Valve: Turning the Spigot on Product to Platform Transformation
How did Valve evolve their company from an Indie video game developer into the dominant platform for distributing PC games, becoming the most profitable US company per employee in the process?
Valve was founded in 1996 by two Microsoft employees as an independent game developer to capitalize on the nascent PC games market enabled by their former employer. Originally, the plan was to make the best PC games possible, and their first title, Half-Life was an immediate success winning over fifty PC game of the year awards and still frequently being credited as one of the best video games of all time[1]. Valve continued to follow up this success with multiple other blockbuster titles including classics like Team Fortress and Counter-Strike.
Soon Valve had a stable of games that had a huge community of online players, some of which were making illegal modifications to its games in order to gain an edge in competition. This rampant cheating caused the company to continuously roll out patches via its website to battle the cheaters. Unfortunately, this also meant that every time a mandatory patch rolled out, there was a huge impact on the community as they had to download the patch and manually install it before they could commence playing again. In 2002, in order to combat this problem, Valve decided that they would build a common platform for all their games that they could seamlessly deploy patches to better serve their community and continue to combat the unfair behavior[2]. Soon Steam became a required piece of software for every one of Valve’s titles.
While initially the focus was on patching games to serve the community, Valve quickly realized that this patching platform could effectively cut out the middlemen of PC game retailers and started building out functionality to not only patch games, but to start selling their own. In this way, they short-circuited their existing distribution pipeline from their retailers and start selling directly to customers. In this way, Valve pioneered a hybrid strategy of selling their products through traditional brick and mortar retail while also distributing online. An awkward half-step necessitated by the low penetration of high-speed internet at the time[3].
This half-step is what enabled Valve to be in the right position when the mass purchasing of games through an online channel eventually became a feasible proposition. When Valve finally started reaching out to third-party developers in 2005[4], they were the de-facto leader in online PC game distribution due to the massive footprint provided by their hugely successful titles. They were effectively able to kick-start a distribution platform with their own product and use that demand to create an audience for non-Valve developers. This massive audience attracted more developers, more games attracted more users, until it reached the dominance it sees today.
While the number of users and number of developers creates its own network effects, Valve has been able to vigorously defend against problems that plague other platform businesses. They’re able to effectively limit multi-homing and disintermediation by adding features important for users such as social components cross-game (e.g. alerts when your friends are playing a game and the opportunity to play with them) as well as for developers such as extremely strong anti-piracy protections as well as access to industry leading user data collection tools such as Steam Greenlight which enables developers to interact with their fan base and test trailers and demos.
Valve has been able to navigate the path from product to platform through incremental evolutions that continued to increase their products value for both their immediate customers that purchase their games as well as their developer network. By continuing to build the Steam platform, Valve has effectively built a channel that increases value for all constituents and encourages the PC gaming community to continue to thrive.
[1] https://www.gamespot.com/articles/greatest-games-of-all-time-half-life/1100-6171044/
[2] https://kotaku.com/steam-is-10-today-remember-when-it-sucked-1297594444
[3] ITU. n.d. Number of fixed broadband subscriptions per 100 inhabitants in the United States from 2000 to 2016. Statista. Accessed 5 March, 2018. Available from https://www-statista-com.ezp-prod1.hul.harvard.edu/statistics/187199/fixed-broadband-subscriptions-per-100-inhabitants-in-the-usa-since-2000/.
[4] http://www.eurogamer.net/articles/2012-08-21-full-steam-ahead
Great post. It’s incredible how long Steam has dominated the digital distribution market for PC games. Valve was so far ahead of the curve here, and I totally agree that they have created a tremendous amount of value for players (rapid downloads, a massive library, user reviews & even a recommendation engine) as well as developers & publishers (decreased barriers to distribution, a high-margin delivery channel, and DRM support). Despite the efforts of EA (Origin) and Ubisoft (Uplay), Valve has managed to essentially retain on a monopoly on the PC distribution market—yet they run the business cleanly enough that it doesn’t feel oppressive, I think, to the most of the PC gaming community.