HTC Vive: Overcoming Developer Hesitance Through Open Innovation
This post details how Valve, the developers of the VR headset HTC Vive, used open innovation to provide a wide variety of video games despite the lack of support from major game developers.
How can a video game company launch an expensive, innovative piece of hardware without the support of the traditional game developers the industry has thus far been reliant on? HTC and Valve Corporation faced this dilemma with the launch of the HTC Vive, a virtual reality (VR) headset that immersed users in VR gaming experiences. These experiences came at a very expensive price and without a critical mass of HTC Vive owners, large game developers were not willing to make an investment in making games for the headset.
An image of a user interacting with the HTC Vive. Source: Trusted Reviews.
The video game industry is dominated by large developers that create video games for the most widely used video game systems to maximize sales. Rockstar Game’s Grand Theft Auto V, for example, has generated over $6 billion in sales by selling over 100 million copies across five popular game systems. VR would require these game developers to create games that would only be playable on three VR game systems, which only sold a combined total of 2.2 million units in the year they were launched. These relatively low sales figures deterred major game developers from creating games for the HTC Vive, forcing Valve to look elsewhere for game development.
Valve’s solution was to leverage its online video game platform, called Steam, to encourage independent developers to create content for the Vive. This focus on open innovation was vital as the variety of games needed to sustain a video game system made self-developing all a system’s games impractical. In the short-run, Valve’s prioritized signing-up independent game developers onto Steam. While Valve considered charging up to $5,000 to list a game on Steam, the company decided to lower the fee to only $100 to encourage cash-stripped independent developers to create games on the platform. Additionally, Valve reduced the price of the Vive with the goal of “expanding the potential market for developers”. In the medium-term, Valve plans to continue leveraging open innovation by providing these developers with hardware prototypes and gathering their feedback for future iterations. As an example, Valve provided developers with prototypes of its new controller which was intended to find solutions to issues previously raised by both developers and users.
A member of Cloudhead Games, a VR game developer, testing a prototype for Vive’s “Knuckles 1.3” motion controllers. Source: Youtube.
Given the nascent nature of the VR industry, I don’t believe VR headset sales will attract large game developers in the short-run. Hence, I would recommend that Valve focus on fostering open innovation and further augmenting the independent developer ecosystem by tackling the developers’ main pain point: funding. In the short-run, Value could use the data collected from Steam to identify independent developers with franchise potential and invest in their studios. These studios lack adequate funding channels which, combined with Valve’s unpublished data on Steam sales, could lead to attractive valuations favorable to Valve. In the medium term, Valve can work towards a more sustainable funding model by leveraging Steam to create a marketplace where independent studios can offer equity stakes in their projects. Many independent developers have turned to Kickstarter, but the cost of creating a prototype for Kickstarter has posed an issue for unfunded developers.
While open innovation does drive product variety, it also comes with added complications for Valve. A pivotal question that arises is: how much control should Valve impose on the independent developers that list their games on Steam? Quality issues with games on Steam will reflect poorly on Valve and the Vive, but too much oversight would be costly for Valve and would significantly increase the time it would take to develop games. (800 words).
 At launch, the HTC Vive was priced at $799. During that time, the average video game console was priced between $400 to $500 at launch
 Chris Smith, “HTC: VR decline reports false, Vive headset selling at record rate,” Trusted Reviews, October 4, 2018, https://www.trustedreviews.com/news/htc-vr-decline-reports-false-vive-headset-selling-at-record-rate-3516698, accessed November 2018.
 Video game systems include the traditional video games consoles, like the Xbox One or Playstation 4, as well as personal computers
 Max Cherney, “This Violent Video Game Has Made More Money Than Any Movie Ever,” Market Watch, April 9, 2018, https://www.marketwatch.com/story/this-violent-videogame-has-made-more-money-than-any-movie-ever-2018-04-06, accessed November 2018.
 These systems include the HTC Vive, Oculus Rift, and Playstation VR
 Sarah Needleman, “Pricey Virtual-Reality Headsets Slow to Catch On,” Wall Street Journal, February 14, 2017, https://www.wsj.com/articles/pricey-virtual-reality-headsets-slow-to-catch-on-1487077201?ns=prod/accounts-wsj, accessed November 2018.
 Steam allows users to purchase digital copies of video games online
 Valve Corporation, “Steam Direct: Joining the Steamworks Distribution Program,” https://partner.steamgames.com/steamdirect, accessed November 2018.
 Samit Sarkar, “Valve Sets Steam Direct Self-publishing Fee at $100,” Polygon, June 2, 2017, https://www.polygon.com/2017/6/2/15729276/steam-direct-fee-valve, accessed November 2018.
 Vive, “HTC Vive Announces Price of Vive Pro HMD at $799, Pre-orders Start Today; Price of Vive Reduced to $499,” https://blog.vive.com/us/2018/03/19/htc-vive-announces-price-vive-pro-hmd-799-pre-orders-start-today-price-vive-reduced-499/, accessed November 2018.
