Valve logo. Source [1]
Press Start
Valve are a video games developer that was founded in 1996 by two former Microsoft employees Gabe Newell and Mike Harrington. In 1998 they released, arguably, one of the most influential first-person shooters, known as Half-Life. If you were a teenage boy back then and were lucky enough to have a PC in your house, chances are that you knew this game. Although, other than the completely innovative way the game changed how developers thought about storytelling, A.I. and physics, Valve also was leading the way in how developers interacted with their fans. Many of Valve’s fans tinkered with the game, making new levels, models and entirely new games altogether. This was encouraged by Valve, packaging the game with certain developer tools to make it easy for their fans. Some of the better projects, Valve helped to develop into full products, of which there are more modern incarnations still played today i.e. Team Fortress and Counter Strike Go. But how Valve is probably better known is through its digital media distribution service, Steam.
Steam logo. Source [5]
Level 1
Steam originally started in 2003 as a way for Valve to automatically distribute updates for its online games, and counter piracy and cheating. However, the release of Half-Life 2 saw Steam used as a channel of sale, players had to sign up to Steam to purchase and play the game. By 2005 Valve had negotiated contracts with other developers to sell their games through Steam. An easy way to describe what Steam is today, is to say that Steam is to the PC gaming industry, what Spotify is to the music industry. Although, that may be an over generalization, as Steam has many more features on offer. Steam is not only a channel of sale, but a hub; offering digital rights management, matchmaking servers, video streaming, social networking, developer tools and cloud storage. Valve’s customers are no longer just the players, but also the developers and in the same spirit as the early days, it offers small independent developers a community and a route into the market.
1 Up
With the success of Steam, Valve’s revenue stream has changed considerably, and it has essentially become at least as much of, if not more of, a distributor rather than a developer. This has enabled a somewhat passive way of generating value as other developers make many of the games that they sell. Valve takes approximately 30 % of sales generated on its platform from games made by other developers. The vast majority of PC games are sold through Steam and we have reached a point where developers are actually taking a huge risk not to release through Steam.
A large contributor to the success of Valve’s business model is how they exploit customer interaction and cultivate a community. As discussed earlier they have encouraged a rich independent developer and modding community. Until recently, when they realized they had to reduce the immense number of games flooding Steam, gamers could vote on which games would come on to the platform. Furthermore, there is a customer review system. The community also has minimum entry requirements, for example a popular revenue model on Steam is the free-to-play, or freemium model where by a game is offered for free but in-game transactions may unlock further features. Many of the most played games on Steam, such as Dota 2, Team Fortress 2 and Counter Strike Go (mentioned earlier) use such a model. This is successful as it removes the initial price barrier that may prevent people from trying the game and thus reduces the barrier on to Steam. People are therefore more likely to join the community. Additionally, these games use very clever mechanics to entice the players to spend money i.e. they may unlock more levels, items or gain some kind of advantage. It also makes piracy pointless, and has enabled developers to earn revenue from countries where the game would normally have only been pirated. Another interesting revenue model that is used through Steam is called Early Access. This allows developers to ‘open the doors’ early on a game in development. This means players can start enjoying the game and developers can start earning money before it is even completed. The main idea behind this is that it enables more adventurous projects to achieve realization. Projects which otherwise may not have obtained full funding can receive funding through sales whilst still in development.
Final Boss
Worryingly, there appears to be a trend in that the middle ground in the gaming industry is disappearing and the landscape is often dominated by a few very successful titles with the rest being relatively small projects. This has the effect that over half the revenue earned through Steam was generated by a small handful of games, the majority of which were not developed by Valve. Furthermore, these triple-A games are just the type of games that probably could successfully launch without Steam, as they would attract players regardless of which platform they are on. This could potentially mean Valve may be in precarious position in the future. Is Valve’s current business model robust enough and able to adapt if the other big developers decide to jump ship? Although, Valve has been reducing the cut it takes and making entry onto the platform easier for developers. Things in the future may change dramatically and Valve will need to evolve.
