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Is Steam’s tactical growth masking a strategic decline?

By on April 6, 2011
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I spent a couple of hours today talking to students at London South Bank University. These are the people who will be the Miyamotos and Molyneuxs of the future, so it was great to talk to them.

I talked about whales, power laws, the rule of 0-1-100 and all the stuff that regular readers of GAMESbrief would expect. One student, though, asked me a question that set me thinking, and I haven’t got the answer yet.

“Given all that you’ve talked about, what role does Steam play in the future of games?”

It’s all about distribution

Steam logo

I love Steam. It’s a brilliant service that has kept PC gaming alive and vibrant even as retail gave up on it. Without Steam, PC gaming would be a much duller place.

I agree with Mitch Lasky of Benchmark Capital (formerly of Activision, Jamdat and Electronic Arts) who argues that distribution is king and Steam is the grand high Poobah. (My words, not his).

I also fear its de facto monopoly status, and the risks to the PC gaming ecosystem if they chose to switch from benign dictatorship (with a 70%+ market share) to tyranny.

But is distribution as important as it used to be?

I argue that we are entering the era of self-publishing. We don’t need gatekeepers or retailers to stock a product sold at a flat price.

Instead, we need to offer our games (all media content in fact) for free, and have ways to allow a small proportion (>2% of our users) to spend $100 on something of value that we can offer.

Steam doesn’t do this. Steam has enabled indie developers to find new niches because it has eliminated the costly process of physical manufacturing, distribution and retailing. It hasn’t enabled the whales who will get so much enjoyment from your games that they are happy to pay $10 a month for 10 months.

Tactical shift versus strategic shift

So tactically, in the short term, PC gaming is moving from the box to the download. Steam is an enabler of that (and they are awesome).

Longer term, I believe that people won’t pay for access to content. They will pay for emotion and status and progress and self-expression. Steam doesn’t help with that at all.

It can adapt. It has 25 million customers. It can be the most powerful filtering and lead-generation business on the planet.

But do they want to become that? And do their customers want them to?

One to ponder for me. What do you think?

About Nicholas Lovell

Nicholas is the founder of Gamesbrief, a blog dedicated to the business of games. It aims to be informative, authoritative and above all helpful to developers grappling with business strategy. He is the author of a growing list of books about making money in the games industry and other digital media, including How to Publish a Game and Design Rules for Free-to-Play Games, and Penguin-published title The Curve: thecurveonline.com
  • I personally think that the Steam platform was a fantastic strategic move for Valve in the short and long term. We all know that Steam has been wildly successful as a distribution play (see Eurogamer article at the bottom) but I think that the platform will really shine because it will enable new business models that take advantage of the “Whales”, “Power Laws” and “The Rule of 0-1-100” through the deep integration of Steamworks into games.

    Ivan did a great job of outlining some of functionality that I think will evolve to enable new business models. For me the key functions are:

    1) Persistent profiles – Great for implementing achievement based metagames
    2) Steam Wallet – Enables the sales of virtual goods and DLC.
    3) Comms Overlay – Enables a social layer that is game agnostic and a requisite for a gaming social network

    Steam is not just a distribution platform. It is also a gaming social network. I think Valve have not even scratched the surface of the whats possible with Steam if it is viewed as a social network even if they are the leaders in the field.

    Steam is at risk though. Big publishers are realising how much value is lost by not controlling the end customer relationship. EA is pushing its distribution platform and I wouldn’t be surprised if it decides to leverage exclusive content to drive adoption of their own platform. What if Battlefield 3 was only available on EAD and multiplayer required EAD for player/server matching? After all…Steam proliferated because of the popularity of Counter-Strike.

    I think Nick is 100% right when he says that user will pay for emotion, self expression and progression and that is why platforms such as Steam are key in monetising gamers. They provide the infrastructure which gamers user to compare, compete and emote. If you have invested years into creating persistent profiles complete with all your achievements, friends and games would you really want to switch and use another platform? Perhaps the only thing that might make you switch to another platform is game which isnt available on your current platform.

    Kieran…what is your take on this?

    From Eurogamer.net:

    Digital download platform Steam controls half to 70 per cent of the $4 billion market for downloaded PC games, according to a new report.

    Steam is “tremendously profitable”, Valve co-founder Gabe Newell revealed for a Forbes profile.
    250 people work at the Half-Life and Portal maker and, Newell said, per employee Valve is more profitable than Google and Apple. “Various sources” value the company at $2 billion to $4 billion, Forbes reports.

    Steam’s impressive rise to the top of the PC download tree has been one of the videogame success stories of the past decade.

    In October last year Valve announced Steam accounts had grown by 178 per cent year-on-year. Sales grew over 200 per cent and over 200 Steamworks games had been shipped. There are over 30 million active Steam accounts, and over 1200 games available from the service. Over six million unique gamers access Steam each day. According to Forbes, publishers earn a gross margin of around 70 per cent on Steam compared with 30 per cent via retail shops

  • It feels very conceivable for Steam to offer games for free along with “Steam Credits” as virtual currency. In fact, it’s so obvious a move it’d be weird if they weren’t working on this now…

  • Good post.
    Perhaps they could sell “steam credits” that people can spend across different games?
    Regardless, the real questions are your last ones, and I imagine only them have the answer.

  • Andrew Eades

    Nick, I think you may have a point there. In our limited experience, Steam has outweighed all other PC digital distribution services for Blue Toad Murder Files. I’d say that more than 70% of our PC sales are through Steam. Even so, I’m not considering that the right business model for future games we self-publish. A fixed price caps what your true fans are prepared to pay and puts off other potential players from trying.

  • …and I just noticed a large part of my post has pretty much missed the point of the article.

    At least last two paragraphs have something to do with the post 😉

  • It can be relatively hard for a developer to come onto Steam. They’re very picky, and sometimes their standards are weird. I won’t be saying more in public, in hopes of future good relationship with Valve, whom I respect very much.

    As a user, I think its prices can also be relatively steep for new products, as if the products were boxed.

    I also think that with Steam, it’s not so much about just distribution as it is about a few other things, compared to its distribution competitors:
    1. proven patching functionality instead of full redownload,
    2. good DRM for developers/publishers that is non-invasive and non-limiting for users,
    3. professional-looking client,
    4. very, very good offers a few times a year,
    5. well-made marketing slots about products that interest users,
    6. users are very smoothly and carefully fed advertising
    7. most of all, EXCELLENT multiplayer support for very popular Valve products such as Counter Strike and Team Fortress: matchmaking, voice, friends list — these things are often not offered by distribution-only competitors
    8. caused by 7: inertia from users that were brought onto the platform by Valve products stay on the platform

    As demonstrated by Team Fortress 2 in-game store and the Steam Wallet, Valve is very aware of the whales. Pack of in-game items for Japan Relief Effort is, if I remember correctly, priced at $29.99. It is only a matter of time before the API is exposed to more games and more developers.

    Overall, I love Steam. They’re moving in the right direction.