You should think of it as the iTunes of video games. Released by game developer Valve in 2003, Steam is a free digital distribution gaming platform through which users (“gamers”) can purchase, download, and play computer games. Sound niche? Consider this:
- Gamers spent around $3.5B on Steam in 2015, or about 15% of the total paid PC gaming market
- At any given time, between 7 and 12 million users are online out of a base of 125 million active users (Snapchat has something on the order of 150 million)
- Valve’s founder, Gabe Newell, is worth $4.1B (47th richest in tech)
- On a per employee basis, Valve could be generating more earnings than any other tech company (including Apple and Google)
From humble origins
Valve began as a game developer and achieved early success with blockbuster titles Half-Life (1998) and Counter-Strike (2000). Steam was originally conceived as a way to deliver game updates seamlessly to users and to apply anti-piracy and anti-cheating systems. Realizing that the proliferation of high-speed internet could transform how entire games were delivered to gamers, Valve began building a client with an integrated marketplace. In 2004, Valve forced Counter-Strike’s 1.5 million players to migrate to the newly-released Steam, and through a series of deals with third-party developers along with the release of Valve’s own wildly successful Half-Life 2, Steam achieved the critical mass required to profitably attract new developers and new users.
Bringing a gamer’s needs into a single client
Steam’s value creation for both game developers and users is straightforward. It provides a free, centralized service for gamers to buy, download, and manage their games. Gamers don’t have to hoof it to Best Buy to get the latest title, nor do they have to worry about keeping up with physical copies of games. Moreover, the service offers a variety of features that amplify direct network effects. A user-generated repository of often hilarious game reviews helps gamers assess titles prior to purchase. A messaging service and lively community forum allow gamers to interact with each other. Most significantly, avid gamers sometimes volunteer time to create additional free content for games (“mods”), which Steam then hosts and allows its user base free access to. (In fact, Steam’s most popular game, Dota 2, is based on a mod!)
While Steam captures about 30% of each sale, developers selling a $50 title on the platform net about four times as much revenue versus brick-and-mortar retail. Tack on the price of manufacturing and distribution costs, and retail margins look dismal compared to those they can realize on Steam. What’s more, by listing on Steam, developers gain instant access to its massive user base and discovery engine, which highlights titles based on “previous activities, what friends are playing, and learns your tastes over time.”
Managing the platform
Though the majority of Steam’s sales are from hit games produced by big name publishers, a significant percentage of its titles are from independent developers. Valve recently shifted from a crowd-sourced model of selecting new indie games to a fee-based model. Before, independently developed games required a “critical mass of community support” via a system called Greenlight in order to get selected for distribution. Now, those games only have to meet “quality” threshold, and developers pay a one-time fee for listing in addition to royalties. Valve, like Apple with its App Store, decided it will not take an active role in curation. Rather, the hope is that a natural selection process based on reviews and demand, along with careful tweaking of the discovery engine, will cause users to abandon low-quality games. The jury is out on whether that model will keep both sides of the platform happy.
Some competition, but not much
Though Steam is far and above the most ubiquitous digital distribution gaming platform, it is not without competition. Hoping to avoid Valve’s 30% cut, many triple-A game publishers, including EA, Riot, and Blizzard, have opted to release titles through their own clients, with some success. Though these clients are digital distribution stores rather than platforms, gamers, who can move easily from one client to another, are happy to temporarily abandon Steam in order to play through the latest blockbuster. Lacking access to the triple-A clients and facing a dearth of digital distribution options, lower end developers are stuck with Steam. The lure of 125 million active users is simply too strong.