 1:30:06Ben Gilbert?

  Epic yet, but is exactly the sort of thing that Tim Sweeney loves, that you can sort of plug into any one of these sort of AWS-like services and the Epic Online Services, whether or not you're using the engine. And there should just be tremendous amount of interop across the whole industry where you could use the matchmaking service, you could use the friends list. There's all sorts of ways that you can allow people to play cross-platform or for friends to be aware of each other. If one person's playing one game on an Xbox and the other person's playing a different game on their phone, using these Epic Online Services, they could all sort of be a part of the same metaverse.

• 1:30:44David Rosenthal?

  There it is. It took us long enough to get there.

• 1:30:48Ben Gilbert?

  But yeah. Here we are an hour and a half in.

• 1:30:50David Rosenthal?

  That's the power. Right now, in the current instantiation of Epic with the Epic Online Services having, you know, just being kind of nascent in adoption and Fortnite being the first and best customer of it, that network economy's power only lives in the Fortnite part of Epic's business. But what you're talking about is they want to bring all of that network economy and network effect of all these friend connections and all the cross-platform into everything that is built on the Epic technology. Like, that's pretty powerful. And I think that's probably also what's really scary to Apple and to Google, right? Like, and probably to Facebook, too.

• 1:31:34Ben Gilbert?

  Yeah. So this really hits at the core of how Tim Sweeney philosophically thinks about what Epic's mission in the world is, and it is how it is diametrically opposed to Apple, Facebook, Google. It's not only open versus closed, it's more like...

• 1:31:52Ben Gilbert?

  Tim thinks there's another internet to be built by basically bringing down rents everywhere, like take rates should dramatically go down and interoperability should dramatically go up. I mean, think about when the World Wide Web first launched, how wide open it was. But Tim's vision is a little bit more privacy protected, that you can't just drop arbitrary JavaScript in and collect information on people. But think about sort of the Ready Player One world, but rather than it all being one company, he has this vision of, and he'll name his competitors. It's actually remarkable to listen to him talk that the Roblox economy could interact with the Fortnite economy, and you could buy goods and bring

• 1:32:33Ben Gilbert?

  them between worlds, and you can easily shift between those worlds with your friends. And I think that the way that he thinks about the world and this metaverse that he wants everyone to live in is commerce is going to be online in this digital space, social connections are going to live there, and it's not just games, and it shouldn't all belong to one company. And you look at the way that Apple is approaching this particular fight and this whole 30% battle, it is, we are entitled to 30% of everything that happens on our platform. And Tim is pounding his fist and saying, nothing is yours and nothing is ours.

• 1:33:08David Rosenthal?

  Yep. Tim Sweeney, not Tim Cook.

• 1:33:10Ben Gilbert?

  Yes, exactly. Too many Tims.

• 1:33:12David Rosenthal?

  Yeah. Well, this is...

• 1:33:14Ben Gilbert?

  As usual, there's like too many, too many white men in power in our stories, but...

• 1:33:19David Rosenthal?

  Absolutely, totally. But I think this is what's really cool. And actually, you know, the whole concept of the metaverse and Ready Player One and all that, it's so cool. And people have wanted it to come about for so long. And VR was kind of a head fake around this. VCs got very excited, myself included. It really is actually starting to happen now, just not in the way that anybody expected. Like, everything we've talked about so far, with all of Epic, Epic's technology, the experiences that they make...

• 1:33:53David Rosenthal?

  Is in the context of thinking about them as games. But we've kind of already crossed the Rubicon. Like, they're not just games anymore.

• 1:34:01Ben Gilbert?

  I mean Fortnite has observer mode. Like, there's a way, if you don't feel like playing, you can still go get on chat with your friends and watch them play without you having to be involved in the game. It's a hangout place.

• 1:34:10David Rosenthal?

  And creator mode, where you can create all sorts of experiences and, you know, play them with your friends. And that's what people also do in Roblox. That's what people do in Rec Room. You know, we've had Nick Fight on the show, the CEO of Rec Room. I think this is what Tim is talking about here. And then you think about the tools that Epic makes. You know, they're so powerful and can enable experiences that just like, honestly, would have been impossible to imagine two years ago. We haven't talked about yet on the episode, but things like The Mandalorian, the awesome, you know, Disney Plus TV series. That series was basically made in the Unreal Engine.

• 1:34:55David Rosenthal?

  Like, they filmed the whole thing on a soundstage with digital walls and all of the sets were built virtually in Unreal.

• 1:35:04Ben Gilbert?

  It's so frickin' insane. I'm gonna hold my tongue for now, but it is like the coolest, most insane. How are there zero practical effects in that whole thing?

• 1:35:13David Rosenthal?

  Am I stealing your thunder from later?

• 1:35:15Ben Gilbert?

  But the point you're making is like, you can enable high IP franchises to be filmed and created at a fraction of the cost, on a fraction of the timeframe. You know, and it's not just this, like theoretically it could happen, like, you know, that the Unreal Engine branching out of gaming and Fortnite branching out of gaming is actually happening.

• 1:35:33David Rosenthal?

  It's already happened.

• 1:35:35Ben Gilbert?

  Sort of real iconic use cases.

• 1:35:36David Rosenthal?

  Yeah. Okay. Any other powers you had on your list?

• 1:35:41Ben Gilbert?

  Those were mine, too.

• 1:35:42David Rosenthal?

  Awesome.

• 1:35:43Ben Gilbert?

  So into the section of what would have happened otherwise? If we were looking at a transaction here, acquisition. This would be what would have happened if the big company hadn't bought the little company. Here, the way I want to analyze this of what would have happened otherwise if Tencent had not invested. And before we talk about if they hadn't invested, I want to talk about their investment for a moment, because I ran some numbers and holy everything, you guys, this is, this is a crazy investment. And we've covered some crazy investments on this show. I think Nasper's Tencent is one of the all time best, but this one is like, let's just run through some numbers. Okay, so in 2012, Tencent bought 40% of the company

• 1:36:22Ben Gilbert?

  for 330 million. And that 40% stake played forward six years in October of 2018, when they raised the round on the valuation of $15 billion. That's now worth 5.4 billion, if I did my dilution math right there. So it took them six years to turn 330 million into 5.4 billion, which I think is a 60% annualized return on that money. And one way to contextualize that is if you're a VC and you're listening to this, that's like, let's say you're a smaller series A firm and you've got a $330 million fund. That's like investing the whole fund and generating a 16x only six years into the life of the fund.

