Epic only realized it had ‘financial problem’ that led to layoffs 10 weeks ago

In typically unguarded comments made on Tuesday at the start of Unreal Fest — a conference for users of its Unreal Engine software — Epic Games CEO Tim Sweeney addressed the financial difficulties that led the company to lay off over 800 staff at the end of September. He mentioned that management only became aware of the seriousness of the situation 10 weeks ago.

Sweeney also announced that Epic would be introducing a new pricing structure for Unreal Engine, making it more expensive to use — but not for game developers. He also restated Epic’s commitment to the Epic Games Store, its crusade against platform “overlords” like Apple and Google, and its mission to “build the metaverse.”

“This wasn’t a right-sizing,” Sweeney said of the layoffs in his speech, which was captured and shared by Fortnite creator Immature (but, oddly, not included in Epic’s official Unreal Fest livestream recordings). “I think we were the right size, and I loved our original plans. This was a survival move that was necessary. And what we did accomplish, the one thing, is that we stabilized our finances so we won’t run out of money as we build the metaverse.”

Sweeney didn’t specify what the sudden change in Epic’s fortunes had been, or explain why the company hadn’t seen it coming sooner. But he revealed it was “about 10 weeks ago” — so, in late July — “that we realized we were running into a financial problem that we had to solve quickly.” And he made a couple of references to how the company had been funded “heavily” by Fortnite revenue in recent years, a setup that appeared no longer to be sustainable.

“This is really Epic’s process of reconciling our business model with the reality that eventually comes to exist for all companies,” Sweeney said. “We escaped it for a while with Fortnite, and now we’re getting back to it, having reached the scale of, now, a 4,000-person company through a really painful downsizing. And we’re desperately now going to be operating in a different way to make sure that we don’t get back in that kind of condition.”

In his email to staff explaining the layoffs, Sweeney had confessed that Epic had been “spending way more money than we earn, investing in the next evolution of Epic and growing Fortnite as a metaverse-inspired ecosystem for creators. I had long been optimistic that we could power through this transition without layoffs, but in retrospect I see that this was unrealistic.”

This year, Epic began sharing 40% of Fortnite revenue with content creators using the new Unreal Editor for Fortnite to create in-game maps, games, and activities. In late 2022, it agreed to pay $520 million in fines and refunds to settle a dispute with the Federal Trade Commission over privacy invasion and “dark patterns” that, the regulator argued, tricked young Fortnite players into making purchases. The company also faces hefty costs from its ongoing, years-long legal battle with Apple over the cut Apple takes from in-app and App Store purchases.

This is not a battle Sweeney seems ready to give up, however. He described the Epic Games Store — which takes a smaller cut from sales than the industry-standard 30% imposed by Steam, the mobile app stores, and the console stores — as “the cure to a disease that’s affecting a lot of the industry right now, where the mobile platforms have become overlords [...] and we’re fighting that.” Although the Epic store has not made great inroads against Steam’s dominance on PC, Sweeney expressed the hope that it could soon find its way onto smartphones, “perhaps at different times in different territories.” Apple may soon be forced to allow third-party app stores like Epic’s onto iOS, in response to European Union laws.

Sweeney pledged not to pass Epic’s financial pain onto other game developers, for whom Unreal Engine’s revenue-sharing model — Epic takes 5% of revenues over $1 million — remains unchanged. “It’s hard for us, but it’s also hard for you. A lot of companies in the industry are [suffering] similarly or in some cases worse than we are, and we can’t make our problems your problems, and we won’t,” he said. Sweeney made a joking reference to the controversy over pricing changes from rival game engine Unity, said Epic recently contemplated lowering its Unreal royalty fee, but concluded, “no, we really need money.”

Instead, Epic will move to a “seat-based enterprise software model,” similar to Adobe or Maya, for other industries that aren’t using Unreal to directly make revenue-generating products like games, and whose use of it is effectively subsidized by other parts of Epic’s business. (Unreal is quite widely used for visualization and design in the automotive industry and for film and TV.) “It’s not going to be unusually expensive or unusually inexpensive,” he said.