So Epic Games is in the news again. This time they’ve picked a fight with Apple and Google. That’s fine. Both companies are very worthy targets, but I don’t have much else to say about the lawsuit itself. This story is evolving by the day, and I make videos much too slowly to keep up with fast-paced stories like this.
The interesting thing is Epic’s Nineteen-Eighty Fortnite campaign, which tries to rally users to their cause. They even have the #FreeFortnite hashtag, but it’s not about making Fortnite free for us, it’s about making the Apple store free to use for Fortnite.
This is not the first time the company has tried to frame simple corporate business tactics as something brave or heroic.
I don’t know Epic CEO Tim Sweeney and even though I disagree with him on many things, I don’t have anything personally against him. But whether he intends it or not, the way he carries himself on social media makes it feel like he thinks he’s the hero because other people are worse. It actually reminds me of Jack from the Borderlands series:
Jack will do something self-serving and deeply frustrating to people and then assume he’s the hero because some of his foes are bad actors, and then he acts like everyone should worship his “heroics”.
I’m not saying that Tim Sweeney the person is a self-serving madman, I’m just saying that this is how the company comes off when it pulls one of these PR stunts.
The most obvious example of this behavior is the Epic strategy of securing platform exclusives. The company acts like they’re saving PC gaming by challenging the Steam cut, but in the meantime gamers are frustrated that they have to have to use this half-finished launcher and not preferred platforms like Steam or GoG. The Epic Store is pretty threadbare in terms of features and a lot of people are torn between passing up on a game they want, or getting that game on a platform they hate. This is even worse for people in Asian markets where Epic doesn’t accept common payment methods. For those people the choice isn’t between “Using Epic” and “not getting the game at all”. They just can’t get the game.
So people asked Tim Sweeney what it would take to get him to stop paying developers to secure exclusives, and his answer was… less than ideal:
He said he wouldn’t stop until Steam lowered their cut to match the Epic store. If you run the numbers, you’ll discover this is basically impossible.
But before we can discuss why Steam can never match the Epic store cut, we need to go back and discuss what the cut is, why it exists, and why the Steam cut isn’t as unreasonable as it might seem.
The Steam Cut
So how things work right now is that if you’re a game developer selling a game on Steam, Valve will keep 30% of the sale price. If you sell a game for ten bucks, then Valve gets three of those dollars. If you sell a game for sixty US dollars, then Valve keeps twenty for themselves. Obviously it’s a little more complex than this when you look at things like special deals for large publishers, regional taxes, trade regulations, and currency conversions, but to keep this simple let’s ignore all of that stuff for now.
This 30% is called the “Steam Cut”. It’s how much of your income you need to hand over to Valve software for the privilege of selling your game on their platform.
It probably seems like a lot. I mean, imagine if you’re a hardworking indie developer. You spend years of your life pouring your heart and soul into making a game. You work long hours. You do the game design. You hire people to make the art. You do the coding. You do the QA testing. You do the marketing. You do the support.
And then you put the game on Steam and Valve helps themselves to almost a third of your income even though you did all the work and took all the risks. You can probably see why developers resent this so much, and why people have taken to calling this the “Steam tax”. Epic is trying to fight against this. That’s good, but while the Steam Tax might be anti-developer, artificial platform exclusives are definitely anti-consumer. Doing bad things in pursuit of a noble goal isn’t heroic. It just makes you a different kind of bad guy.
The Bad Old Days
As annoying as the “Steam Tax” is, things are a lot better than they used to be. See, creative people have always faced this gatekeeper problem. You make something, and then you need a big company to help you distribute that work to the masses. If you’re an author then you need a book publisher, and if you’re a band then you need a record label.
In the pre-internet world, all of the power was in the hands of those publishing companies, which meant they set the terms of the contract. So if your book or album sells for ten bucks, you might see a single dollar of that. And that was the cut you’d get if you were incredibly famous and successful. If you were some kind of nobody, then you’d get even less.
