Sony (NYSE: SNE) recently acquired a minority stake in Epic Games, the publisher of Fortnite, for $250 million. The deal grants Sony a 1.4% stake in Epic and values the company at $17.86 billion, up from a valuation of roughly $17 billion after its last funding round in June.
Sony's investment sounds significant, but it remains dwarfed by two larger stakeholders. Epic's founder and CEO Tim Sweeney retains over 50% of his shares, while Chinese tech giant Tencent (OTC: TCEHY) acquired a 40% stake in Epic for just $330 million eight years ago.
Nonetheless, Sony's investment in Epic could strengthen its gaming business, which generated 24% of its revenue and 28% of its operating profits last year, ahead of its PS5 launch in late 2020.
Why does Sony need Epic?
Sony CEO Kenichiro Yoshida highlighted both Epic's portfolio of games and its Unreal Engine, the popular game engine that powers its own games and third-party titles, as the main reasons for its investment.
Yoshida declared "Epic's powerful technology in areas such as graphics" places it "at the forefront of game engine development." He noted Sony "will explore opportunities" for further collaborations with Epic -- "not only in games, but also across the rapidly evolving digital entertainment landscape."
Epic's Sweeney stated the two companies will "strive to build an even more open and accessible digital ecosystem for all consumers and content creators alike," which indicates that many of Sony's upcoming first-party games will run on Epic's Unreal Engine.
That isn't surprising, since Epic and Sony revealed PS5 tech demos running on the upcoming Unreal Engine 5 back in May. Epic currently charges developers a monthly subscription fee for using Unreal Engine 4, and collects a 5% cut of the game's commercial sales, but it waives that cut for games released on the Epic Games Store.
New games... and a possible expansion into PC gaming?
Epic has already stated that the Unreal Engine 5 will work across multiple platforms, including Microsoft's (NASDAQ: MSFT) Xbox Series X and PCs. Many of Epic's top games, including Fortnite, are cross-platform games.
Therefore, it might seem unusual for Sony to cozy up to Epic. However, Sony's investment might grant developers lower fees and royalties for using the Unreal Engine to produce PS5 games, which could give Sony an edge in exclusive games.
Sony's first-party games are generally exclusive to its PlayStation consoles, but it recently confirmed the upcoming PC launch of one of its top PS4 games -- Horizon Zero Dawn -- via the Epic Games Store and Valve's Steam this summer. Horizon Zero Dawn wasn't built on the Unreal Engine, but its cross-platform launch suggests Sony will bring more of its PS-exclusive games to PCs.
Some of those games will likely run on the Unreal Engine, and Sony could retain a bigger cut of the revenue by distributing them through the Epic Games Store. Doing so would also give Sony a foothold in the PC market (beyond its cloud gaming service PS Now) against Microsoft -- which sells both Xbox and Windows games through the Microsoft Store, and allows Xbox gamers to stream their games locally to Windows 10 PCs.
The key takeaways
Sony's investment in Epic is significant, but the details were vague. Epic could develop more exclusive games for Sony's PS5 to showcase the Unreal Engine 5, Sony might develop more Unreal Engine games, or Sony might leverage its investment in Epic to gain favorable distribution deals for PC versions of its first-party PlayStation titles.
That's all speculation for now, but those strategies could strengthen Sony's gaming business as it moves from the PS4 to the PS5. But it could also convince Microsoft and other gaming giants to strike similar deals with Epic -- which could be bad news for rival publishers like Activision Blizzard and Electronic Arts.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool's board of directors. Leo Sun owns shares of Tencent Holdings. The Motley Fool owns shares of and recommends Activision Blizzard, Microsoft, and Tencent Holdings. The Motley Fool recommends Electronic Arts and recommends the following options: long January 2021 $85 calls on Microsoft, short January 2021 $115 calls on Microsoft, long January 2022 $75 calls on Activision Blizzard, and short January 2022 $75 puts on Activision Blizzard. The Motley Fool has a disclosure policy.
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