Continue?
It’s hard to deny that Valves success has been largely due to Steam and their subsequent digital business model. In fact, many fans of Valves games are somewhat bitter at Valve as their games development has slowed considerably as they seem to be paying more attention to Steam. Where the hell is Half-Life 3?! Although, I would wager they would have been successful even if they were just developing games still. In fact, the 3 of the most popular games we mentioned earlier, were all developed by Valve. Their games have been some of the most innovative in the industry. I imagine that even if developers decide not to release through Steam in the future, Valve and its platform will live on for a long time and it will be interesting to see what they do.
References
[1] Valve Logo. June 2015. Valve [Public domain]. [Accessed 26 Feb 2019]. URL= https://upload.wikimedia.org/wikipedia/commons/6/6c/Valve-logo.jpg.
[2] Dunn, J. 2013. Full Steam ahead: The History of Valve. [Accessed 28 Feb 2019]. URL= https://www.gamesradar.com/uk/history-of-valve/.
[3] Ahoy. 2014. RetroAhoy: Half-Life. [Accessed 28 Feb 2019]. URL= https://www.youtube.com/watch?v=bp5vOgz8vyI&.
[4] Seal, E. 2016. The Little Steam Engines That Could: Fan-Made Mods That Made It Big with Valve. [Accessed 28 Feb 2019]. URL= http://www.nitwitty.net/for-the-fans/valve-fan-made-mods/.
[5] Logo of Steam. [Public Domain]. [Accessed 28 Feb 2019]. URL= https://commons.wikimedia.org/wiki/File:Steam_logo.svg.
[6] Sayer, M. Tyler, W. 2018. The 15-year evolution of Steam. [Accessed 28 Feb 2019]. URL= https://www.pcgamer.com/uk/steam-versions/.
[7] wikipedia. [Accessed 28 Feb 2019]. URL= https://en.wikipedia.org/wiki/Steam_(software).
[8] Statt, N. 2018. The Verge. Valve’s new Steam revenue agreement gives more money to game developers. [Accessed 26 Feb 2019]. URL= https://www.theverge.com/2018/11/30/18120577/valve-steam-game-marketplace-revenue-split-new-rules-competition.
[9] Grubb, J. 2017. Valve won’t manually curate Steam because it dominates PC gaming. [Accessed 28 Feb 2019]. URL= https://venturebeat.com/2017/02/13/valve-wont-manually-curate-steam-because-it-dominates-pc-gaming/.
[10] Kuchera, B. 2018. Steam remains comfortably dominant, but the competitive threats are gathering. [Accessed 26 Feb 2019]. URL= https://www.polygon.com/2018/8/27/17785946/steam-usage-fallout-fortnite-amazon.
[11] Steam. 2018. [Accessed 28 Feb 2019]. URL= https://store.steampowered.com/about/communitymods/.
[12] Sarkar, S. 2017. Valve shuts down Steam Greenlight, replacing it next week. [Accessed 01 Mar 2019]. URL= https://www.polygon.com/2017/6/6/15749692/steam-direct-launch-date-valve-greenlight.
[13] Plunkett, L. 2018. Big Study Of 10 Million Steam Reviews Is Absolutely Fascinating. [Accessed 01 Mar 2019]. URL= https://kotaku.com/deep-study-of-10-million-steam-reviews-is-absolutely-fa-1825908713.
[14] Soomro, .D. 2018. 15 Best Free Steam Games You Should Definitely Play. [Accessed 28 Feb 2019]. URL= https://beebom.com/best-free-steam-games/.
[15] Steam. [Accessed 29 Feb 2019]. URL= https://steamcharts.com/.
[16] Pearson, D. 2012. Guillemot: As many PC players pay for F2P as boxed product. [Accessed 28 Feb 2019]. URL= https://www.gamesindustry.biz/articles/2012-08-22-guillemot-as-many-pc-players-pay-for-f2p-as-boxed-product.
