Amazon.com (NASDAQ:AMZN) has announced it will be launching its own game engine, called Lumberyard, and giving it away. While some may be worried that it points to a dying Amazon Game Studios, I believe it is a pretty shrewd move. Here's why.
Do I need to put gas in it?
If you play video games, you may have heard of game engines with mysterious names such as "Unreal," or "CryEngine." But what exactly is a game engine anyway? A game engine is a software tool, or collection of tools, game developers use to create games. Instead of having to program everything from scratch each time developers want to build a new game, they can use a game engine to do the heavy lifting.
For example, when you want to write a document, you use word processing software. The software doesn't tell you what to create, but it gives you the tools to create all kinds of different documents such as letters, resumes, and invitation cards. Similarly, game designers don't have to reinvent the wheel every time they create a game but can use a game engine to create some of the basic elements and code.
Amazon claims its game engine will be capable of creating "triple-A" games, an industry term that refers to big blockbuster games, not just small indie games. Indeed, the visuals technology in the engine is based on the popular CryEngine, which has been used for games such as the popular Crysis series.
Currently, Lumberyard supports games for Windows, Xbox One, and PlayStation 4, but it will eventually expand to supporting all of the other major platforms such as Mac, Linux, iOS, Android, and even virtual reality such as the Oculus Rift.
So how does "free" make money?
You may be asking, "What's the catch?" There is one: If game developers design games that need to run on servers, they must use Amazon's Web Services (AWS) and can't run their game on a non-AWS Web service that is "similar or can act as a replacement" for AWS. However, Amazon does allow developers to use their own servers if they want, and there's no fee or obligation if the game doesn't require Web services, such as a single-person-only game.
To analyze the value of this proposition it is helpful to look at the competition. Most popular game engines require a subscription or royalty agreement. For example, while Epic Games has switched to offering its Unreal engine for free, it demands 5% of all gross revenue the game brings in after the first $3,000. This isn't a terrible arrangement, because it's proportionate to how well the game does.
However, considering the 5% comes off the top before any other expenses, Amazon's arrangement could potentially be more lucrative for developers. Using Lumberyard, game developers only need to pay for AWS, an expense they would already have to pay to host their game online. This is especially beneficial if they were going to go with AWS anyway for its competitive pricing and scalability. The downside, of course, is being locked into AWS, with the only other alternative to go it alone and build in-house servers.
Picks and shovels
Most people haven't heard of Amazon Game Studios. It's similar to Amazon Studios, with the idea to have an in-house team develop original games for Amazon, similar to how Amazon Studios has developed original TV shows. However, the game studio doesn't seem to be faring well, with only a handful of games released and some key figures leaving the team last year.
Amazon's Game Studios doesn't appear to be going away or be replaced, but this move to release its own gaming engine shows it is open to outside game developers. I believe this is a wise move. It's notoriously hard to churn out blockbuster games as budgets run high and gamers can be fickle. Why not let others take that risk and make money selling them the tools? In a gold rush, it's better to sell the picks and shovels rather than try your luck as a prospector.
Amazon will also be integrating Twitch, the live video game streaming service it bought back in 2014 for nearly $1 billion. The integration of AWS and Twitch suggests Amazon is looking at the future of gaming and seeing more growth in the online and competitive gaming world. Professional gaming, or e-sports, is expected to grow over 40% in 2016 and reach over $1 billion by 2019, definitely an area Amazon should want to be.
At this stage it's a bit too early to put figures on how much additional revenue this could eventually bring in for Amazon, but overall this is a positive development, as it shows Amazon is adjusting, or at least expanding, its strategy for the video game market -- a market that has a lot of room to grow.
Chris Kuiper has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.