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.

Valve's Dota 2 in action.

Above: Valve’s Dota 2 in action.

Image Credit: Valve

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.