[17] Green, H. 2016. Gamasutra. 7 successful Early Access games that all developers should study. [Accessed 28 Feb 2019]. URL= https://www.gamasutra.com/view/news/275719/7_successful_Early_Access_games_that_all_developers_should_study.php.
[18] Hruska, J. 2018. Steam Earned an Estimated $4.3B in 2017, but Benefits Flow to Handful of Titles. [Accessed 28 Feb 2019]. URL= https://www.extremetech.com/gaming/266323-steam-earned-estimated-4-3b-2017-benefits-flow-handful-titles.
[19] Kuchera, B. 2018. Valve now rewards successful games with a larger cut of Steam revenue. [Accessed 28 Feb 2019]. URL= https://www.polygon.com/2018/12/3/18123649/valve-steam-revenue-sharing.
[20] Ravenscraft, E. 2018. What the Hell Does Valve Even Do Anymore (Besides Take Our Money). [Accessed 26 Feb 2019]. URL= https://www.howtogeek.com/360177/what-the-hell-does-valve-even-do-anymore-besides-take-our-money/.
[21] Soper, T. 2013. GeekWire. Valve’s Gabe Newell to receive British gaming award for “exceptional contribution”. [Accessed 28 Feb 2019]. URL= https://www.geekwire.com/2013/valves-gabe-newell-receive-british-gaming-award-exceptional-contribution/.
[22] Fahey, R. 2005. Half-Life 2 named game of the year in AIAS Awards. [Accessed 28 Feb 2019]. URL= https://www.gamesindustry.biz/articles/half-life-2-named-game-of-the-year-in-aias-awards.
Simon's Digital Business Models Blog 
Great article Simon, I’m more of a casual Steam user (only really load it up for Civilisation 🙂 ) and never knew the history behind the company, was really interesting to read about.
You mention that triple-A games would likely be able to launch without Steam (we can see that with the likes of Nintendo and Blizzard are still doing fine) but a small to medium size PC game development company doesn’t stand a chance of existing without steam. My question is are you worried about the monopoly Steam have over the market?
For example they could easily abuse their power by charging more commission, the developers would have to play along to survive. Another example is if Steam as a centralised company were to go down for any reason, it could mean a lot of game developers go bust.
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Hi Tom, first off the PC gaming market is actually only approx. 20 % of the entire gaming market. Which is actually quite small compared to what it used to be: https://newzoo.com/insights/articles/global-games-market-reaches-137-9-billion-in-2018-mobile-games-take-half/. I think the things that mostly worry me are the rise of mobile and console gaming. These markets have both grown hugely in the last 20 years. The mobile market somewhat exponentially. This means that a lot of developers are targeting these markets more with the large games and neglecting the PC market. Another problem I see is that the sheer number of developers. There are just so many games being released that it is kind of stagnating the landscape. Steam did release their console ‘Steam machine’ a while ago. Which was basically a console-sized PC. But it was not particularly successful. Plus they have released apps to try and move into the mobile space. https://www.techradar.com/uk/news/steam-link-app-for-android-and-ios-will-allow-you-to-play-games-on-the-go. But this is a very hard market for them to gain a footing. Perhaps it would be more suitable for them to enter this market as a developer rather than a distributor. Following this I’m not particularly worried about them gaining a monopoly as they have so much competition with other markets. They need to be able to attract developers into a much smaller market. And as Vincent has raised already, other platforms are offering better rates and it may be hard for them to remain dominant without some fundamental change.
Thank you kindly for your question,
Simon
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Hi Simon! As a steam user myself, I found that your post is interesting.
I do agree with you that steam has been a high contributor to the success of valve and that even without steam, valve can still be successful.