• 1:37:05David Rosenthal?

  Yeah. The crazy, crazy, crazy thing, though, about Tencent and why they're just such, like, they're just on a whole nother level than anyone else out there, is like, this is far from even their best investment. We covered what's probably their best right now. I haven't run the math on Meituan, but in Pinduoduo in two episodes ago, that stake, I think, is worth 20 some odd billion now, and they've invested less than a billion.

• 1:37:35Ben Gilbert?

  Yeah, it's, it's wild.

• 1:37:36David Rosenthal?

  And similar order of magnitude for Meituan.

• 1:37:38Ben Gilbert?

  Unbelievable investors and they bet huge and with conviction and are often right. Anyway, quiet giant. The other thing that I want to say about that deal, not the 2012 deal, but the 2018 deal is when they were valued at $15 billion, I hadn't done my research on the company at that point. And I was like, oh my God, people are caught up in the Fortnite hype. This is not going to end well. But in 2018, they did $5.6 billion in revenue, $3 billion of which was profit. So that valuation is 5X EBITDA.

• 1:38:13David Rosenthal?

  Yeah.

• 1:38:13Ben Gilbert?

  Like, it's, that's not crazy at all.

• 1:38:16David Rosenthal?

  Not crazy at all.

• 1:38:17Ben Gilbert?

  That's a, I like, I'd be a buyer. It's very rational relative to a lot of these other sort of mid teens and 20 and 30 and $40 billion valuations that we saw from lots of other companies over the last several years. So, you know, this business grew incredibly quickly, was spitting off cash and continues to.

• 1:38:37David Rosenthal?

  It reminds me a lot in, in that way of Zoom. Here's a company that's been growing incredibly quickly, incredibly capital efficiently. Zoom, I believe, generated over $1 billion in free cash flow last quarter. You know, and you contrast that with all of these other, you know, it's kind of all these other companies out there that are burning capital. You know, it reminds me also of just, you know, kind of how we started at the top of the show with who Tim Sweeney is and what his goals are and how he operates. You know, he's not hobnobbing with celebrities, even though he's a billionaire. He's eating Bojangles fried chicken and spending

• 1:39:17David Rosenthal?

  his time building epic towards his vision and mission for the future. And he bootstrapped for, how long did we say? Was it 22 years, I think?

• 1:39:27Ben Gilbert?

  22 years.

• 1:39:28David Rosenthal?

  22 years.

• 1:39:28Ben Gilbert?

  Before taking the Tencent money.

• 1:39:29David Rosenthal?

  Before taking the Tencent money.

• 1:39:31Ben Gilbert?

  Yeah. So I mean, on the one hand, yes, you're right. It's absolutely this reflection of Tim's personality. On the other hand, we're comparing it to these companies like Uber that are like moving people around their cities. And Fortnite makes money by selling digital hats. Like they're selling zero marginal cost items that have zero distribution costs. And they're selling a ton of them because of social proof.

• 1:39:52David Rosenthal?

  You're pulling forward a playbook theme.

• 1:39:54Ben Gilbert?

  Yeah. But anyway, would Epic be what they are without the Tencent investment? Absolutely not. Like if you think back to 2012, probably 2011, when the conversation started, you know, they had no or very little digital distribution expertise. They had most recently shipped Gears of War on some discs to some Xbox customers. They had no live ops experience of running anything like the platforms that they have today that are constantly changing and constantly getting updates and constantly getting new seasons. There's no games as experience. And I think like Tim would be the first to tell you, there's a quote that I grabbed here that Tim says that which is Tencent is the number one operator of live games in the world, the number one game publisher in China and the number three internet company in the world.

• 1:40:40Ben Gilbert?

  They're not the game developer. Their expertise is how to operate these games on a very large scale and really appeal to customers. And we found that their values are very similar to ours and that we have a great deal that we can learn from them. And I think that was in like the 2013, 14 timeframe that he gave that quote. So, you know, I think not only are they investors, but I think the leadership team at Epic thinks of them really as strategic advisors and sort of people who brought them into this Epic 4.0 era of the company.

• 1:41:10David Rosenthal?

  Yeah. I mean, it's telling that all of the major, the three major strategic moves and then the game development in this new way that have remade Epic, all happened after the Tencent investment. You know, and it just underscores too, like this theme shows up so much, even though it's specific to Tencent. That company has been so misunderstood for so long. You know, when the investment happened in 2012, we didn't talk about this in history and facts, but a lot of people left the company, left Epic because they thought that Tencent coming in meant that they were going to turn into Zynga. They thought of Tencent as like, oh, free to play, like this is not what we want to build. This is not how you build real games.

• 1:41:56David Rosenthal?

  And the reality was that it was totally. Wrong. It was this whole new vision of a much more sustainable, more democratic way of building games and vision for the industry. And people are only now just starting to wake up to that reality of Tencent.

• 1:42:14Ben Gilbert?

  It's absolutely right. Playbook?

• 1:42:17David Rosenthal?

  Playbook. Let's do it. Okay, so Ben, you mentioned a virtual, digital, zero...

• 1:42:25Ben Gilbert?

  Selling hats.

• 1:42:27David Rosenthal?

  Zero marginal cost goods. Say more about that.

• 1:42:31Ben Gilbert?

  Yeah, so it is literally the greatest business model of all time to have the fixed costs and frankly, not even the large fixed costs of designing a new piece of virtual garb, or a character, or a skin, or, you know, using the tools that Epic has built. It is not, you know, it is, it is a lot of work for an animator to do this and a rigor and all the other things involved, but like, it's not crazy. It's, it's one to five people doing it for less than a couple of months. And, and in some cases, a day. And then you can sell that thing to 350 million people for like 20 bucks each. And it costs $0 for you to get it to them. Like, it is the most incredible operating leverage that you could

• 1:43:16Ben Gilbert?

  possibly have on getting something that takes a very small amount of fixed costs to create relative to its distribution and have zero marginal costs and zero distribution costs in getting it out there. It is like the gods of internet business models come down and knighted Epic and said, "You have this privilege to just print dollars." And there's an ATM machine in their backyard that is just spitting out money. And like, I'm assigning zero value judgment on that. I'm just saying the reality of the business that they find themselves in is unbelievable.

