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Why the Music Business Should Be Looking Closely at Fortnite and Epic Games

What Fortnite’s parent company Epic Games — and its complex business model — tells us about the future of music, rights and artists

fortnite travis scott

The collision of the music business and Fortnite has become a lot more noticeable in the past week.

Rolling Stone

In 2006, I worked my first shift as a beat journalist in the video game business — an industry I would go on to cover for the following half-decade. The big news that year was the arrival of Gears of War, developed for Microsoft’s Xbox 360, in which a troop of hefty marines (Delta Squad) aim to obliterate grotesque mutant forces (the Locust Horde) using massive guns and even more massive explosions. Gears of War didn’t exactly shovel a great deal of matter into the tube marked Evidence for Video Games’ Potential as Narrative Instruments for the Furtherment of Adult Cognition. It was, however, a truckload of fun.

There is some storytelling satisfaction, then, in the fact that the creator of Gears of War — proudly one of the biggest, dumbest video games ever made — has now established itself as one of the smartest, most trailblazing companies in the history of entertainment.

In addition to being “that Gears of War company,” Epic Games has long been known in video games circles for its Unreal Engine, the technological blueprint for countless hit games made both by Epic and by other developers. But it wasn’t until the 2017 arrival of its game Fortnite — a title originally built as a hackathon experiment, which now boasts over 250 million registered players — that Epic became a mainstream name.

The collision of the music business and Fortnite has become a lot more noticeable in the past week with the in-game appearance of Travis Scott, whose “Astronomical” virtual concert premiered new track “The Scotts” (with Kid Cudi). Not everyone loved it, but plenty showed up: over 27.7 million individuals “attended” the five pre-recorded Fortnite experiences made available by Epic and Scott.

Meanwhile, “The Scotts” racked up 7.45 million plays in its first 24 hours on Spotify, where it remains the world’s Number One hit. Scott’s in-game Fortnite stunt came just over a year after DJ/producer Marshmello pulled off a live motion-capture concert in the same virtual world, which drew over 10 million people.

With the music business being a particularly fertile playground for imitation — and “The Scotts” establishing itself as the globe’s favorite song — we can now expect every major label, manager and agent worth their salt to badger Epic Games for copycat opportunities. But those same individuals should know that there’s much more to Epic Games than Fortnite, and that other aspects of the firm’s tightly-knit business provide some fascinating clues as to where the future of the record industry might lead.

Here’s a few things to know, with some heavily hypothetical analogies thrown in for good measure.

Epic Games Store and the 88% split

In December 2018, Epic launched its own digital games store, both for its own titles and those of third party developers. Epic Games Store was created to challenge the incumbent king of digital PC games retail, Steam, owned by Washington-based Valve.

Perhaps the most important element of Epic’s transition from content creator to content retailer was its decision to reward the artists of the video games world — i.e. games developers — via a generous 88%-12% revenue split. This was a significant challenge to a raft of other online game retailers, Steam included, which had traditionally charged a 30% commission on digital sales.

Epic has since nailed a raft of exclusive PC releases for Epic Games Store from leading developers, tempted over with guaranteed minimum payments. These games-makers have consequently shunned Steam — while Epic, of course, has pulled all of its own first-party games, including Fortnite, from the Steam store.

This has all been huge news in the video games space — the equivalent, perhaps, of Universal Music Group launching a rival to Spotify or Pandora in music, then extracting its own catalog from these platforms, before tempting other labels to port their music to a UMG-owned service, exclusively, with the promise of a better return.

Perhaps the biggest lesson for the music business to learn here is simply one of technological scaling. Despite its generous revenue share, Epic claims that its store is “a profitable business,” due to a low-overhead, low-processing-cost, tech-driven platform. What’s more, Epic is now using its store, which generated $680 million last year from 108 million PC customers, as a weapon to try and force other retailers to give content makers (conveniently including Epic itself) a sweeter deal.

In April last year, Tim Sweeney, CEO of Epic, stated: “If Steam committed to a permanent 88% revenue share for all developers and publishers without major strings attached, Epic would hastily organize a retreat from exclusives… and consider putting our own games on Steam.”

En garde!

Epic’s influencer kickback

Another element of Epic Games Store that the music business should watch closely: the storefront has a mechanism baked into it that ensures influencers — for example, bloggers, YouTube hosts or Twitch live-streamers — get a monetary reward if they successfully convince a consumer to buy a game. When an approved Epic influencer (“Creator”) shares a referral link to any game, they earn a revenue share of any consequent sales on Epic Games Store, at a minimum rate of 5%.

Imagine this in music: TikTok, for one, is quickly becoming the place for record labels to wind up momentum for soon-to-be chart hits, before unleashing them on streaming services — yet this tactic often requires the buy-in and cooperation of TikTok’s biggest influencers. Should the Bytedance platform’s most-followed clip makers actually be getting a revenue share of money generated by streams for the chart hits they helped create?

Drake, in a stroke of marketing genius, recently turned to Insta-famous, Atlanta-based dancer Toosie to spread word of the accompanying moves to global smash “Toosie Slide.” Was Toosie paid for this endeavor — and if so, how? Could, and should, he benefit from an Epic Store-esque cut of the proceeds from “left foot up, right foot slide”?

The Unreal Engine

How does popular music get made? By creative people in studios, yes. But do these creative people use the same technological tools to develop their art? Aye.

Whether it’s Apple’s GarageBand for demos, or more high-tech production interfaces like Ableton Live and Logic Pro, the music in your Rolling Stone charts this week will all have been put together using the same sets of software — which typically come with a significant upfront cost. Yet what if this software was free to access… but, in order to use it, you agreed to pay its owners a 5% royalty share for any track that went on to make more than $3,000?