In your 1Up sections, you mentioned that valve takes approximately 30 % of sales generated on its platform from games made by other developers. Do you think this cost is reasonable? While epic games only take 12 %. https://www.epicgames.com/store/zh-CN/about and there are several studios that have delay or cancel their steam launches because of this reason. https://www.gamesindustry.biz/articles/2018-12-10-three-studios-delay-or-cancel-their-steam-launches-in-favour-of-epic-games-store
Also, you mentioned that ‘the success of Valve’s business model is how they exploit customer interaction and cultivate a community’. I do agree with this statement as well. I just wanted to add that there is steam market feature in steam as well where you can buy and sell in-game items. And I believe this feature has contributed to the success of steam community as well. https://steamcommunity.com/market/
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I did not realise that Epic games took such a smaller cut Vincent, that is very interesting. I think you raise some good points. As I wrote this I did come across some articles about Steam reducing the cut they take: basically if a game sells over $10 M Steam reduces their cut by 5%, then there is another 5% drop after $50M https://www.rockpapershotgun.com/2018/12/01/steam-taking-smaller-sales-cut-from-bigger-games/. This perhaps, is not enough to really benefit medium to small developers. However, they have very low entry requirements for small developers. i.e. it only costs a couple of thousand or so to get a game on Steam (sorry can’t find the exact figure right now).
But to be honest, in my opinion, it doesn’t seem particularly competitive of them and as I said in the article they will need to think of something. Many digital platforms such as Spotify and Steam, offer their customers ‘freemium’ content. As Steam’s customers are also developers, could this idea be used for implementing some kind of freemium revenue model that benefits developers?
People may complain about Steam, and go and try other platforms, but from what I’ve seen they soon realise why everybody is on Steam. Realizing other platforms are not as good as Steam. But they will catch up eventually. Steam needs to be careful though that it doesn’t rest on its laurels.
Yes, that’s a good point Vincent, Steam market place is a good example of how they cultivate their community. Lol I got to the stage where I couldn’t fit anything else in my blog but wanted to cover much more. Friend’s lists is another one.
Thanks for your comment,
Simon
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Hi Simon,
Great blog! I am not a gaming person, but I have certainly played Half-Life and realized how many of my friends are into games nowadays. Your blog gives me a great insight into the evolution of this giant company as well as the industry.
As Steam is facing the competitors from the mobile games and the console games. As far as I’m aware, more and more of my friends are moving from PC games (excluding League of Legends and Dota :P) to mobile games for example, Mobile Legends. There is also a significant increased profit year by year that developers can make from mobile game industry (https://www.telegraph.co.uk/news/world/china-watch/technology/chinese-mobile-game-market-booms/). As you’ve mentioned previously, Steam has tried to enter mobile and console market, but both didn’t go well. Therefore my question is, what would you say is the future of Steam or the whole PC gaming industry? Do you agree that it will be more focused on switching to virtual reality (VR) games, or in other word, do you think VR games will be the ‘Half-Life’ for our next generation? (https://www.roadtovr.com/vr-headset-growth-steam-biggest-leap-yet-steam-survey-january-2019/)
Chen
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Hello Chen, Yes I think you raise a very good point. The advantage of PC is hardware. PCs have always had huge potential performance advantage over consoles and mobile devices as they can always use the latest high-end hardware. VR is especially demanding on hardware and so PCs definitely have the advantage in this area. I can definitely see VR being fundamental in gaming in the future. At the moment, however, there are lots of factors which are slowing down its development and adoption. I don’t know if you’re aware of this but there are basically just three companies which make PC graphics processors (GPUs). Intel, AMD and NVIDIA. Intel has the largest market share because it’s GPUs are integrated into their CPUs and most desktops and laptops use Intel CPUs, however, they are very low end GPUs. AMD and NVIDIA make the only VR capable GPUs but AMD’s GPUs have struggled to keep up with NVIDA for quite a while. This means the high end of the market has been dominated by NVIDIA for a while and they have been able to charge a premium, making them unobtainable to the average person. Furthermore, AMD GPUs have also suffered inflated prices due to them being especially good for cryptocurrency mining. Basically VR is too expensive for the average person at the moment and the hardware is just barely capable. But yeah, I think PC gaming will move in this direction but I just think it will take a while before it’s mainstream.