And to a certain extent, this is understandable. Maybe this 10% cut makes the publisher look heartless and greedy, but if you’re selling a physical book then your effort as the author is tiny compared to the gargantuan costs of typesetting, printing, binding, and warehousing millions of books, shipping them all over the country, marketing the books to the public, and selling them at retail. That process involves hundreds of people, and they need to be paid too.
But then the internet showed up, and suddenly those publishing costs vanished. In the internet age, distributing digital goods is very close to free. The bandwidth needed to deliver a book or album is just a few pennies per user.
So then we had a long shake-out period where the old publishing conventions were challenged. In the video game world, we seem to have settled on a situation where the creator gets 70% and the store gets 30%. That’s a massive improvement, but it’s also reasonable to wonder… could we do even better?
Enter the Epic Games Store, where the developer keeps 88% of the sale price and the store takes just 12%. That sounds really good, doesn’t it? More of our money gets to the people who make the games, and less of it gets eaten up by the middlemen.
The problem is that people don’t like using the Epic Games Store, and rather than trying to bring people to the platform with better features and pricing, Epic has been offering developers money to agree to make their titles exclusive to the Epic Store.
This does not sit well with the average PC gamer who has become accustomed to more developed platforms. So people asked Epic CEO Tim Sweeney what it would take to get him to knock it off. And that’s when we come back to Sweeney’s tweet.
On the face of it, this seems like a pretty cool challenge. He’s throwing down the gauntlet and saying that he’ll abandon the exclusives if Steam will lower their cut from 30% to 12%. He also hints that maybe he’d consider putting Epic games on Steam, although I notice a lack of commitment on that last point.
This sounds like it would be a win for everyone. The problem is that this is impossible. It’s not just impossible because Epic has no leverage over Valve and annoying gamers will never motivate Valve to change. It’s also impossible because you can’t compare these two services. If Epic began competing with Steam, then they wouldn’t be able to offer such a generous cut either. There are financial hurdles here that Epic is either ignoring or unaware of, because the Steam platform is doing a lot of things that the Epic Games Store can’t or won’t.
So let’s talk about retail for a second…
Stores like Walmart and Target take the same 30% cut that Steam does. 30% is pretty much the industry standard. That doesn’t mean it’s okay or that it couldn’t be lower, but it does mean that Valve isn’t some outrageously greedy outlier like Epic insinuates.
In fact, Steam is quite a bit better than retail outlets. Walmart doesn’t offer any additional value to either the consumer or the developer. They give the developer 6 inches of shelf space, and in return they take 30% of their profits. For contrast, Steam has systems for support, beta programs, modding infrastructure, community tools, support for discount bundles, metrics for sales and playtime, a massive content delivery network, and a ton of other things that make a developer’s life easier.
In 2019, several Steam developers gave a talk at GDC. In that talk, they revealed the sheer scope of Steam’s massive content delivery system. See, Steam doesn’t just shove their content over the public internet. They have their own redundant pipes around the world that feature a direct connection to 2,500 different internet providers. If the non-gaming muggles of the world all start streaming the latest HBO offering at the same time, your game downloads and multiplayer sessions will be protected from that congestion.
In 2018, Steam’s parallel internet carried 2 exabytes of network traffic. That’s more than the entire combined internet traffic for planet Earth in 2003. Valve maintains this network and if you release your game on Steam then you get all of the benefits of this network for free.
Yes, Steam keeps 30% of the sale price, but in return they offer a ton of things that retail doesn’t. Some of that 30% is going into infrastructure that benefits both developers and consumers.
I don’t want to sell the Epic Games Store short. It has a content delivery system of its own. Epic runs Fortnite, and I’m sure that game has given the company a lot of practice running huge networks at scale. And just like with Steam, you get free use of this network if you release the game on their store.
My concern here is this: Is the Epic Network really being supported by the tiny percent that they’re making from games? Is that cut large enough to sustain these kinds of massive-scale networks? It’s possible the funding is coming not from the store itself, but from the cultural juggernaut that is Fortnite. That only works as long as Fortnite continues to be an unstoppable cash cow.