• 1:43:51David Rosenthal?

  This theme that... Low or zero marginal cost goods make for incredible businesses and business models, I feel like is such an important like mega theme that we've, I feel like I've been rediscovering this past year and we've been discovering on this show. The cool thing is, well, two cool things. One, it doesn't only apply to the internet. Once you start to scratch the surface about this idea, you realize it's actually been around for a long time.

• 1:44:25Ben Gilbert?

  Right. Media was classic.

• 1:44:26David Rosenthal?

  Media was this. Yep. And, and reading The Outsiders actually really made me think about this.

• 1:44:32Ben Gilbert?

  Media doesn't have the advantage of that software has where once you, aside from maintenance costs, once you make it, then people keep finding value in it over a pseudo infinite time scale. Like media generally has a shelf life and then you have to kind of create more media, which is the same thing in Fortnite, to be fair.

• 1:44:49David Rosenthal?

  It's also though, it's, it's multiple types of the media business. There's the content part of the media business that you're talking about. There's also though, the distribution part of the media business. Now, this is vastly changed with the internet, but I think about John Malone and TCI and the cable business. You know, that was a business that had incredibly high fixed costs to literally run the cables and launch the satellites for the distribution of signals. But then, once you were a cable operator and you had those lines laid into people's homes, it was literally zero marginal cost to keep charging them a hundred bucks a month, you know, every, every month. Once you start to

• 1:45:31David Rosenthal?

  see this, it's really helps me, I think, evaluate business models and start to foresee what a business model of a company is going to be. And like, no matter how successfully you operate, Hamilton talks a lot about this in Seven Powers, operational excellence is super important and table stakes for becoming a great company. But you kind of have this ceiling of how great you can be based on the economic characteristics of your business and your industry. And it comes down often to this marginal cost aspect.

• 1:46:07Ben Gilbert?

  Well, and if you just look at the FAANG, and I don't want to say FAANG because I don't think Netflix deserves to be in it. Let me get on my high horse for a moment because I slipped up. Feng should refer to high paying jobs in the valley at big companies. And people have used it to refer to a set of stocks that should actually include Microsoft and should not include Netflix, especially from a market cap perspective. So anyway, if you are looking at the big five tech companies by market cap, much of the same characteristics are present in all of them. I mean, online advertising, the Google model, the Facebook model, that's a zero marginal cost, zero distribution cost business. I mean, you look at like the virtue, virtue is very much the wrong word. You look at the advantages that even an Instagram has over a YouTube.

• 1:46:51Ben Gilbert?

  Like Instagram doesn't have to pay creators, whereas YouTube has to pay a cutout to creators. So any business where you are able to charge to distribute something that costs you nothing, and it also costs you nothing to distribute it. It is like, that is present in a lot of these companies. Now, fascinatingly, which I'll foreshadow before grading, Apple is one of these companies that does not have zero marginal costs and definitely does not have zero distribution costs. Their, for the longest time, business model is making 35% operating margins on shipping goods to you that are really, really expensive to produce, even on a, on a variable basis. Like, obviously, the R and D is expensive, but the crap in an iPhone is really expensive. It's not like a digital hat.

• 1:47:33Ben Gilbert?

  And so it's no wonder they're trying to get into these, these services businesses that, you know, are creating this clash. So I think, you know, in some ways, an interesting takeaway here is Epic has the best business model of all time, and Apple is jealous. And that is a little bit of what we are seeing here. But yes, David, I think you're exactly right that once you see it, you can't unsee it.

• 1:47:53David Rosenthal?

  Totally can't unsee it. I think there's another theme to highlight here that Epic at first stumbled into with the Unreal Engine. But then Tim, really, Tim Sweeney, really got religion around and has driven his whole vision now of letting a thousand flowers bloom. Then this is related to the marginal cost aspect of what you're doing. But it's one thing to make games yourself and invest lots of resources into doing that.

• 1:48:29David Rosenthal?

  That's really making an assumption that you are gonna be right and know what the market is gonna want. And Tim has a pretty good track record of that, but as we've seen, like even he can slip up sometimes. You know, those three titles that they started working on in 2012, 2013 didn't work. A much better aspect is if you can find a way to just enable entrepreneurship and creativity kind of writ large and be able to say, hey, I don't know what's gonna work, but I'm gonna let lots and lots of people try and have their shot. That can be way more powerful.

• 1:49:11Ben Gilbert?

  Yeah. What was the phrase we used with Chathin when we had him on the LP show? Leverage on tinkering, which is like anytime you can empower a creator to do more with their same skillset. It can be really powerful. The way that I had what you were describing written out in my notes here are steady platform revenues to smooth hit driven spikes from games.

• 1:49:30David Rosenthal?

  Yep. The only other kind of second layer of nuance I'd add to that. I remember Ben Thompson talking about this in the early days of Strategery. The very best way you can do that is if you can lower the bar to creation and entrepreneurship. And that's what Epic and Tim are really trying to do. They're trying to say, no, you don't need the budget of a Hollywood studio to make an amazing online experience.

• 1:49:53Ben Gilbert?

  Yep. Yep. That's a great point. Okay, some other themes that I had here, a few of them roll up under control. One of them is don't be beholden to a publisher. You know, creative differences with Microsoft over the future of Gears of War is an example of this. And you know, Epic definitely publishes Fortnite, publishes and develops Fortnite. And so it's important to kind of have the final say. And Tim found a way to do that. It also is interesting, if you look at their capital structure, I don't think they could pull the thing that they're pulling with Apple if they were a public company. Like it in stark contrast to the lesson learned from Eventbrite, which was it's nice being public because you have more flexibility when you need to do things like raise capital.

• 1:50:37Ben Gilbert?

  It forces more capital allocation discipline than when you have sort of deep pockets from VC money. In this scenario, if he had public shareholders, it's very unlikely, I think, that he could have gone after Apple in this way. Because as we'll talk about,

• 1:50:53Ben Gilbert?

