A technology company in Washington state has 75 million users. It earns more profits-per-employee than Apple or Google, and its fans adore it. That company is Valve Corporation, the developer that first created the popular PC shooter Half-Life back in the ’90s and now runs online software store Steam.
Valve is a behemoth in the game industry, but it isn’t satisfied with its past and current achievements. No, Valve is currently working on changing the nature of the PC forever by taking on Windows, turning its community into content creators, and helping to bring virtual reality to consumers.
Right now, Valve’s biggest project is working with hardware manufacturers like Dell Alienware to produce set-top boxes that run its new Linux-based operating system called SteamOS. The company calls these boxes Steam Machines. Both the hardware units and the new OS take their names from (and fully integrate) the Steam digital-distribution network. Valve’s plan for the Steam Machines is to combine the openness of PCs with the convenience and accessibility of consoles on living-room television sets.
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It’s a bold strategy — one that would sound kinda crazy coming from any other company.
The truth is, gamers would laugh off a plan like the Steam Machines from anyone else for a number of reasons: Linux is not Windows. PC gamers don’t care about playing in the living room. The open nature of PCs is the antithesis of the curated platforms that big companies like Nintendo, Sony, and Microsoft have offered for years on the television.
These are all major hurdles — obstacles of perception and technology. So why aren’t gamers laughing at Valve?
To understand why this big idea seems reasonable coming from the Bellevue-based corporation, you need to understand Steam. We need to look at what Steam is now and how it got to the point of totally dominating PC gaming.
The reach of Steam
Let’s get the basics out of the way. At its core, Steam is the iTunes of gaming.
It is a portal through which developers and publishers can sell software to gamers. It’s all digital, which means that unlike Amazon, customers have no option to order a physical disc in retail packaging. Valve takes a cut of what’s sold. Publishers and developers take the rest. Once a customer buys a game, they can then use Steam to launch it and connect with others.
The service offers games from major companies like Assassin’s Creed publisher Ubisoft and Call of Duty publisher Activision, but Steam is also one of the best platforms for independent studios looking to sell their products. Small developers can make a lot of money on Steam, which is primarily due to the size of Steam’s customer base.
Steam has 75 million active user accounts, according to Valve.
That’s a massive number of people logging onto Steam to play and potentially purchase games. On an average day, the service hosts around 6.5 million peak concurrent users.
The thing about these numbers is that they are even more impressive when you consider the nature of a Steam customer. This isn’t the same kind of “daily active users” that frequent free-to-play games like Clash of Clans or Candy Crush Saga on mobile.
Unlike mobile publishers, Valve isn’t out spending money trying to acquire new gamers, and Steam customers are core gamers looking to spend money upfront for premium-priced software. That includes $60 triple-A new releases, $15 indies, and older titles on sale at a deep discount.
Oh, yeah — Steam sales
If Steam is an iTunes for gaming, Valve sets the service apart with its blockbuster quarterly sales. Four times a year — in winter, spring, summer, and fall — Valve and its publishing partners mark down huge swaths of the back catalog available on the store. Games that sold for $60 just a few months before will go for $30 or potentially much less. Many frugal gaming fans purposefully hold off on new purchases to pick up a bigger number of titles during these discount periods. This is in addition to smaller, more focused weekly sales.
At this point, Steam isn’t the only service holding these kinds of sales. Amazon, GOG, and others all features massive discounts quarterly or biannually. Valve’s sales are the ones that usually grab headlines and the attention of the wider gaming community.
Thanks to these bargains, even people with only a passing interest in gaming often have a pretty substantial library of titles on their Steam account.
Gamers love and trust Steam
Like any enthusiastic group of fans, the people who play a lot of games are very passionate, extraordinarily loud, and some times vicious. For example, publisher Electronic Arts makes a number of games that people enjoy. That includes titles like Madden Football and Battlefield, but that hasn’t stopped gamers from voting the gamemaker as the “worst company in America” in the last two annual polls on the customer-rights blog The Consumerist. That’s right. Gamers think EA is worse than Comcast, Time Warner, and Exxon.
EA has done a lot to earn the scorn of fans (it released busted games and Origin, a lackluster Steam competitor), but gamers also know how to hold a grudge. That’s why it is amazing that more than a decade after launching, customers almost universally love using Steam. The company has navigated fickle customer demands expertly.