I’m sure Fortnite has many years of life left in it, but sooner or later everything fades. Remember when Team Fortress 2 was the biggest multiplayer shooter? Remember when Starcraft was the premier title in eSports? Remember when Unreal Tournament and Quake III Arena were the titans of online shooters and everyone else was an also-ran?
Someday something new will displace Fortnite, and those juicy battle pass dollars will stop flowing in. When that happens, will Epic still have the cash to keep this massive network running? Or will they have to choose between taking a bigger cut or cutting back on services?
My other concern is the problems they face with payment methods.
So let’s talk about…
You know how it works. You go to the store, you buy a ten dollar game card, then you bring the card home and buy ten dollars worth of games. From the consumer’s standpoint, it’s a pretty simple transaction.
What you don’t see is that this transaction absorbs a lot of the face value of the card. When Walmart sells you a ten dollar Steam card, Valve doesn’t get all ten dollars. Walmart keeps between twelve and fifteen percent of the face value. So you pay ten dollars, but Valve only gets $8.50.
Next you jump on Steam and use your card to buy a ten dollar game. Seven of those dollars go to the developer. Walmart keeps a buck fifty for themselves, and Valve gets the remaining dollar fifty. Valve doesn’t make as much money as they would have if you paid directly, but they still make money.
But what would happen if Valve were to do as Tim Sweeney suggests? What if they lowered their cut to just 12%?
You go to Walmart and buy a $10 Steam card. Walmart keeps $1.50 like they usually do, and Valve gets $8.50. Then you jump on Steam and buy a $10 game. Now Valve owes the developer $8.80. But hang on, Valve only got $8.50 from Walmart. Which means that Valve lost thirty cents on the deal. And that’s ignoring the other costs like payment processing, game delivery, support, and all the other expenses required to run the platform.
This is a big deal because of countries like Japan, where these kinds of cash cards are a major part of the economy. Gamers go to a convenience store to buy cards for cash, and then they go home and use those cards to buy games.
In the west we think of 7-Eleven as a place to buy fuel and cigarettes, but in Japan these stores are an important part of life, particularly for urbanites. A Japanese 7 Eleven is a grocery store, a take-out restaurant, a post office, a bank, a Wi-Fi hotspot, a transport ticket vendor, currency exchange, a place to pay your utility and insurance bills, and most importantly, it’s where you buy your game cards. If your games store isn’t doing business in these places then you’re not doing business in Japan.
This presents something of a problem if you’re trying to sell digital games to Japanese consumers. If your store only has a 12% margin then you’re going to be losing money on every single sale, forever.
This probably explains why Epic doesn’t have any gift cards. It would also explain a few of the items on the development EGS roadmap. At some point the team is going to add “Additional Payment Methods” and “Additional Currencies”. The team is going to have to reconcile these unusual expenses with the low cut of the Epic Games Store. It’s entirely possible that there’s no good way to do it. Maybe you can’t get by on a 12% cut in some countries, and maybe you can’t maintain a massive content network if you’re only making 12% per game sold.
So yeah. Getting back to Sweeney’s Tweet. It boils down to “We’ll stop getting exclusives if Valve is willing to financially sabotage themselves.”
I like the idea of applying pressure to Valve to loosen their grip on the PC platform. More competition is usually a good thing and a more generous platform cut is certainly feasible. But sooner or later Epic is going to need to stop relying on exclusives. Eventually their platform needs to be able to stand as a viable alternative to Steam and exist as something that people are glad to have on their machines. Eventually it needs to be a platform that people will use willingly, not just when they’re forced to. If I ever go back into game development, I know I’d rather keep 88% of the profits from Epic as opposed to the 70% on Steam. That’s a huge difference that can make or break a studio. But I’d also like to make sure my audience can use the game on a platform they enjoy, not a platform that’s been annoying them for years.
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