  It's likely short-term value destructive. And it's not necessarily clear that it's long-term value creative either. He's doing something on behalf of an ecosystem for value that Epic itself and their shareholders may not get to realize. And so I think this notion of having control, so you can sort of do what you want. And I'm sure he very much checked with Tencent and had a deep conversation, especially about what Tencent wants from Apple before doing this. Being a controlling shareholder allows you to do things that you certainly could not do that may pay off compared to being a public company.

• 1:51:28David Rosenthal?

  Yep, total. I mean, could you imagine what the share price would be doing through all this if this were a public company?

• 1:51:35Ben Gilbert?

  Oh, my gosh. Yeah. Well, if you look at Apple, it's only going up.

• 1:51:40David Rosenthal?

  Yeah. Which actually, you know, I think, to be fair to the Eventbrite episode, I think Kevin or Julia, or maybe both, when we were talking about this, said, yes, there absolutely are situations where being private is better. It's not like being public is better writ large, and this is one of those situations.

• 1:51:58Ben Gilbert?

  Right, right. Yeah, that's a great point. Okay, a couple more. One is that game engines in particular are of a type of product that have incredible inertia that are hard to build. It's hard to get customers, but then they're almost impossible to displace. Like, no one's going to swap out their game engine for a different game engine. And you also aren't going to be able to start a successful competitor to the Unreal Engine right now. Like, if you look at when Unity successfully started a game engine, it took off because of the birth of mobile. There was this brand-new paradigm where you needed to have an engine with a very different set of resources. We haven't gone deep on this on this show, but if you're developing a mobile-only game,

• 1:52:39Ben Gilbert?

  like, you would be pulling your hair out trying to do it just with the Unreal Engine. Like, if you're going to do that, it better be worth it because you're also developing for PC and consoles. And the only way to compete with one of those products, once it has momentum behind it, is in a displacement of paradigm. So, mobile coming out, and who knows what the next one will be. But it's definitely one of these companies where the sort of inertia around it makes switching basically impossible until the next technology generation.

• 1:53:10David Rosenthal?

  Yep, 100%.

• 1:53:13Ben Gilbert?

  Okay, and my last one. So in my notes, I wrote down iteration and compounding. So iteration is standard dogma in startups and engineering. I mean, you hear about agile development and compounding is standard dogma in investing. But this is one of the first times that I really grasped how interlinked the two concepts are. The sort of methodical, small iterations that Epic is able to do all of these years on, say, Unreal Engine, compounds on each other to provide extraordinary value. So it's not just dollars that compound on their own, the way that you would think about a stock growing over the years. It's dollars deployed into, like, every single day into people building that next building block of software that future engineers and non-engineers

• 1:53:58Ben Gilbert?

  can build on top of. And it just really concretized, like, iteration is almost like the implementation of the abstract concept of compounding and investing.

• 1:54:10David Rosenthal?

  Yeah, I love that. That's like, I think that's a really elegant way to describe what the job of capital allocation actually is, or maybe better put, resource allocation, right? Like, it's not just that you're allocating resources and sitting back and watching them compound. I mean, maybe you're doing that if you're like a public markets investor. But what somebody like a Tim is doing, you know, what a, well, both Tims, what a, what a CEO is doing, you know, especially a outsider type CEO in the Will Thorndike sense of the

• 1:54:51David Rosenthal?

  word, of which Tim Sweeney would 100%, 1,000% qualify, is that iterating every day with, and the allocation of resources with an eye towards what's the most optimal compounding rate that-

• 1:55:07Ben Gilbert?

  How will a dollar invested in what we're building today become a building block to make us able to build more tomorrow, rather than starting from scratch every time?

• 1:55:16David Rosenthal?

  Yeah, I love that.

• 1:55:18Ben Gilbert?

  All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired, Logora, the agentic operating system that is redefining how the world's best legal teams work.

• 1:55:31David Rosenthal?

  Yep. It's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Logora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry?

• 1:55:48Ben Gilbert?

  So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm for months. They sat with the lawyers just watching how the work really gets done.

• 1:56:03David Rosenthal?

  And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Logora's bet here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

• 1:56:27Ben Gilbert?

  And they recently launched Logora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective, then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required.

• 1:56:46David Rosenthal?

  And Logora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Logora numbers essentially speak for themselves. When they have a head-to-head pilot with their top competitor, they win 70% of the time. Logora now has over 100,000 lawyers on the platform from 1,200 legal teams in 50 countries. And crazily, they went from 1 million to 100 million in ARR in about 18 months.

• 1:57:16Ben Gilbert?

  Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com/acquired and just tell them that Ben and David sent you. All right, David, so grading. So normally, for anyone new to the show, we would normally grade a transaction. So was it a good use of capital for Facebook to buy Instagram? In that scenario, that is our A+ and then everything else sort of rolls down from there to our, I think, F for AOL Time Warner.

• 1:57:58Ben Gilbert?

  So in this scenario, because, I mean, I guess we could grade like, was it a good idea for Tencent to deploy capital or something like that? The big thing that we all should be grading right now is this fight with Apple. Like, what is going to resolve here and what should each company do? And so, the way that I want to evaluate this is if Epic holds strong, what should Apple do? And if Apple holds strong, what should Epic do? And to set the table for that, I pulled up a bunch of numbers that I think are worth sort of walking through here to sort of contextualize this fight. So, the App Store last year generated an estimated $18.3 billion of revenue for Apple.

• 1:58:41Ben Gilbert?

  So that's their 30% cut, so $61 billion that was spent on the App Store that went to Apple and developers. For Apple, for anyone who's been following the stock and listening to earnings, when Tim says, Tim Cook, says services revenue, 40% of that is App Store. So this $61 billion represents 40% of the services revenue. Fortnite makes, right now, about $200 million a year on iOS, which means about $60 million is going to Apple. And that's a 12%, which actually came out in a court proceeding today. So Fortnite last year did $1.8 billion in revenue across all of its platforms.

• 1:59:24Ben Gilbert?

  So, you know, you take a 12% of that, comes to $200 million that they're making on iOS. So that's sort of what's at stake here. Is that that 200 million? So then there's this other thing that has entered the arena, which is Apple pulling out the hammer and saying, "We are going to make it so that anyone using Unreal Engine can no longer deploy onto Apple platforms," which sounds really scary. And most people analyzing this are looking at it saying, "Well, that's actually the real problem here because the Unreal Engine sort of loses credibility with developers if this major platform where there's an incredible amount of spend going on in the App Store no longer has Unreal Engine as a deployment target."