Instead, Valve has earned the admiration of its customers in a number of ways. Steam is easy to use. It’s a convenient way to store all of your games and to access them when you need them in one place. The aforementioned sales have gained the system a reputation for fairness. Valve also treats developers and publishers well, which end users notice.
More than the above, the executives that run Valve make decisions as if they are real gamers. They are in charge of a company that earns an extraordinary amount of money. It got that way by appealing directly to people who live and breathe interactive entertainment, and it seems intent on sticking to that strategy.
Gamers respond to that. They see Valve as an ally or as a team they can root for in the battle against evil corporations hellbent on squeezing every dime out of consumers. In the end, Steam benefits because gamers feel at home using it.
For connection and community
Steam is more than just a store. Users have accounts where they keep all their games in a digital locker, but they can also use those accounts to make a friends list to game with others. They can also join groups based on similar interests.
People can quickly chat with their friends using the built-in instant messaging, and they can post on Steam’s message boards about specific releases or general topics. Unlike Xbox Live Arcade and PlayStation Network, which are similar services for Xbox One and PlayStation 4, respectively, Steam does not require a monthly subscription fee.
Valve is also consistently adding more features. It has achievements that players can unlock by performing difficult feats in games. It recently added trading cards that users can collect by purchasing and playing games. Gamers can even trade their unplayed games and virtual items with one another.
These are all ways Valve manages to engage customers and keep them coming back.
How Steam came to rule PC gaming
An estimated three out of every four games sold on PC are through Steam, according to industry research group IHS Screen Digest. It wasn’t always like that. Steam started small, and gamers actually didn’t like it. But Valve predates Steam, and we should look back to the very beginning.
In 1996, Gabe Newell and Mike Harrington — a pair of Microsoft employees who worked on early versions of the Windows operating systems — left the company to make video games. They founded Valve Software in Bellevue, Wash. Two years later, with a team of developers working for them, they released Half-Life, a sci-fi shooter with adventure and exploration elements. Many consider it one of the most influential games of all time.
Following the success of Half-Life, the company continued releasing expansions for the popular title and began work on Half-Life 2 as well as a new suite of development tools called Source Engine to help produce the game. After years of waiting, Valve finally released Half-Life 2 in 2004.
Leading up to that release, Newell spent much of his time preparing the company’s new Steam client. Back then, before Steam, Valve struggled to update its games. A patch for the multiplayer Half-Life mod Counter-Strike would cause connectivity problems for huge parts of the audience for days at a time. To fix that problem, Newell approached companies like Microsoft, Yahoo!, and RealNetworks to create a client that would automatically update its games. Everyone turned Valve down, so it built the tool itself and called it Steam.
The studio released a beta version of the software in 2002. The official version went live in 2003. In its first iteration, Steam could auto-update Valve’s games as well as fight piracy and cheating. That’s it.
“Selling games over the wire was something we came up with later,” Valve spokesperson Doug Lombardi told GamesIndustry International in 2008.
As much as gamers love Steam now, they actually really didn’t like it at first. The service didn’t always work and would sometimes break games by updating them improperly. When Valve released Half-Life 2, the company required Steam for the game to function. This meant that even if people didn’t want the client on their computer, they had to install it to play the anticipated sequel.
But Valve didn’t give up on its plan for a PC gaming client. It kept forcing it on gamers and worked in the background to make the service better. In late 2004, the developer-turned-technology company was now eyeing a future of digital distribution. It started selling some of its own games on Steam, and then it inked a number of deals to distribute small titles from independent developers.
This lasted for a few years, and Steam started earning a profit. In those days, PC gamers still mostly purchased their software in packaged boxes from stores, but Steam — without shipping, printing, and manufacturing costs — had much bigger profit margins. Seeing the potential, larger publishers like Tomb Raider maker Eidos Interactive, Doom developer id Software, and Resident Evil publisher Capcom all started releasing games on Steam in 2007.
“We’ve approached the development of Steam the same way we treat our online games; we release something we’ve tested, we internalize the feedback, and then we release new features and functionality based upon the feedback received,” Newell said in a statement from May 2007. “In the past year, we’ve added over 100 new titles from third parties, grown to over 13 million active accounts, and introduced new features such as Guest Passes and Free Weekends.”