This is the genius behind Epic’s Unreal Engine licensing model. Unreal Engine provides “building blocks” with which a bunch of mega-selling games titles have been made, both by Epic (Fortnite, Gears of War) and outside Epic (Borderlands 3, the Batman: Arkham series). Since 2015, Unreal Engine has been free to use for any developer, even those with no money in the bank – until their game starts earning $3,000.

It could be argued that music already has an analogous licensing setup here with sampling — whereby the use of music is usually paid for via an agreed percentage of future royalties. But imagine if music’s most popular production software companies started mirroring Epic’s model with Unreal: it would shift the power balance of the industry overnight. (With this in mind, I remind you, gently, that Apple owns both GarageBand and Logic Pro; and that Spotify acquired the “online recording studio” Soundtrap in 2017.)

Adding to Epic’s smarts here: If you build your game with Unreal Engine but then sell it on Epic’s own digital Games Store, Epic will forgo the 5% licensing charge it would usually sting you with should you sell your title elsewhere. Clever.

What could Tencent want with music, gaming, and AI?

Epic is an entertainment company with billion-dollar annual profits, in which China’s Tencent Holdings is a minority stakeholder. Sound familiar?

Tencent acquired a 40% holding in Epic Games for the bargain price of $330 million in 2012 — five years before Fortnite was even released, let alone a cultural phenomenon. By 2018, according to reports, Epic was posting a $3 billion annual company profit.

Earlier this year, Tencent acquired a 10% stake in Universal Music Group — the world’s biggest music rights company, which, in 2019, posted a $1.26 billion EBITA profit. Tencent now has the option to increase its stake in Universal to 20%. What Universal sees in Tencent is obvious: a crucial partner to maximize revenues in Greater China (UMG parent Vivendi has said as much). But what does Tencent see in Universal? That’s trickier to ascertain. I have one theory which might just spin your head.

First, back to Epic. The North Carolina-based games company is, these days, actually not just a games company. For one thing, it’s also a social media player, having acquired app HouseParty (and its developer, Life On Air) for an undisclosed sum last year. HouseParty, like many video-chatting platforms, has seen a popularity explosion amid COVID-19 lockdown — being downloaded over 2 million times per week globally, and becoming the most-downloaded free app on iOS in the UK, New Zealand and Canada.

There’s an obvious lesson here for the record business about not “staying in its lane,” and using a portion of labels’ modern-day streaming wealth to invest in platforms that could one day challenge the likes of TikTok and Instagram. But there’s a second important lesson here, too — and it’s about the future of Epic Games itself, Tencent as a strategic partner, and music’s role in tomorrow’s digital ecosystem.

In January 2019, Epic Games acquired Serbia-based 3Lateral, which is, in Epic’s words, “the leading developer of digital humans technology”. And is, in other, even more shudder-worthy words, a company that uses “data to create once unthinkable humans”. Check. This. Out.

Excuse me for the breakneck logic-jump, but… if there ever was a company that could bridge the “uncanny valley” and build a non-human, human pop star, 3Lateral is it — which means, by association, Epic Games is also it. US startup Brud has already created Lil Miquela, the AI-powered singer who recently collaborated with Kanye-endorsed songstress Teyana Taylor, and who has over two million followers on Instagram. COVID lockdown has made all of our lives more virtual: could Epic Games, with the support of 40% stakeholder, Tencent, be about to take things to the next level?

Roy LaManna is the CEO of Vydia, the digital distribution and services company that has worked with artists such as Kanye West, Akon, Post Malone and Lil Pump. The Universal-Tencent-Epic link has been on his mind, too. He says: “People in the music industry are looking at Tencent Holdings and focusing on their music moves, but when you start connecting it to their gaming moves, things get ultra-real. In a post-COVID world, if we’re heading more towards virtual shows and virtual merchandise, then, five years from now, we could be having a very serious conversation about this.”

Or earlier. Because what happens, for example, when Tencent pulls together the technical might of Epic Games (and “digital humans” maker 3Lateral) with the hit-laden publishing catalog of Universal Music Group, all within the Fortnite cosmos? Virtual popstars with a ready-made, rights-cleared, audience-tested smorgasbord of classic tunes, no?

Here’s another one: in a modern world where tracks (Old Town Road, Roxanne) are drawing major bidding wars from record companies — arguably even more so than the artists behind them — does the record industry, in its ruthless pursuit of streaming chart dominance, really care enough about living, breathing human performers not to, you know, on occasion, kind of do away with them entirely?

Sorry; I got caught up in my own conspiracy there for a second. I blame this recurring fever dream, where a pre-recorded giant facsimile of a famous rapper being blasted into space entertains nearly 28 million people — people who are all standing, willingly, in a virtual metaverse, hosted and monitored by a company partly owned by Tencent Holdings.

In the wake of the Marshmello concert in Fortnite last year, Epic Games CEO Tim Sweeney stated: “We can go a lot further with the creation tools built into games. Where this is ultimately headed is games becoming more open platforms for creators to build their own stuff… In the future, we’d like for any musician to hold their concert of that sort without having to coordinate with us.”

“Any musician” presumably does not rule out those of non-human origin. Call it my COVID lockdown mania, but we’re long past the point of Fortnite being just a game. Ask Travis Scott: he’ll surely tell you, it’s an un-living, un-breathing second life; a place where social media, in its truest incarnation, comes alive on a global scale.

It’s already Epic’s world, friends. We just get to play in it.

Tim Ingham is the founder and publisher of Music Business Worldwide, which has serviced the global industry with news, analysis, and jobs since 2015. He writes a weekly column for Rolling Stone.

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