• 2:00:09Ben Gilbert?

  Like, you can deploy to these five other platforms, but not the sixth, which is a big one. So that's a problem.

• 2:00:14David Rosenthal?

  It'd be one thing for Epic to lose $200 million of Fortnite revenue over this. It'd be a whole nother thing for them to massively disappoint all of their Unreal Engine and all of their services' customers.

• 2:00:31Ben Gilbert?

  Right. But when evaluating, push comes to shove on that, the biggest game on iOS that uses the Unreal Engine is Fortnite. The second biggest game is PUBG. And when you look down the list of the top 100 grossing apps, very, very few of them use Unreal Engine. As we've been talking about the rest of the episode, Unity is actually the preferred sort of mobile game 2D Candy Crush-style game engine. And so I don't know in practice if a big game developer who is thinking about making a AAA-style title to deploy across Sony platforms and Xbox and, I shouldn't say Sony platforms,

• 2:01:16Ben Gilbert?

  PlayStation and Xbox and the PC. I think mobile's a little bit of an afterthought, where they're saying like, "Yeah, it'd be nice, but like, that's not where most of my revenue's going to come from." And so I actually, I don't think it would be that big a deal. I mean, it'd be a big deal, but I don't think it would be this like catastrophic loss for the whole ecosystem that people are sort of chalking it up to be if the Unreal Engine was no longer available on iOS. So I really do think what it actually comes down to is the $200 million a year that Fortnite makes on iOS and the 60 million of that that goes to Apple.

• 2:01:55David Rosenthal?

  This is super interesting, right? Like, I actually think the question, the context is, is not what you said of like, I'm, I don't know, take two, I make Grand Theft Auto, like, I'm not gonna put that on the App Store, cuz I'm not gonna make my revenue there. As we've talked about, that whole model, like, yeah, that's gonna be around, that whole Hollywood style of game making, that's gonna be around for a while, it's gonna be fine, but that's not where the big industry is. The really interesting question is, like, these dynamics, like, why is Overwatch not on the App Store? Why is League of Legends not on the App Store? Why is Dota 2 not on the App Store? Why are all these modern game as a service esports

• 2:02:37David Rosenthal?

  style, true, like, big, big winners, big platforms in this era, why are they not on mobile? It's not cuz of technical limitations. An iPad or iPhone 11 Pro, like, is very, very capable of running these things.

• 2:02:51Ben Gilbert?

  And so it's only moderately because of tech. It's more like it's really difficult. Like, it better be really worth it if you're gonna go and do all the hoops to make it actually run on those devices and modify all your input controls to be touch and not have the WASD controls and all that.

• 2:03:06David Rosenthal?

  Totally, totally, but doable. I mean, Tencent's done it with Honor of Kings in China.

• 2:03:12Ben Gilbert?

  Yeah, totally. And I played Fortnite on my phone last week.

• 2:03:14David Rosenthal?

  Yep, totally. So it's doable. I think the reason that it hasn't happened is because of this economics issue, right? Like, if you're operating your game as a service and making revenue in a SaaS-like manner through subscriptions and/or virtual good economies, you don't wanna pay 30% to Apple or Google. Like, that's just a nonstarter. Actually, I think Apple's kinda like, zooming out even more, one of the kinda big failures of Apple and Android too, in a different way, but really, Apple, is that they have, like, they had an opportunity to have iOS devices, you know, which sort of became the Uber device that ate lots of

• 2:03:54David Rosenthal?

  other specialized niche electronic pieces. They had the opportunity to eat game consoles as well, but that never happened. And I think this is the reason why.

• 2:04:05Ben Gilbert?

  Yeah, instead, they segmented it, and they, they ate a lot of handheld gaming. The Switch has still done well, but they, there are mobile-type games that have done exceedingly

• 2:04:14David Rosenthal?

  Well, they ate, like, Facebook Gaming and Web Gaming.

• 2:04:16Ben Gilbert?

  Yeah. Oh, that's a great way to put it. The Candy Crushes of the world, I think those types of games are still the most played, even more so than Fortnite. But you're right that they could have eaten AAA titles too, and they didn't. And the question is, I do think there's some combination of like, the devices aren't that great of a user experience to be playing those types of games. So there's, the developer has to like, jump through extra hoops to make it a better experience, and then it still doesn't feel totally right. To your point, Honor of Kings did work, so. But you're right that like, the economic model is just not as appealing.

• 2:04:55David Rosenthal?

  Right. Like, again, because these games are network economies, it's in the developer's interest to want to have as many, as large and addressable audience of potential players as possible. And the mobile platforms have so many, so large installed bases that like, they should want to be on these things. But, you know. So, anyway, what should people, what should each party do here?

• 2:05:20Ben Gilbert?

  So here's my straw man. So let's right now say that the courts hold that Apple can't drag the Unreal Engine into this. And let's say Epic holds strong and decides that we are going to leave the version in the App Store that lets me buy directly from Epic. And, you know, what, what should be done there? And I did another little fun calculation. The money that Apple receives from Fortnite per year on the App Store comes to about a third of a percent of App Store revenues. Like, you know, what is on trial here is Apple's like emergent business model of the last five years with this, this sort of App Store fees.

• 2:06:02Ben Gilbert?

  So if it means dropping their take rate 1%, like, they should not do that. They should say, okay, we're happy to lose you Fortnite, goodbye. And they should make it unplayable on everyone else's phones. Like, the counterargument to that is that, first of all, that it would trigger new legislation, that it would sort of have antitrust implications. And, you know, there's another thing around, maybe that they would turn off more developers from doing that because people would go, oh, my gosh, like, you don't have this trustworthy development platform even for even my mobile game anymore. The Epic revenue is really a drop in the bucket for Apple.

• 2:06:42David Rosenthal?

  Here's what I think the biggest danger is for Apple. If you believe that this trend that Tim Sweeney definitely believes in of these things are becoming more than games, they're becoming a metaverse. And if you think that is going to keep happening and accelerating, do you box yourself out of participating in that as Apple? Because none of the creators and developers are gonna wanna play on your platform, just like none of the MOBAs and the games as a service have. And so as that industry becomes bigger and bigger and bigger, none of those play on your platform, and then all the consumers that wanna consume those, that content, now go to other devices to do that.