By then, Steam’s path to PC dominance was set. It took Valve around six and a half years to reach 65 million users in December. A month later, at the first ever Steam Dev Days conference in Seattle in January, Newell revealed that Steam had already added another 10 million accounts.
Where Steam is going next
So Valve has built a platform that millions of people use. It could just sit back and let the checks keep rolling in as most of the publishers in the multibillion-dollar industry continue using its online store to sell their games.
That’s not the plan.
“Right now, we’re into rethinking games as a connected economy of virtual goods and services — and virtual reality,” Newell wrote in a post on the content-aggregation site Reddit.
Valve is “into” upending the traditional economic model that it has built its entire business upon and some sci-fi magic. That’s in addition to its major plans for SteamOS and the Steam Machines. This is a company that is not settling for its already impressive position atop the PC gaming pile. It has a vision for the future, and it is charging ahead.
Dota 2, hats, and free-to-play PC games
Sure, Steam has millions of gamers willing to pay up front for traditionally priced games, but Valve sees that the world is changing. Emerging nations are coming online, picking up PC gaming, and flocking to free-to-play titles. Last year, China’s gaming industry generated $13 billion, and most of that went to PC games like League of Legends, NBA 2K Online, and Valve’s own Dota 2.
The company will continue to sell full-priced games, but when Newell says that they’re into “virtual items and services,” he’s talking about Steam’s next 75 million users.
The developer is currently running a pair of already successful experiments. One is the 2007 class-based shooter Team Fortress 2, and the other is the aforementioned action-strategy title Dota 2.
Team Fortress 2 debuted in Valve’s Orange Box compilation alongside its game Portal, but in 2011 the studio decided to make it free-to-play. Now, gamers can download Team Fortress 2 at no cost, but the game is still a source of profit. The title generated around $139 million in microtransaction sales last year, according to industry-intelligence firm Superdata Research. How is it making that money? Hats.
That’s right: Virtual hats, and it isn’t even making all of them. The company has a suite of tools that enables community members to create and sell virtual goods to other gamers. Valve then takes a cut. These digital seamstresses sold enough hats (and other pieces of armor in Team Fortress 2 and Dota 2) to earn a $10.2 million payout from Valve.
Dota 2 is a highly competitive title that is massive in the highly engaged pro-gamer scene. The title has teams of five players working together to quickly level up characters to destroy the opposing team’s bases. In 2013, its first year out of its beta-testing phase, the game earned $80 million. Like Team Fortress 2, that was primarily from cosmetic items.
While this is the free-to-play model in action, it is different from what we see on iOS and Android. Big successes on mobile platforms are strategy titles like Clash of Clans or puzzler Candy Crush Saga. These titles make millions of dollars by selling virtual items and bonuses that improve the customer’s ability to play the game. Or the game might offer a player who just failed a stage the opportunity to pay a dollar to continue from where they left off.
Those kinds of microtransactions fundamentally change the game.
That’s not what is happening in Dota 2, Team Fortress 2, or League of Legends (a popular Dota competitor). The fans of these games are highly sensitive to what they call the “pay-to-win” model, where the person who spends the most cash is guaranteed to perform better. While that is a proven strategy for flash success on mobile, it has yet to prove it can support long-term growth.
Valve is betting that its strategy of highly playable, fundamentally sound games with a thriving ecosystem of community-created virtual goods will support growth into the future.
Science fiction has promised the world a gaming experience that feels like the real world for decades. Whether it’s the holodeck in Star Trek: The Next Generation or the full-body suit and headset of 1992 film The Lawnmower Man, we’ve constantly considered the implications of a digital representation of reality.
Valve thinks we’re only about a year away from virtual reality for consumers.
Back at the Steam Dev Days conference in January, Valve’s VR visionary Michael Abrash held a talk called “What VR Could, Should, and Almost Certainly Will Be Within Two Years.” He detailed the challenges that the technology faces while also speaking on the potential for the medium.