 Alex Osborn, “New HTC Vive Controller in Development,” IGN, October 13, 2016, https://www.ign.com/articles/2016/10/13/new-htc-vive-controller-in-development, accessed November 2018.
 Stephen Totilo, “Valve is Making a New Vive Controller [Update],” Kotaku, October 12, 2016, https://steamed.kotaku.com/valve-is-making-a-new-vive-controller-1787718562, accessed November 2018.
 Cloudhead Games, “SteamVR Knuckles 1.3 – Next Gen VR Unboxing,” Youtube, published June 29, 2017, https://www.youtube.com/watch?v=FCkD5aM3AwQ, accessed November 2018.
 Jaume Esteve, “Kickstarter: is crowdfunding a good idea?,” Jaleo, January 22, 2018, http://jaleopr.com/blog/kickstarter-crowdfunding-indie-game/, accessed November 2018.
Student comments on HTC Vive: Overcoming Developer Hesitance Through Open Innovation
Great write-up! I really like your idea of providing funding to promising indie developers. With so few VR systems out there, there is a bit of a chicken and egg problem where there isn’t enough interest in creating games because there aren’t enough VR gamers and vice versa. I do think that providing that funding to indie developers could serve as a way to grow the supply of games in this ecosystem which in turn will draw gamers to VR.
As an additional data point that this could work, Slack also took a similar approach when they wanted to grow their platform of apps built on top of Slack and raised a $80M fund to fund developers  building on top of Slack which helped them greatly with their platform.
This reminds me of when Apple introduced the App Store – it relied extremely heavily on many smaller independent developers creating apps that iPhone users could use. Granted, Apple had relationships with large companies so they could get their apps on platform first, a large part of what drove the App Store’s success, and later the Google Play Store, was the variety and sheer number of applications available. The lack of apps was an important factor in the failure of the Windows Phone OS and Fire Phone, among other things. Along with raising a fund for developers, I think HTC and Valve should fees and any other monetary barrier that developers face in order to ensure highest chances of success for their VR platform.
Cool read, Ahmed. Valve is wise to get content creators and influencers on their side. In accommodating developers through reasonable pricing, for instance, Valve is definitely building its brand credibility, as well as developers’ affinity for the brand. This is a smart move because when Valve works to build its product offerings, network effects will already be in play, which will presumably work to their advantage. I am curious how new entrants in the VR space will lure developers away from the likes of Valve.
I like the approach of keeping fees low or zero to list on Valve’s Steam platform. High costs would keep smaller developers off the platform. I realize that Valve has to balance low cost with high quality, so I could see a scenario where Valve lends its developers to smaller firms for advice/assistance on creating really great games. Nvidia has a similar program that embeds their software engineers with companies working on machine learning applications, where those companies may not have the level of expertise necessary to achieve their objectives. VR has been a popular trend for a while but hasn’t had a big impact and I would love to see that happen.
A really interesting read: https://www.washingtonpost.com/news/innovations/wp/2017/06/16/why-is-virtual-reality-taking-so-long-to-take-off/?noredirect=on&utm_term=.43e2e44a964b
Nice insights! I agree Valve really needs open source content creation at this point in its life, but I fear they are setting themselves up for failure unless they partner with an existing widespread console manufacturer. I’m worried that Microsoft or Sony may simply be letting HTC spearhead the move towards VR platforms, and will jump into the market once critical mass of content and consumers is generated. At that point, I don’t know that HTC can compete with the momentum that already exists on the mainstream platforms – what do you think?
I completely agree. Many business strategists believe that the second mover is actually most likely to succeed in very innovative industries with relatively low switching costs. Valve could create more barriers to entry by creating a large game library with Steam.
Great Article! I agree that getting developers onboard will be the key for building VR ecosystem. And I understood from my friend, who is the founder of a traditional game company, that the VR content development is not as hard as it may seem to be and the main reason that they won’t invest in VR games is the poor ROI caused by lack of real players. So I agree with your skepticism that the VR headsets might not attract the developers in the short run and the company should invest in the pain point — funding.
Great analysis. There’s definitely a chicken-and-egg problem going on in the AR/VR industry. I have been blown away by some of the hardware systems being produced (HTC Vive and Magic Leap being at the top of the list), but even after a few years there has not been a blockbuster hit in VR. You might be right that leveraging Valve/Steam’s access to customer data to inform a game offering might improve the decision-making, but many full-fledged modern games take up to $100M in investment to develop. This is probably why these gaming companies appear to be addicted to providing sequels and expansion packs to current offerings they know with certainty will resonate with customers. It’s a shame, but some company will need to take a big risk moving to this new platform or VR might go the way of the Microsoft Kinect and Wii nunchucks.