It is difficult for publishers and developers to survive in the videogaming industry. Product development is technologically and creatively complex, projects can cost millions of dollars for a AAA title (AAA is the industry’s informal classification for videogames produced and distributed by mid-sized to large publishers, typically with substantial development and marketing budgets), timelines are notoriously unreliable, and even if the project is eventually released to the public, user tastes are fickle.
How then has Valve, a small Washington-based developer, grown into one of the world’s most successful and influential videogame companies? As of 2017, Valve accounts for an estimated 18% of the $24 billion worldwide digitally-distributed PC videogame market, serves 125m registered users on its Steam platform, and is considered to be the most profitable company in the USA on a per employee basis. Valve has achieved this success through its long-term embrace of open innovation as a fundamental element in its business model.
Open innovation, often also known as crowdsourcing, occurs when a company leverages external participants who contribute labour or ideas that could alternatively have been performed or generated internally by employees or contractors. These contributions can involve both idea generation (e.g. innovation tournaments such as Netflix’s $1m prize for a better recommendation algorithm) and also idea selection (e.g. Threadless’ use of user voting to narrow initial design submissions to a shortlist).
Open innovation has been critical to Valve’s success since it was founded. Many of Valve’s most successful videogames such as Counter-Strike and Team Fortress began as “mods” in the broader user community before Valve brought the IP and teams behind them in-house for development into fully-fledged retail products (an approach at odds to that adopted by the broader videogame industry).
As Valve matured with the launch of its Steam platform, its business model transitioned from identifying innovative ideas of others and refining them in-house to building an environment where others could develop content and make it available for sale, with Valve taking a 30% cut of all revenue generated on the Steam platform. Each feature introduced to Steam, be it the release of the Steamworks API, the creation of the Steam Workshop for the sale of user-generated content (most famously seen in Team Fortress 2’s “hat-based economy,” with Gabe Newell once commenting “…we have a kid in Kansas making $150,000 a year making [virtual] hats…”), or the introduction of user reviews, has been focussed on increasing the amount of content available for purchase and helping users identify great content to buy. In particular, Valve has focussed substantial efforts on reducing the difficulty for users to make content available for sale on Steam. While Valve initially curated all content launched on Steam, Steam Greenlight was launched in 2012 giving users the power to vote on what content they wanted to see launched on Steam. After user and developer criticisms, this program evolved into the 2017 launch of Steam Direct, a new model whereby developers need only fill out some simple identification and tax documentation, pay a refundable $100 deposit, and wait 30 days for the content to go through a minor review from the Valve team before their submission will be launched on Steam. The cumulative result of these various efforts can be seen in explosive growth in Steam’s user base, available content, and revenues.
But as Gabe Newell and the Valve team look to the future, they must be cautious. Valve’s success has been facilitated by an open PC ecosystem, but as players such as Microsoft and Sony push users into closed-platform environments, Valve will need to invest to sustain the open nature of PC videogaming. Indeed, Valve’s recent efforts to reinvigorate gaming on the Linux operating system and make investments in proprietary hardware can be seen as responses to those industry dynamics. Valve will also need to improve its systems for dealing with inappropriate content. Recent controversies have highlighted the tension between reducing barriers to publication and maintaining standards.
Whether Valve can successfully navigate these challenges will depend on their ability to answer two questions:
- How can Valve expand monetisation of user-generated content without disrupting the dynamics of communities that have evolved without monetary incentives?
- How can Valve prevent the spread of inappropriate material on its platform without stifling users’ ability to release content or incurring excessive monitoring costs?
 Taylor Soper, “Valve reveals Steam’s monthly active user count band game sales by region,” GeekWire.com, August 3, 2017, [https://www.geekwire.com/2017/valve-reveals-steams-monthly-active-user-count-game-sales-region/], accessed November 2018 and Dustin Bailey, “With $4.3 billion in sales, 2017 was Steam’s biggest year yet,” March 23, 2018, [https://www.pcgamesn.com/steam-revenue-2017], accessed November 2018.
 Andrew King and Karim R. Lahhani, “Using Open Innovation to Identify the Best Ideas,” MIT Sloan Management Review 55 (Fall 2013), 1.
 Valve Handbook for New Employees (Valve Press, 2012), PDF e-book, accessed November 2018.
 Dan Crabtree, “Gabe Newell: “Windows 8 is kind of a catastrophe” ,” IGN.com, July 25, 2012, [https://www.ign.com/articles/2012/07/26/gabe-newell-windows-8-is-a-catastrophe], accessed November 2018.
 Jeffrey Matulef, “Steam Greenlight to be replaced with Steam Direct next week,” Eurogamer.com, June 6, 2017, [https://www.eurogamer.net/articles/2017-06-06-steam-greenlight-to-be-replaced-with-steam-direct-next-week], accessed November 2018.
 See the recent controversies with titles such as Active Shooter, ISIS Simulator, and AIDS Simulator initially published and then removed from the Steam platform. Nat Levy, “Valve removes controversial school shooting game and denounces developer as ‘troll with history of customer abuse’ ,” GeekWire.com, May 29, 2018, [https://www.geekwire.com/2018/valve-removes-controversial-school-shooting-game-denounces-developer-troll-history-customer-abuse/], accessed November 2018.