We are a couple of years into the epic (pun intended) fight between Apple and Epic Games over the App Store. This is really the biggest tech fight we have seen in tech in a decade. For example:
- Apple doubles down in fight with Fortnite creator Epic Games, seeks damages for breach of contract (CNBC)
- Apple and Epic Games are mired in a bitter legal battle, and ‘Fortnite’ is in the middle of it. Here’s how Apple found itself in Epic’s crosshairs. (Business Insider)
In terms of digital strategy, there are three really important things going on in here.
- This is ecosystem competition. In this case, between smartphones and gaming. Such a cool topic.
- Video games are becoming more and more powerful. Especially in terms of capturing attention, building engagement and creating communities (discussed below).
- 3D gaming engines are a big disruptive technology and business model. It is going to disrupt gaming, media / entertainment and other industries.
Let’s start with Point 1 about ecosystem competition.
Point 1: Ecosystem Strategy Is Great But Confusing.
I’ve written a lot about the difference between competing with a linear business model vs. with a platform. And I have gone into pretty good depth on the different types of platforms (Taobao as a marketplace platform, Youku and Douyin as audience-builder platforms, etc.). And this is really what a lot of the powerful digital companies are doing.
I have also frequently mentioned that these platforms can sometimes generate complementary platforms.
- Taobao was complemented by Alipay. And then to Youku Tudou.
- Tencent gaming complements QQ, WeChat and other platforms.
Companies like Alibaba and Tencent have evolved into collections of digital platforms and services that are complementary. People start to call them digital conglomerates. Alibaba often refers to itself as a “digital economy”. And I think at a certain point, we are really talking about “digital ecosystems”. Complementary platforms are sort of a bottoms up approach to the phenomenon. But we can also look at it from top down.
Generally, ecosystems are situations where lots of companies, users or other groups have to work together to provide a product or service. Cities are ecosystems. So are jungles. But in technology we are usually talking about ecosystems because all the software, hardware, code and data have to be coordinated. And ecosystems often emerge when there is a major technological change happening. These are situations where lots of the companies have to coordinate to get a new technology off the ground. For example:
- The launch of the personal computer required a new ecosystem, because all the hardware and software had to be coordinated to function together. And Intel and Microsoft were pretty much in control of the ecosystem for decades.
- The launch of electric and autonomous cars requires a new ecosystem. Lots of new technologies and components have to be invented and work together. Tesla is trying to do most of this itself. But everyone else is doing an ecosystem approach.
Ecosystem is the “go to strategy” for most new new technologies. Because these new products are usually far beyond the capabilities (R&D, capital, manufacturing, etc.) of any one company. It takes a lot of money and manpower to create a new tech paradigm. And major new technologies require lots of trial and error. There is a lot of uncertainty as the technology, products and markets all get figured out. Ecosystems are good at this problem because they are a more adaptive approach to innovation. They can try lots of things and can innovate like an amoeba feeling its way around. The downside to this more adaptive approach to innovation is it is very inefficient.
Once a new product and technology is launched, the ecosystem persists but a dominant design has emerged. And most businesses in the ecosystem then operate more independently. Usually there are leaders (Intel, Nvidia, Microsoft Windows, Apple, Epic Games, etc.) that everyone else mostly follows. This is much more efficient than coordinated innovation of the early phase.
Which brings me to the fight between Epic Games and Apple, both of which are leaders in their ecosystems.
I have written multiple books that argue that winning longer term as a digital business requires doing a moat or a marathon (preferably both). You have to build competitive advantages. And you have to know what marathon you are running every day. I use the acronym “SMILE Marathons“. It’s a simple acronym to describe five types of marathons I commonly see in digital businesses. Each letter in SMILE corresponds to one of the below marathons.
- S – Hyperscale and/or Hypergrowth
- M – Machine Learning, AI, and Zero-Human Operations
- I – Sustained Innovation
- L – Rate of Learning and Adaptation
- E – Ecosystem / Platform Orchestration or Participation
This is just my current list. And it will certainly change over time. But I find this to be a pretty solid list for predicting who is going to achieve superior operating performance over time.
