Yesterday Epic Games, the creator of Fortnite and Gears of War, announced they were laying off about 900 employees, or 16% of their workforce. Two-thirds of the layoffs are outside the core development team. In an email to employees and published to the Epic Games website, CEO Tim Sweeney said the company has been spending more than it earned and investing in their future in the metaverse.

“I had long been optimistic that we could power through this transition without layoffs, but in retrospect I see that this was unrealistic,” Sweeney said.

Epic Games is sufficiently funded to support employees losing their jobs, the CEO said. They will receive a severance package that includes six months of base pay, and in the US, Canada and Brazil, six months of healthcare paid by Epic Games. They are accelerating their stock option through the end of 2024, and in the US, Epic will vest any unearned profit sharing from employee 401(k) plans, and they’ll provide career transition support and visa support when possible.

The CEO shared that Fortnite is growing again but the growth is driven by creator content which means “significant revenue sharing.” While they are glad to see the growth, this revenue has a lower margin.

“Success with the creator ecosystem is a great achievement,” Sweeney said, “But it means a major structural change to our economics.”

What’s changing

To help right the ship and cut costs, Epic Games is making big changes in addition to the layoffs. They are divesting Bandcamp who is being acquired by Songtradr, a music licensing platform and marketplace for supporting artists, labels and publishers.

“The acquisition of Bandcamp will help Songtradr continue to grow its suite of services for artists. I’m a passionate musician myself, and artistry and creativity have always been at the heart of Songtradr. Bandcamp will join a team of music industry veterans and artists who have deep expertise in music licensing, composition, rights management, and distribution,” said Paul Wiltshire, CEO of Songtradr, in a news release yesterday.

Songtradr shares Epic and Bandcamp’s values around ensuring artists are fairly compensated for their work,” said Steve Allison, Vice President and General Manager, Store at Epic Games. “Bringing Bandcamp to Songtradr will make it easier for independent artists to connect with creators and developers looking to license their music and enable Epic to focus on its core metaverse, games, and tools efforts.”

SuperAwesome’s advertising business will become a separate business. Kids Web Services (KWS), a parent verification and consent platform, will remain under the Epic Games umbrella.

“We know the opportunities in building for kids and teens are only increasing. Today’s kids and teens are the pioneers of new technology, and they are the first generation to grow up as AI natives. They influence more than $1.2 trillion in family purchases per year. This reality underscores the imperative for creators and brands to attend to this dynamic and powerful audience,” said Kara O’Laughlin, CEO of SuperAwesome, in a statement. “Given our expertise, we are the best team to tackle these opportunities with our partners and the industry. We are poised for a new era of growth and innovation.”

What’s staying the same

The company intends to keep developing its core lines of business, and it hopes to deliver other products and initiatives on time, Sweeney said. However, he understands that may not be possible since they are losing valuable resources.

“We’re OK with the schedule tradeoff if it means holding on to our ability to achieve our goals, get to the other side of profitability and become a leading metaverse company,” Sweeney added.

FTC vs. Epic Games

What Epic Games does not mention in the announcement is the record $520 million in penalties and refunds the Federal Trade Commission made the game developer pay. Of the $520 million, $275 million is the penalty for violating children’s privacy laws and changing default settings in the popular Fortnight video game. The $245 million balance is for refunds to be paid to gamers for Epic Games’ use of dark patterns to trick users into making unwanted purchases.

The FTC alleged Epic Games collected personal data from children without getting permission from their parents, which violates the Children’s Online Privacy Protection Act (COPPA). After parents requested to have their children’s data deleted, Epic Games made it harder for parents to do so, or even flat out denied the parents’ requests. This fine is the largest ever seen for COPPA to date.

Last week, the FTC began notifying more than 37 million people who may qualify to claim a partial refund of the $245 million settlement. The FTC is notifying gamers via email, and they have until January 17, 2024 to submit a claim. Gamers must be at least 18 to file a claim. Younger players can have a parent or guardian apply for a refund on their behalf.

Insider Take

Are the timing of the refund notifications and the layoffs related? Did Epic Games know months ago that layoffs would be necessary but held off until they’d have to start paying refunds in addition to the FTC penalty? It is hard to believe this is a coincidence. Regardless, there are bigger lessons here for the subscription industry. Transparency isn’t just a best practice; it is a requirement when the law is violated. This also signals that the FTC and other regulatory agencies aren’t going to sit idly by why companies like Epic Games and Amazon use tricks and traps to reap revenue from their customers. In this case, Epic Games’ employees were also casualties of their employer’s missteps.

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