Something I think that has bigger potential is Augmented Reality (AR). For example, look at games like Ingress or Pokémon Go. These games merge the boundary between the gaming world and reality. You don’t necessarily need an expensive device and they have the same attractions as other mobile games. They can be played anywhere and enhance your experience of a real location. In the gaming industry, high fidelity graphics can’t compete with a well imagined game with immersive interaction. I can see a huge gap in the market here for anyone who can think of something truly great.
Thank you for your comment,
Simon
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Very interesting choice of company. I am not part of the Valve community being from a country where gamers did not have much choice but pirate games, so I do not exactly know how it works of how popular it still is.
But I recently heard about a new gaming model called “Cloud gaming”. The game would basically be processed on a server, and the player would only receive a video of it on its laptop, but would – of course – be able to interact with it with a pad. The internet being fast enough now, the gamer would only need a decent connection to play any video games without the need of an expensive setup.
Don’t you think it would be a dangerous situation for Valve as not only it would certainly offer numerous games, but people would not need to update their PC anymore. Any cheap i3 core would be enough.
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Hi Loïc, thank you for your comment. That is an interesting point which I totally hadn’t considered in my blog post. Yes I agree, cloud gaming is definitely a potential threat to Steam but the idea of cloud gaming has actually been around for quite a while https://en.wikipedia.org/wiki/Cloud_gaming. I can remember going to the European Gaming Expo in 2010 or 2011 and they were showing off this console called OnLive https://en.wikipedia.org/wiki/OnLive. They were even giving them away for free. It was probably the first cloud gaming system I had heard of but it didn’t really take off for some reason. One problem I can see with cloud gaming is latency. This is the time it takes from when a button is pressed to when something happens on the screen. And I can see this being a huge problem as with cloud gaming the signal has a long distance to travel. This may sound a bit ridiculous but I think that some of the more enthusiast level gamers would definitely notice it and find it unbearable. Actually I just realised there is a section about latency in that OnLive wiki article I posted which says more or less the same thing. Another similar issue would be connection quality. I don’t know if you’ve done any online gaming but connection quality is a huge factor in your experience and a lot of people have terrible internet. Perhaps, when internet improves these won’t be problems and cloud gaming will become the next thing but honestly at the moment most people’s internet is not stable enough for a good experience. The idea is a very good one. The games could run on high-end hardware in the cloud and be streamed to the users. Gamers wouldn’t have to keep updating hardware to play the latest games. But to be honest I think if anybody is going to be in a position to implement this well in the future it will probably be Valve.
Thanks for the comment,
Simon
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Hi Simon, really nice article. I’m glad to see a fellow who are still waiting for a day Valve will finally count to three. Well, I agree that Steam is one major factor that makes Valve become Valve today. As you mentioned, one of reasons that makes Steam so successful is its customers interaction and community features. In my opinion, another reason that make Steam so successful is because it has been dominated the PC market without any true competitors. But recently many video game corporations start to compete with Valve with their own platform. For example, as Vincent already mentioned in the previous comment, Epic Games starts to offer a greater cut to developers in exchange that games from those devs need to be exclusive titles on Epic Games Store. I think most people (at least me) still prefer Steam over any other platforms but if more games going to be exclusive titles for Epic Store, people will have no choice but to shift from Steam to Epic Games Store. Do you think Steam can still rely on its strong customers features or competitors such as Epic Games will be a challenge for Valve?
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Haha I appreciate your Half-Life 3 comment lol.
Hi Siwat.
Yeah I have to admit I know many people who are heavily invested after spending thousands on games which are tied to their Steam account. This basically deters them from moving out of the Steam eco-system. Steam is very fortunate that they have somewhat of a monopoly on the PC gaming market. A little competition is good though. It will hopefully drive down prices and benefit the customers/developers. But yeah I think it would be dangerous for Steam to rely too heavily on what it has at the moment. They face competition from many directions (mobile, console… epic) and technology is moving very fast.
Thanks for your comment,
Simon
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