And I chose the phrase “Ecosystem / Platform Orchestration or Management” carefully.
- If you are in retail, you are probably focusing on how to manage your relationship with Lazada, Amazon or Alibaba. So you are doing “platform participation” as your marathon.
- If you are Shopee, you are thinking about how to orchestrate your platform. You are doing “platform orchestration”.
But when we talk about Epic, Apple, Tencent and Alibaba, we are really looking at ecosystem (not platform) orchestration. Epic is fighting to be the orchestrator of gaming everywhere. But Apple wants everything to control everything in its App Store and on its smartphones. So Epic vs. Apple is a fight between two ecosystem orchestrators. And this is really a game of 3D chess. It is super complicated.
Actually, Epic Games CEO Tim Sweeney may be doing something even more daring than just taking on Apple. He may be trying to create a metaverse in which there are no powerful orchestrators. He has argued that nobody should control the online world. Everything and everyone should be able interact freely, just like in cities. Nobody should control the flow of money (transaction fees like PayPal). Nobody should control connections between people (Facebook). Nobody should control the stores where you buy (Apple takes 30% of App Store purchases). There should be no toll booths. There shouldn’t be any powerful ecosystem orchestrators. It’s should be a big, free online world everyone can live in. He may be trying to become the ecosystem liberator.
Ok. On to my second point.
Point 2: Video Games Are Becoming More and More Powerful
My mother and aunt have spent their whole lives playing the card game Hearts. At every family gathering, they get out the cards and start playing Hearts. I, however, grew up playing Dungeons & Dragons, a tabletop game with lots of cards and notes. My nephew grew up playing Pokémon, collecting all those cards year after year.
Games are strange activities. They get tremendous engagement. They have big fan bases. People build teams and communities around them. And people play the same games for years and sometimes decades. We can see this tabletop games, including board games, card games and parlor games. And we can learn a lot about games as these traditional games go digital (which is currently happening).
Jonathan Lai and Andrew Chen at Andreesen Horowitz published a fascinating piece about the digital revolution in tabletop games. It’s great.
From their article “The Digital Future of Tabletop Games“
“D&D’s growth is illustrative of a larger trend. Tabletop games—a quintessentially analog experience that encompasses board games, card games, and parlor games—are being dramatically improved by digital tools. While the first attempts at modernizing tabletop games sought to merely replicate games in the digital realm, the next generation of games goes a step further, integrating tools such as live-streaming, user generated content (UGC), audio products, and community platforms. This digital transformation is reinventing the way we learn, play, and connect with one another over tabletop games.
As a result, modern tabletop games have the potential to be bigger than ever before. Board games are resurgent—the overall market reached $12 billion in 2018 and is growing at a 9 percent compound annual growth rate. Parlor games such as Werewolf and Mafia, in which players act and deceive each other, have grown into global hits. China’s Werewolf Kill app reached over 70 million users within a year of launch. Even one of the oldest tabletop games, chess, is making a mighty comeback: 605 million people around the world play today, and traffic to the official chess.com website roughly doubled in the first half of the year to 94 million monthly visitors.
The next generation of tabletop games will diverge from tradition in four key ways: livestreaming, user-generated content, audio-first experiences, and online community platforms.”
That last sentence is important. Traditional, tabletop games are adding user-generated content (UGC), live streaming and online communities. That is all about building engagement. And as I have said so many times, the intangible assets that matter in a connected world are users, participation and data. Content and gaming are far more powerful at this than, say, ecommerce sites.
What is really happening is they are taking a product, making it digital and then turning it into a network-based business model. They are focusing more on the connections and interactions between players and the ability of users to create their own content. They are making games a network-based activity.
And, of course, once you have the network built on the digital connections between players, you can start to do all the things that make digital so powerful. Like going for network effects.
“One of the defining traits of tabletop games has been their focus on small group play. Most games are played in groups of only two to eight people. As a result, the tabletop games community has historically been fragmented and hyper-local. Yet over the last few years, the rise of community platforms and online play has gradually overcome these barriers and brought network effects to play.”
