Editor’s Note: From time to time the Katusa Research Special Situations team looks deep into different sectors. Over the next three days, we’ll introduce you to a monster profit generating machine and the companies leading the charge.
In 2012, Tim Sweeney had a vision of the future of video games.
Over the previous two decades, he had been instrumental in many of the advances in the industry.
He had created one of the most popular gaming engines in the world. And his company developed some of the most-played titles ever.
Now, he had a radical vision: He believed that the best way to make money off of a great video game was to give it away – for free.
The company he owned, Epic Games, lacked the resources to pivot in this new direction. So he turned to a growing Chinese video game conglomerate for a $330 million cash injection.
Using part of the investment, his company developed a little game called Fortnite.
The game failed to receive much attention from gamers. And after five years, it looked as though the company would write it off altogether.
But in 2017, Epic Games was finally ready to make its move. Tim Sweeney’s vision was about to come to fruition.
Seeing the wildfire success of a game called PUBG, Epic decided to fine-tune Fortnite using PUBG’s gameplay.
In just two months, Fortnite was converted into a “battle royale” game. It’s a game type in which 100 players fight to the death on an ever-smaller battlefield.
And Epic began to distribute it for free.
The move worked far better than Tim could have ever imagined.
In the last 18 months, Fortnite has become an international phenomenon. It has amassed over 125 million players, with 80 million playing it every month.
And true to Tim Sweeney’s vision, those players are shelling out real money for skins, battle passes, celebratory dances, and other in-game items that distinguish them from their peers. And it’s making the creators an absurd fortune.
The average Fortnite player who spends money in the game pays an average of more than $80. That’s more than twice what the game would normally sell for.
Last year alone, Tim’s vision made Epic Games more than $3 billion in profit.
The best part is that the success of Tim’s theory wasn’t luck – and it’s easily repeatable.
Americans now spend more time playing video games than they do driving. And they’re spending more money inside of – not on – video games than they ever have before.
That’s why Epic Games just raised another $1.25 billion in cash. They know that even though they made billions in profit in 2018, they can do even better in 2019… and again in 2020.
Same Vision, 400% Larger Market
Long-time Katusa Research readers have heard this before: The most important factor in a new investment is the people behind it.
For example, Fortnite’s success was due to the foundation laid by Tim Sweeney, its experienced, fearless leader, back in 2012.
Tomorrow, we’re going to profile the leader of another company. He’s Stanford and Wharton educated, and has achieved some huge career wins.
Long before Tim decided to pivot Epic Games, this CEO that we will introduce you to tomorrow had already predicted the new direction that video games were headed in.
He saw how big video game revenues were going to get, and precisely how games were going to make money in the future.
Only he had an even bigger vision.
He decided to take on the biggest video game market in the world: China.
His plan was to create:
- The highest-quality, lowest-cost independent video game development studio in Asia.
- A company where video game developers could pitch their games and get financed (think: Netflix).
- A school that would train new video game programmers and artists.
- Video games that were free to play, but made money from microtransactions.
- Video games that were perfectly tuned to their target market for maximum profitability.
So he did.
The Pixar of Video Games
He opened a new video game school in China. The school receives 30,000 applications a year, and accepts less than 5% of those. From this pool, his company can hand-select the best talent in the world to work on their video games.
The team in place at his company has already worked on more than 30 AAA titles. These are games that have grossed hundreds of millions of dollars each – including Fortnite.
They’ve already released a successful video game. It made more than $60 million off of just $3.5 million in development costs.
They have partnered with the same Chinese company Epic Games partnered with, meaning they have access to promotion to over a billion people (unlike Epic, they did not lose any equity in the deal).
And they have developed a flagship game that is just about to be launched to that huge audience.
Tomorrow, we’re going to talk about their joint venture partner – it’s a company you’ve probably never heard of – and how they can “moneyball” nearly any game they partner with to incredible success.
We’ll discuss why China, not the United States, is the best place in the world to develop a video game right now.
And show you how one man’s epic vision could easily eclipse Epic Games.
Think of the visionaries of past decades.
Imagine investing alongside Bill Gates and Microsoft in the ’80s… with Michael Dell and Dell Computer in the ’90s… with Steve Jobs and Apple in the ’00s… with Elon Musk and Tesla in the ’10s…
All of these companies had leaders who envisioned a future that was different than anything ever before.
Regards,
The Katusa Research Team
