The Baffling Economics of Steam

Summary

Valve's decision to focus on Steam over its popular game franchises like Half-Life and TF2 is rooted in the platform's incredibly profitable business model. Steam, founded in 2003, revolutionized digital distribution and continues to generate massive revenue by taking a cut of game sales, in-game purchases, and advertising. Despite some setbacks, like failed hardware attempts and lawsuits, Steam's success is undeniable. Valve benefits from its private status, allowing it to take risks without shareholder pressure. This strategic approach has made them a juggernaut in the gaming industry, with little incentive to revitalize older titles.

Takeaways

• 😀 Valve has a tendency to abandon its popular game franchises like Half-Life, CS:GO, and TF2 despite their success.
• 😀 Valve's primary revenue source comes from its platform, Steam, which generates substantial income with minimal overhead.
• 😀 Steam was founded in 2003 by Valve to patch games, but soon evolved into a digital distribution platform.
• 😀 Steam’s success began when it allowed third-party publishers to sell games on the platform starting in 2005, taking a percentage of sales.
• 😀 The Steam Workshop (2011) allowed users to create content, which Valve could monetize, outsourcing content creation to the community.
• 😀 Despite some early failures like Steam OS and the Steam Machine, Valve’s user base and revenue grew exponentially over the years.
• 😀 Valve earns a 20-30% cut from game sales and in-game transactions, creating a profitable revenue stream without developing the games themselves.
• 😀 Steam also generates income through ads, making money from companies that pay to be featured on the platform, while still taking a cut from sales.
• 😀 Valve’s past game franchises, such as CS:GO and TF2, still generate significant revenue despite being outdated and neglected.
• 😀 The Steam Deck, Valve's latest hardware venture, has been successful and adds another revenue stream to their already profitable system.
• 😀 As a private company, Valve can take more risks with projects that may not be immediately profitable, unlike publicly traded companies.

Q & A

Why does Valve seem to abandon popular franchises like Half-Life, CS:GO, and TF2?

Valve prioritizes its platform, Steam, which generates substantial revenue from various sources like game sales, cosmetics, and ads. Maintaining or updating older franchises is less profitable compared to their ongoing success as a platform.

What was the original purpose of Steam when it was founded in 2003?

Steam was originally founded by Valve to provide patches for their existing games. Over time, it evolved into a digital distribution platform for games.

How did Steam expand its user base after its launch?

Steam grew its user base by requiring players to sign up for accounts in order to play Half-Life 2. This move helped Valve build a massive customer base, eventually reaching over 75 million users by 2014.

How did Valve's business model for Steam differ from traditional game sales?

Valve took a percentage of each sale made on Steam without having to bear the development costs of the games themselves. This model allowed Valve to profit from the games hosted on its platform while other publishers handled development.

What was the significance of Steam's Workshop feature introduced in 2011?

The Steam Workshop allowed users to create content for games and earn a share of the revenue when Valve monetized the content. This helped Valve outsource content creation, reducing costs and increasing community engagement.

What were some of Valve's failed ventures outside of Steam?

Valve had several failed ventures, including Steam OS (an operating system), the Steam Machine (a console-like system), and their attempt to compete with Twitch in the livestreaming space. These initiatives did not gain traction and were eventually abandoned.

How much revenue does Valve make from Steam's cut of game sales?

Valve takes a 20-30% cut from game sales on Steam, depending on the revenue generated by each title. This, combined with millions of transactions, generates massive income for Valve.

How does Valve earn additional money from in-game transactions on Steam?

Valve takes a further cut from in-game transactions, such as cosmetics and DLC, typically ranging from 20% to 30%. This 'double dip' adds to their revenue beyond just the initial game sale.

What role does advertising play in Steam's business model?

Steam generates additional revenue by selling advertising space to the games listed on its platform. Valve profits from both the advertising fees and the 20% cut of sales made from those ads, creating a highly profitable cycle.

Why are older Valve franchises like TF2 still profitable despite being neglected?

Even though these games are no longer actively updated, they still generate significant revenue through microtransactions, cosmetics, and a dedicated player base. These games' profitability is small relative to Valve's overall income, so they remain secondary to the platform's growth.