“For hyper-local tabletop games like Magic and D&D, the rise of online community platforms like Discord and Reddit has been a game-changer. Over the past decade, these platforms have been able to stitch together fragmented groups into a connected online community. The official DnD subreddit counts over 2 million members; the MTG subreddit counts over 500,000. There are more than 4,500 Discord servers dedicated to D&D or Magic, where tens of thousands of players chat with each other about their favorite cards and campaigns. First-time players can make friends, discuss strategy, and listen in on live games from the comfort of their homes.”
Games are continuing to increase in their power. In an age of abundance, where there are endless options, capturing people’s attention is critical. And games are just really great at this. Think about what the transition from tabletop to “digital, networked gaming” means:
- Tons of digital interactions and high engagement. Sometimes even network effects and virality.
- Tons of new content creation. Mostly UGC. Highly shareable. Authentic.
- New communities, based on content and user activity. This is critical for retention and creates value far beyond the game itself.
- AI can be increasingly run on all this data, making the games increasingly smart, personalized and automated.
The fight between Epic Games and Apple is about the rise of gaming as a powerful phenomenon. Smartphones have long been the most powerful ecosystem in the B2C world. But the gaming ecosystem is now challenging that. And as things go towards the metaverse, it is easy to imagine a world in which gaming ecosystems are the most powerful phenomenon.
Epic’s fight with Apple is also about Tencent. It’s the unspoken part. Tencent, which is amazing at games and ecosystem strategy, owns 40% of Epic. I think there is zero chance Tim would launch such an attack on Apple without Tencent being aware or involved. The following link is to a 6 Part Primer for Epic Games by Michael Ball, which is a good summary of the ecosystem they are building.
Ok. last point.
Point 3: The Rise of Gaming Engines
I haven’t even mentioned Epic’s Unreal gaming engine. Game engines are a really powerful digital technology that can create 3D virtual worlds in real-time. This technology is already moving from gaming consoles to media / entertainment. For example, the Mandalorian television show is made on Epic’s Unreal Engine. Now imagine a world where 2-3 creative people in a warehouse anywhere in the world can create movies and television shows at the same quality as the Mandalorian. That is what’s coming.
Epic’s primary competitor in high-end game engines is Unity. But there is a third gaming engine called Cocos. Based in Xiamen, Cocos builds game engines for lower-end, mobile gaming (mostly 2D and open-source). And, like Tencent, they happen to be in China, which is to gaming what Hollywood is to movies. As gaming, especially in Asia, is shifting to 5G smartphones Cocos will become more important. They are good at powering simple 2D games that anyone can make and then distribute through app stores. Here is a great take on Cocos by SCMP:
“Chinese game engine creator Cocos is the fast-food equivalent of Unreal Engine, powering hit mobile titles”
“If Epic Games’ Unreal Engine were a fancy restaurant – where customers could expect to pay high prices to enjoy leisurely meals – Chinese competitor Cocos Technologies would be the “McDonald’s or KFC of the market”, according to Xiamen-based Cocos’ founder Zhe Wang.”
“Such platforms have become increasingly more popular and important as users spend more time on mobile devices. Mobile games made up 75 per cent of total game sales in China in the first half of the year, according to a report by government-backed China Audio-Video and Digital Publishing Association.
Many of these are built at least partially with Cocos, which powered half of the top 10 games in China in May, according to data firm Qimai Data. Cocos said that in 2018, 45 per cent of mobile games in China and 30 per cent of those worldwide were created with the help of its game engine.”
So there is a lot of important stuff here in the Epic vs. Apple fight.
- Ecosystem competition is really fascinating but complicated.
- Apple vs. Epic is a fight between two different ecosystem orchestrators.
- And within gaming, gaming engines are an important dimension.
Ecosystems are 3D chess. Fascinating but hard to predict.
That’s it for today. Cheers, Jeff
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From the Concept Library, concepts for this article are:
From the Company Library, companies for this article are:
- Epic Games
I write, speak and consult about how to win (and not lose) in digital strategy and transformation.
I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.
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