• 2:07:27Ben Gilbert?

  You're absolutely right, yes. Apple's risk here is much less about the Fortnite revenue. And frankly, I don't think it's that much about the unreal thing either, because as we talked about, like, it's really not the games people are playing on their platforms. You know, are people so loyal to Fortnite that they'll say, you know what, screw this, my next phone is an Android phone? Like, is Apple gonna be shut out from participating in the more sort of open? Well, one of two things. Are they gonna be shut out from the Tim Sweeney's version of the metaverse when people are picking their next device? Or even long before that, are people gonna say, look, I wanna play freaking Fortnite, and I can't on your phones?

• 2:08:01David Rosenthal?

  Yeah.

• 2:08:01Ben Gilbert?

  And not by phones? That would be the argument that Apple should blink.

• 2:08:05David Rosenthal?

  Yep.

• 2:08:07David Rosenthal?

  But it's it's major business model disruption to them if they do blink.

• 2:08:12Ben Gilbert?

  Totally, totally. I mean, I think it'd be a different thing here if it was Unity. If it was if Unity made Fortnite, I think then Apple's like, yeah, we're not gonna like, we will definitely not kick all Unity games off of the platform, but.

• 2:08:26David Rosenthal?

  There's some chance, right, that Unity joins in with Unreal here.

• 2:08:34Ben Gilbert?

  And why would they do that? They have a perceived license model, not a cut of revenue model.

• 2:08:40David Rosenthal?

  Frankly, I mean, without having studied Unity enough, they may want to switch to the cut of revenue model at some point. I mean, actually, if anything, like, it's sort of surprising that Unreal is the one with the cut of revenue model, given that they are the high-end platform and Unity is the SaaS model, given that they're the low-end platform. You would think that as a low-end platform, you'd want as many developers coming onto the platform as possible in this. You wouldn't want to have any incentive for or any barrier for them not to. Now, I think you can start using Unity for pretty low or no fees as an indie developer.

• 2:09:22Ben Gilbert?

  Yeah. Yeah, that's an interesting point, too. Getting back to if Epic refuses to blink and then Apple kicks them off. So obviously, some kind of compromise is the best thing for everyone, including customers. It's only 12% of Fortnite's revenue. Like, it would suck to lose out on that revenue, but it's also not the end of the world. Like, it's not where most people are playing Fortnite. And so to me, is it that bad for Fortnite to not be on your iPhone? I don't think it's that bad. Is it that bad for Apple that the most popular game is not on your phone? I actually think it's worse for Apple.

• 2:09:57David Rosenthal?

  It's worse. Yeah, I think it is worse. Because again, like, think about if you're playing Fortnite on iOS, chances are high that if you really, really love Fortnite, you're able to go buy a Switch Lite for 150 or 200 bucks and keep playing Fortnite.

• 2:10:15Ben Gilbert?

  Yep. Okay, so if it's worse for Apple, then what we're saying is, okay, Apple should blink.

• 2:10:21Ben Gilbert?

  Apple should not bring down the ban hammer and, and kick all Fortnite users off the phone. There's some middle ground where they just keep them banned, but I think that's actually just as bad for them. It's just as bad a look as disabling functionality from all the phones that currently have Fortnite installed, or as John Gruber would put it, the kill switch. So what does Apple do? Like, Apple's actually in the hot seat then. And let's say that Epic's gonna hold strong. Like, Epic's demands are very interesting here. They want an App Store. They want to be able to compete with the App Store by putting the Epic Games Store on the phone. And they want to be able to charge consumers money directly through their app. If Apple says yes to the first one, like if they want to

• 2:11:06Ben Gilbert?

  give on one of these two things, they say yes to the first one, like, their whole business, like their whole strategic positioning is totally screwed. Like, they make all this services revenue because the App Store is a monopoly. If they do the second and budge on the 30%, you know, that's an $18 billion a year business for them. That's every single percent you budge on is incredibly impactful. So like, I mean, it's not clear that Apple should blink either.

• 2:11:35David Rosenthal?

  I actually think like, the best long-term value preserving and ultimately value creative move for Apple is not to give in to Epic on saying you can have your own App Store here, but to lower their own take rate in line. Because, because it's not just about Epic here. It's like, there's a bigger thing going on, which is that developers no longer love Apple. It's not just Epic. It is, it's Basecamp. It's everybody.

• 2:12:11Ben Gilbert?

  Thousands. Yeah. Yeah, I mean, it's everyone that they privately communicated with and said and tried to make some distinction between a B to B app versus a B to C app.

• 2:12:20David Rosenthal?

  Right. Anytime you're doing something like that, like you're losing. I don't care what you're saying, if it's coming to that, you're arguing against your most arguably, your most important constituency. Cause like they have customers who buy their devices, but customers only buy their devices because they get great experiences on the devices that developers create for them.

• 2:12:43Ben Gilbert?

  Apple would say customers or well, Apple would say Apple is their most important. They wouldn't say that, but Apple is the most important customer is second, developers last. They were very fortunate to get all the developers onto iOS very early and have had tremendous lock in in their sense.

• 2:12:57David Rosenthal?

  So I think they're really putting themselves at risk here in the long term. Like, yeah, you know, if Fortnite weren't on iOS, would some people switch to Android? Sure.

• 2:13:08Ben Gilbert?

  But like, and you know, they've, they have people out trying to figure that out right now. What, what, how many customers would we lose now and in the future?

• 2:13:15David Rosenthal?

  Sure, but like, what's the big risk here? The big risk is like, like I certainly wouldn't switch, you wouldn't switch, but what if Spotify?

• 2:13:22Ben Gilbert?

  I just reinstalled Fortnite because I had deleted it a year ago, but I actually I could reinstall it because I had previously downloaded it. It's some weird loophole.

• 2:13:32David Rosenthal?

  But what if Spotify weren't on Apple?

• 2:13:35Ben Gilbert?

  Right, right. Like, yeah, I have a lot of lock in there. Like, I'm not leaving. I'm not going to do the Apple Music thing, so.

• 2:13:42David Rosenthal?