“A great VR system at a consumer price in 2015 is more than just possible — it’s sitting there waiting to happen,” Abrash said. “And it will happen. If not in 2015, then soon after. Virtual reality on the PC over the next few years may be as exciting as anything that’s ever happened in games.”
Abrash built Valve’s own prototype, but the company currently isn’t planning on releasing its own product to consumers. Instead, it shared what it has learned with other companies working in the space. That includes Oculus VR, the technology startup that seems the closest to releasing a consumer VR headset within the next 12 months.
Valve’s interest in VR is another one of its forward-looking prospects. The company thinks this tech has the potential to change the relationship between people and media, and it wants to take part.
“Not only could VR rapidly evolve into a major platform, but it could actually tip the balance of the entire industry from traditional media toward computer entertainment,” said Abrash.
Basically, once your grandma can visit a digital re-creation of her childhood neighborhood, she’s not gonna have much use for reruns of NCIS anymore.
SteamOS and Steam Machines
“The PC is successful because we’re all benefiting from the competition with each other,” Newell said at an event in Las Vegas, where he introduced the Steam Machines to the press. “If Twitter comes along, our games benefit. If Nvidia makes better graphics technology, all the games are going to shine. If we come out with a better game, people are going to buy more PCs. That has been the engine of [PC’s] growth.”
Valve’s CEO believes in the openness of the PC platform. Anyone can make software for the PC. You don’t need to get permission from Apple. You don’t need to give Google its cut. It’s survival of the fittest. Newell’s dedication to that openness was the impetus behind the creation of SteamOS and Steam Machines.
You see, Newell believes that the PC’s openness is in danger, and he thinks the best way to counter this is by expanding the platform to the living room.
“A couple of years ago, we started to get pretty worried that maybe that openness was going to be challenged — that there was success in proprietary platforms in living rooms and in mobile, and that was going to cause the entire industry to step away from the opportunity of openness,” he said last month.
Newell’s concerns are directed at Microsoft. Back in July 2012, Newell called the newest Windows operating system at the time (Windows 8) a “catastrophe for everybody in the PC space.” He thinks that Microsoft may attempt to close its grip on the distribution of software on PC through its Windows Store, which would make the platform more like Apple’s iOS walled garden.
“If that’s true, it’s going to be a good idea to have alternatives to hedge against that eventuality,” Newell said.
Back in Las Vegas, before the International CES last month, Newell showed off how Valve is hedging.
“[We asked ourselves] what can we do,” he said. “We picked three things to look at.”
They didn’t just look. Valve is building an operating system, an open console platform, and a new input device — also known as SteamOS, Steam Machines, and Steam Controller.
These devices solve a few issues. First, they cut Microsoft’s Windows out of the equation. Second, Valve is building the SteamOS software to work with televisions and a controller. Third, it is working with hardware partners to offer a variety of form factors that make more sense for the living room than a traditional, office-bound PC.
Together, the OS, the machine, and the controller form what is essentially the first open, PC-based gaming console.
This isn’t without its own issues. SteamOS’s Linux kernel isn’t compatible with most of the Windows games currently on Steam. Valve has a plan to solve that in the short term with local-streaming technology that will enable gamers to play their Windows games on a Linux machine. That adds a layer of complexity that might turn off some, but the real plan is to convince developers to port their games to Linux going forward. That will require significant investments from companies making large games.
In all, Valve and 14 hardware partners showed off a whole line of Steam Machines at CES. Any PC that ships with SteamOS and the Steam controller is essentially one of Valve’s new open set-top boxes, and consumers can actually download SteamOS for free right now and put it on their home PC.
Valve doesn’t care how SteamOS gets out; it just wants it to spread. Of course, nothing guarantees that it will.
As concerned about the openness of the PC as Valve is, this is not necessarily a fear that gamers share. Most are happy with their Windows rigs, and they aren’t ready to deal with compatibility issues to stave off some threat that they don’t perceive as imminent.
Valve knows this. It is going to keep moving forward with the project. It has enough money to support it, and it could prove a wise investment in the long run.
What’s clear is that Valve anticipates consumer trends better than most, and it understands the power that games has over a market. If its plans for the living room, free-to-play, and virtual reality play out as it expects, little could stop Valve from reaching much more than 100 million users. It could also create the first real threat to Windows in the PC space.
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