Epic Games: An Unreal Healthcare Opportunity
By: Raya Kondori & Lindy Lin
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
An Epic Entrance
Epic Games (Epic), founded and led by CEO Tim Sweeney, is a titan in the video game industry. It is best known for its hit game Fortnite and cutting-edge game engine Unreal Engine (Unreal), which offers a development environment enabling people to create video games. Despite the volatility that the gaming industry faces due to its dependency on hit titles and evolving consumer preferences, Epic has found success by making its products accessible and easy to use. This accessibility is evident with Unreal: not only is the engine’s source code available for anyone to view online, but also it uses a revenue-sharing model that has lower barriers to entry for new developers. The combination of these two characteristics gives developers open access to a comprehensive set of tools to make high-quality games with tight budgets. However, it is not the only acclaimed game engine on the market, and in recent years it has faced increasing pressure from its largest long-standing rival: Unity.
Ready Player Two
Unity’s eponymous game development platform is a notable competitor to Epic’s Unreal engine. Unity specifically focuses development support on mobile gaming, the largest and fastest growing segment of the video game market. Unity has also shown interest in expanding beyond gaming with products such as Unity Reflect and Unity for Humanity which support architects and social impact projects, respectively. Healthcare is another industry where Unity has proven useful, particularly in the Virtual Reality (VR) landscape. Specifically, companies like AppliedVR and KarunaLabs currently use Unity for the development of their VR platforms. This aggressive expansion outside of traditional gaming makes Unity a serious threat to Unreal’s position as the leading game engine.
Virtual Reality With Real-World Results
While Unreal was designed originally for video game development, its photorealistic renders and ease of use have found their way into adjacent industries such as film production. For example, many visual effects for Disney’s The Mandalorian television series were filmed entirely using Unreal, without the use of real sets. There is, however, an even bigger opportunity for Unreal outside of gaming: healthcare VR, a space growing by 41.2 percent annually. Unreal is already being used in healthcare in the form of Precision OS: a medical VR education program that provides realistic simulations for surgeons in training. Given its successful track record so far in healthcare, Unreal is well-positioned to serve as an engine for initiatives like pain management VR, where Unreal’s high fidelity makes it an ideal tool.
Within the healthcare industry, medical experts have begun exploring alternatives such as VR therapy in place of traditional treatments like opioid painkillers. This medical technique is based on The Gate Control Theory of Pain, which postulates that humans have a limited capacity in terms of brain activity in processing sensations. Hence, VR can be used as a source of external stimuli to reduce a user’s perception of pain by directing attention away from physical discomfort and towards an immersive VR experience.
Studies conducted to assess the effectiveness of VR on pain levels have shown strong evidence of pain reduction and elimination both during and directly after the use of VR therapy, with nearly all participants reporting at least some pain relief. VR has been especially helpful in the reduction of acute pain, such as experiences of pain during medical procedures and abrasions. However, in one study, only 33 percent of participants experienced complete pain relief, highlighting an opportunity for additional technological advancement. Beyond acute pain, VR also has short-term benefits for relieving chronic pain, a condition affecting over 100 million American adults. Above all, to improve the complete pain relief capabilities of VR, technology with the potential for enhanced immersion is necessary.
The pain management segment of the healthcare VR industry is the second largest sub-category by market share, with a value estimated to reach $33.7 billion by 2027. Given the scale of the pain management opportunity, many start-ups such as AppliedVR and KarunaLabs have emerged to address this issue. However, current iterations of VR therapy are limited in their ability to provide the level of immersion needed for medical-grade pain relief. One reason for their lower immersion levels is a mismatch in the types of engines used to create VR therapy experiences and the kind needed for high fidelity experiences. Specifically, several VR therapy startups use the Unity engine, whose competitive prioritization of the mobile gaming market limits its ability to create complex and high-fidelity images. Since VR therapy’s effectiveness is based on the patient's ability to become immersed within the VR system, lower fidelity visuals could limit the effectiveness of pain management treatments. This represents an opportunity for Unreal to improve the immersion of experiences in a medical setting.
Despite VR’s demonstrable benefits and external support from dedicated research trials, its application in pain therapy has seen significant regulatory challenges and faces a lengthy go-to-market process. These issues have driven developer support and resources away from the space. This shortage in both resources and talent is exacerbated by major technology companies luring proficient candidates away with competitive compensation packages. To address these problems, active support from various stakeholders outside of the startups developing VR pain management apps is needed.
An Unreal Healthcare Solution
To encourage a greater number of diverse, non-gaming start-ups to embrace Unreal, Epic should design a new startup incubation program for app developers. Specifically, the incubation program should target healthcare VR companies. Not only is healthcare among the top three industries that will be leading VR adoption through 2025, but healthcare applications of VR demand high-fidelity, immersive graphics which Unreal can provide. Through an incubation program, Epic can offer talent from its experienced game development division to assist VR startups in scaling up their content catalogues. This would address some of the major barriers to the adoption of VR therapy, providing companies with the people and resources they need to develop applications. In the long term, not only will growth in participant companies translate to growth for Unreal, but the engine can diversify its revenue beyond gaming and remain a leader among competitors with this strategy.
Given that healthcare VR is a relatively untapped industry, Epic can catch up to Unity by leveraging its talent, fidelity, ease of use, and customization options offered by Unreal. Epic has an advantage with this opportunity given its expertise in first-party game development, which major competitors like Unity do not possess apart from small educational projects. Unreal also offers inherent advantages in render quality and developer tools. These advantages allow it to create incremental value for developers and better address healthcare VR’s core requirement of increased immersion. Moreover, while coding is a major component of development, Unreal’s visual scripting feature BluePrint can enable new developers to create immersive experiences with minimal coding experience. This advantage will allow employees with limited coding experience to still work effectively with the engine, greatly reducing the difficulty of hiring developers. Furthermore, the accessible nature of Unreal allows developers to view the base code, which allows for customization towards various patient needs. These competencies, supported by its large base of talented developers, can help Unreal gain ground outside of traditional game development while advancing healthcare VR as a whole.
A New Profit Engine
Currently, Unreal licensees pay five percent royalties once the product generates a lifetime revenue exceeding $1 million. While this is sufficient for traditional game development, the significant development costs and difficulty of distribution associated with healthcare VR make this model unsustainable. These barriers, along with the considerable support offered by Epic in the incubator program, would justify charging a 15 percent royalty on revenue greater than $1 million for companies in the incubator. To enable sustainable growth, the royalty should be lowered to 7.5 percent when revenues surpass $50 million. This royalty allows Epic to mitigate the risk of third parties developing their own VR platforms while participating in the upside created from its program. If Epic can capture 10 percent of the $33.7 billion pain management VR industry by 2027, that would present an increase of its revenue by between $0.63 billion and $1.26 billion. To put that into perspective, the Epic Games Store generated just $700 million in revenue in 2020 despite favourable tailwinds resulting from the pandemic. If done right, this expansion into healthcare would be an extremely lucrative opportunity for Epic.
An Epic (Virtual) Reality
The proposal for Epic’s incubation program provides a holistic solution that addresses concerns of both the company and the VR healthcare industry. Using Unreal would improve fidelity and ease-of-use within the industry, while the incubator would address the talent shortage. The patient experience would also benefit from more immersive, non-invasive experiences for pain management. Ultimately, the incubator program will make VR therapy a more attractive form of pain management to healthcare providers and assist in the phasing-out of opioids as the primary source of pain management, ushering in a new era in treatment technology.