  What if, what if Netflix weren't on Apple?

• 2:13:46Ben Gilbert?

  That's easier because I don't watch it on my phone. Like, it would be very easy for me to go and buy something other than an Apple TV. But yeah, that's a good point. I mean, Spotify is a.

• 2:13:57David Rosenthal?

  Right. So each of these things on their own, yeah, yeah, yeah. Okay. But now there's another device out there that has all these things. And oh yeah, they're cheaper and they're better experiences because it's a more developer friendly platform.

• 2:14:10David Rosenthal?

  It doesn't take too, too many of those where you're like, hmm, do I really need an iPhone?

• 2:14:14Ben Gilbert?

  Yeah. So the question for Apple comes down to, do we want to preserve our monopoly position? And take less economics for the privilege of keeping our monopoly position by being the only app store? Or do we want to let other people compete with us? And in that case, we're just going to get competed down on price anyway. So they should probably just figure out a way to drop their rate to something that Epic will agree to. Gosh, are they going to roll that out? I mean, the implications are so huge. But I think where we're both landing is like, Apple needs to give on something here. And it probably needs to be either on economic terms or letting other, letting people use alternate

• 2:14:54Ben Gilbert?

  payment methods in apps and like, ugh, if I'm Apple, I'm not doing that. I'm trying to go back to Epic and say, we will cut it to, I don't know, 20%, but like no on the store and no on alternate payment methods. Preserve monopoly, try and make everyone happy and feel like you're not overly rent seeking on your device. And I think that's the strategy.

• 2:15:18David Rosenthal?

  Yeah.

• 2:15:19Ben Gilbert?

  It all comes down to this magical question of is Fortnite actually impactful enough to be the catalyst of all the bad things that we've just talked about with Apple actually happening if it weren't there? And maybe, maybe not, you know, that's, that's the dice roll.

• 2:15:35David Rosenthal?

  Yeah. Well, here's though, the other big calculus for Apple to bring back in is Tencent. Right? Like who is the most important company and partner to Apple in the world? Can make an argument, it's Tencent.

• 2:15:52Ben Gilbert?

  Why is it Tencent?

• 2:15:53David Rosenthal?

  Well, Apple has a huge, huge business in China. If WeChat is not on iOS in China, that business goes to zero.

• 2:16:03Ben Gilbert?

  That's a great point because WeChat has the closer relationship with the customer than Apple does.

• 2:16:07David Rosenthal?

  Yep, much, much closer. Like, I think it's probably not even a question. Like, no WeChat on iOS, everybody's moving to Android.

• 2:16:15Ben Gilbert?

  You're right. Yeah, there's so many games of chicken that this could start. Tim Sweeney is willing to take risks, but who else is? Who will throw in with him? And I mean, because like if you're WeChat, like, come on, that's crazy to lose all that distribution on all those phones.

• 2:16:32David Rosenthal?

  But you could maybe argue that they don't need it, right? Like, WeChat is more important.

• 2:16:37Ben Gilbert?

  Don't they also have a special deal where people can use WeChat Pay for virtual goods in China and go around the App Store there?

• 2:16:43David Rosenthal?

  Oh, I didn't research that. They may. Well, so then Apple's already compromising.

• 2:16:49Ben Gilbert?

  Right. Apple needs to find a way to quietly compromise and talk about why this is a special case and have it hold water and then do that and then hope that no one as big as Fortnite comes in and does this again.

• 2:17:02David Rosenthal?

  Which is for sure not going to be the case.

• 2:17:04Ben Gilbert?

  It's a losing strategy. I think you're right. Ultimately, we've said this eight different ways, but yeah, long term, they need to figure out a way to preserve their control and give on economics a little bit. And that is long-term value creative.

• 2:17:15David Rosenthal?

  They need to become a great platform for developers again.

• 2:17:18Ben Gilbert?

  Yep. Make Apple great again for developers.

• 2:17:23Ben Gilbert?

  All right. Well, we moved a section after grading that we normally have before, which is value creation and value capture. A couple of ways I want to talk about this. So Epic has done a tremendous job of creating value in the world and frankly, capturing like less of it than I think they create. The fact that they only charge 5% for the Unreal Engine, like, it is fair. And I think the fact that they undercharge for the Epic Game Store also, you know, again, capturing far less value than they create. You always have to capture less value than you create in order to enable value for your customers. So no one's just trading a dollar for a dollar. But, you know, I think they capture dramatically less value than they create and they've got lots of headroom above them. The other way

• 2:18:04Ben Gilbert?

  to evaluate this value creation, value capture is like, in this whole dance with Apple, the unfortunate thing is the consumer is losing. Like, the customer is the one that's bearing the brunt of these tech giants clashing. And that's, you know, value destructive ultimately for the end user that these tech giants are at war over who gets what economics.

• 2:18:31David Rosenthal?

  Yeah. Well, and that's also a game, you know, where regulation and the government comes into play. And in that part of the game, the deck is stacked against the big tech companies, right? Like, are regulators really gonna say, oh, no, you, you know, independent, much smaller business in North Carolina, like, you are being unfair to Apple here. No way.

• 2:18:59Ben Gilbert?

  This $17 billion business is being mean to the $2.2 trillion business. Also, I do want to point out, Apple grew by 10 epics this week.

• 2:19:12David Rosenthal?

  Wow. The scale is just unbelievable with these.

• 2:19:16Ben Gilbert?

  Compound interest continues to blow my mind. And, uh, yeah. Well, listeners, on, on the grading and on the value creation, value capture, there's so many nuanced points here. We would love to hear from you. So you should join us in the acquired Slack, acquired.fm/slash Slack, or just go to our website and talk about it. Or we'd love to, you know, chat on Twitter, too, or at acquired FM. I think there's, obviously, the situation changes every day. There's probably going to be new news that comes out between this episode and, you know, recording and release. But also, there's just lots of nuanced points here. So we'd love to, to hear your perspective on, uh, on what we sort of missed.

• 2:19:51David Rosenthal?

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• 2:19:57Ben Gilbert?

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• 2:20:08David Rosenthal?

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• 2:20:25David Rosenthal?

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• 2:20:28Ben Gilbert?

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• 2:20:41David Rosenthal?

  So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com/acquired to get started.

