Earlier this month, Sony announced it was investing $250M into Fortnite maker Epic Games for a 1.4% minority stake (valuing Epic at ~$18B). On the surface, it might be easy to assume that Sony is making a move to deepen its ties with the developer of the world’s most prolific video game title. However, both company’s public positioning of this deal seems to have little to do with Fortnite or creating new games. In fact, Epic was quick to point out that this investment will not require any exclusivity of their titles on Sony’s PlayStation consoles.
So, what’s the angle?
Epic Games is MUCH, MUCH more than a video game maker. There is no doubt that Fortnite is the company’s most important brand asset, but it is Epic’s Unreal Engine – a foundational set of computer graphics tools - that actually drives a bulk of the company’s profits and may play a pivotal role in the evolution of the broader entertainment ecosystem. Unreal, now heading into its 5th iteration, powers everything from AAA console titles like Fortnite to automotive engineering software to virtual reality experiences. Remember Travis Scott’s “Astronomical ‘Fortnite'” event? Those 13M users participating in a digital concert were watching a performance powered by Unreal.
Epic’s game engine is also rapidly emerging as a crucial component of Film/TV/Event production. Using Unreal, filmmakers are able to create and edit digital backgrounds and props in real time, producing virtual sets with unprecedented control. These digital assets can then be immediately shared with partners in gaming, social media, and other various digital channels. Industry adoption was already accelerating pre-pandemic (see Disney+ Original The Mandalorian as exhibit A) and the obvious implications of this technology in a post-COVID world are only becoming more important as Hollywood creatives continue to innovate and demonstrate the power of the engine.
As IP across film, television, music, and video games increasingly converge and interact, Sony remains one of two major entertainment companies with a complete vertical stack of premium capabilities in all these areas plus Hardware (the other arguably being Apple). Sony’s investment, therefore, should be seen as a play for early preferential insight and access. Leveraging a seat at the table and an insider’s look and into the emerging applications of the Unreal Engine could create a significant advantage – further linking Sony’s various divisions, IP and talent with a common next-gen toolset for digital experiences.
Three key takeaways here:
The Bank of Sony is Open. Sony appears to be approaching our current pandemic as a buyers’ market. Despite COVID’s impact, Sony still has almost $31B cash on hand (double that of Disney BTW) and rapidly greenlit a $250M investment in Epic in just under two months. We’ve also heard they took a swing at Stitcher (and passed feeling the 3x multiple was still too high) before SiriusXM closed the deal. While other major studios and publishers are struggling – we expect to see Sony double down in the coming months and make a large purchase in either Audio Storytelling (to serve as a feeder of Film/TV IP and to bolster Sony Music’s negotiating leverage with Spotify) or Gaming (for obvious reasons + competitor Microsoft’s 15 in house game studios are beginning to drive adoption of Xbox Game Pass.)
But Content Isn’t Always King. Particularly in Entertainment M&A, much attention is paid to the quality, depth and franchisability of a target’s library. In most cases (see New York Times acquiring Serial above) this is a crucial differentiator. However, creative development at its best is an uncertain, highly risky endeavor. Just because a studio struck gold in the past doesn’t mean their IP or creative talent can do so again in today’s constant content onslaught. Instead, the wise (and often overlooked) move is going vertical and controlling the tech that shapes how we consume content. Apple did it with the iPod+iTunes, Netflix did it for streaming video. Legacy hardware player Sony has been largely left out since the days of the Walkman and our hunch here at illum is that they won’t let that happen again.
Epic’s Big Picture. One final note, Epic founder Tim Sweeney has long been positioning the company as bigger than Fortnite. Some of illum’s recent conversations with our friends over there suggest that a larger, more public initiative in support of their metaverse aspirations is internally formulating - we'll put a 2021/2022 date on that though.