• 2:20:52Ben Gilbert?

  Carvouts. Let's do it. All right. I'm going to go first because mine is a continuation of this episode. So I have a three-part carve-out that is going to be in the order that I experienced these three pieces of media, and I recommend the same to you. So when was this? August of 2019. So this is before Disney Plus launch, before The Mandalorian came out. There was a demo video put out by Epic with a guy walking over, getting on a motorcycle, and revving the engine. And what was amazing about this, first of all, you're like, why is this short little video put out by Epic? What was amazing about this is the fact that it was shot in a studio with a guy sitting on a real motorcycle, but with a screen behind

• 2:21:36Ben Gilbert?

  and to the side of him that was rendering the full background. And the other amazing thing was that the camera was moving slightly, as you would expect, a dollyed camera on a set to move. And the background shifted perspective in the right way that you would expect with the camera. So not only were you like, whoa, that background is real, and certain things are 1,000 feet away and other things are five feet away, but there's no artifacts. Like, it also just looks like the real world, and there's the appropriate amount of blur for what the depth of field on this lens is. So like, it all actually looks right. And then they show you the behind the scenes. And oh my God, it's a screen, and the screen is just super-high-density pixels.

• 2:22:20Ben Gilbert?

  And so there's no sort of like crazy artifact that you would normally see if you took a picture of a screen. The physics of the... Like, there were accelerometers on the camera that are tied to what is being projected on the screen so that the stuff on the screen shifts in the exact right way with the camera as it moves and pans in real time, undetectable, no lag detectable to the human eye, unfreaking believable breakthrough technology. So I remember watching that and being like... Holy God, the future of filmmaking is here. It's amazing, this games company, and I'd heard of Epic, obviously, because of Fortnite and because of the Unreal Engine. It's amazing, the Unreal Engine can sort of like do this now. I wonder if anybody's gonna... Okay, so flash forward, The Mandalorian happens. Watch it, it's fantastic.

• 2:23:04David Rosenthal?

  Literally worth the Disney Plus subscription just for The Mandalorian.

• 2:23:07Ben Gilbert?

  Oh, it's so good. I mean, it's a Star Wars Western. It's excellent. And so then, February 2020, there's this video that gets released of the making of The Mandalorian in what they call "The Volume." And this is a soundstage, David, exactly as you described. 360-degree, you know, screens all around, a sort of like horizontal screen above you, and that's used for lighting the scene. So not only are they rendering all of the elements around... By the way, amazing that that's CG, right? It all looks so real. People are wearing costumes. They have some props, like desks and stuff. But like, other than that, all the backgrounds at all depths are just rendered on these

• 2:23:46Ben Gilbert?

  screens and then lit using the Unreal Engine from above, from this like crazy huge horizontal screen that is making sure that the lighting that is falling on the character exactly matches the right lighting based on what the background in the scene is. Mind blowing. So, really cool video. It's short, it's like five, six minutes. Then, a friend sends me this thing in ASC, it's ascmag.com. I think it's like the American Society of Cinematographers or something like that. It's this incredible long-form read on the physics of how the whole thing works. If you're into like film at all, movies or photography or whatever, it is just the most fascinating read on the technical details of how they accomplish a lot of these shots.

• 2:24:30Ben Gilbert?

  And it is totally worth carving out some time to go and read because it is, what's the quote? "Sufficiently developed technology is indistinguishable from magic." Something along those lines is absolutely true. And I am so amped up about Unreal and the future of filmmaking.

• 2:24:47David Rosenthal?

  It's so cool. So amazing. And the net of all of this is like, it's better you enable more creativity at an order of magnitude lower cost, too. Like, they talk about this is how The Mandalorian was able to be made and be so awesome as a TV series versus a multi-hundred-million-dollar-budget movie. Because they just did it in a room.

• 2:25:08Ben Gilbert?

  And it truly would have been. Yeah, the whole thing shot in the same room.

• 2:25:12David Rosenthal?

  Amazing. Okay, so my carve out, more of a stretch to connect it to the current episode, but I'm gonna try, I'm gonna try. I have been rereading Isaac Asimov's Foundation series. I might have had this be a carve out years ago on Acquired. Ah, so good. It's classic. You know, the whole thing is about the fall of a dominant society and its replacement by an upstart society was, you know, an allegory for Rome, or, you know, whatever you could apply it to the current state of the world right now. I think you could also, maybe, maybe it's a stretch, but maybe you could apply it here to Apple and Epic 2, you know, the galactic empire that falls, falls because it stops

• 2:25:54David Rosenthal?

  doing its job. It becomes all about politics and it loses its technological edge. Like, one of the main themes in the book is that nuclear power and knowledge of, you know, how to harness it and continue developing it gets lost in the empire and it's only the foundation, this tiny little, you know, edge of the galaxy upstart that has that power. Having the ability to be on the cutting edge of technology and the nimbleness to move fast with it, probably gonna win.

• 2:26:25Ben Gilbert?

  Indeed. Well, that's a great, great place to leave it. Well, listeners, if you aren't subscribed and you like what you hear, you totally should. And if you have a friend who you think should, should check out this episode or any other episode, you know, maybe they are a gamer, or maybe they've also talked about the Mandalorian with you and want to understand more about the company that powered it, share the episode. We love, we love when you share with new folks. So thanks so much for, for doing that. As always, if you love acquired and you want to hone your own craft of company building, you should join the community of acquired limited partners. You'll get access to the LP show where we dive deeper into the fundamentals of company building and investing. In addition to our monthly LP calls where we talk directly with all of you and of course, our book club

• 2:27:09Ben Gilbert?

  and our Zoom calls with the authors. To give you a little preview of our most recent LP episode, it was one in our fundamentals of venture capital series of which we're doing six, maybe seven, David, we gotta decide. But this was the one on Basically how VC firms make decisions mechanically as different people in the firm are involved, which is helpful to know if you're pitching or if you're aspiring to be an investor, or frankly, if you just want to know how other investors do it and you're active today. If you aren't already a limited partner, you can click the link in the show notes or go to acquired.fm/lp. And of course, all new listeners get a seven day free trial. If you want to hang out with the acquired community, join us in the Slack. And with that, listeners, we will see you next time.

• 2:27:50David Rosenthal?

  We will see you next time.