The battle for the living room continues to heat up with the entrance of successful video game retailer, publisher and developer Valve Corporation and its free digital distribution platform, Steam. The company arguably saved the PC segment of the multi-billion-dollar industry once before and appears to be trying to do it again.
|Value of global games market 2013 (estimate)
The private, Kirkland, Wash.-based company last week announced a new video game console, operating system and game controller that, other than a pure commercial play, could be interpreted as the PC-focused company’s effort to arrest ongoing declines in PC gaming generally. The new Steam Machine and Linux-based operating system (SteamOS) essentially move PC gaming from desk to the more popular—and potentially more profitable—living room couch where video game consoles from Microsoft, Nintendo and Sony have traditionally dominated the industry.Whether those companies should be worried is a matter of some contention, but the timing of Valve’s announcement–just several months before powerful new consoles from Microsoft and Sony are due for release—doesn’t seem entirely coincidental.
“Steam is proven,” says Rick Heitzmann, managing director at Firstmark Capital. “They’ve built a great company and a great culture. I think [the incumbent console makers] have to be worried. Valve is a big, powerful company with very good distribution, and very good partners. I think they have to be viewed as a legitimate and credible competitor.”
While Valve is by any measure an extraordinarily successful company with an estimated 50 million users on its Steam platform and with estimated revenues of US$1.1 billion, it’s still far smaller than Nintendo and the gaming units of Microsoft and Sony. (Neither Microsoft nor Sony responded to requests for comment on Valve’s announcement.)
Describing Valve’s new product, which is now entering beta testing, as a “latent threat,” Piers Harding-Rolls, analyst at IHS Screen Digest, says that for all its accomplishments Valve faces an uphill battle. The company has no track record in the hardware or software business. And there are “usability issues” with its current foray into the living room, Steam’s “Big Picture” mode.
The two so-called next-gen consoles, Microsoft’s Xbox One and Sony’s PlayStation 4, have been hailed as significant technological leaps forward, in addition to seamlessly incorporating other entertainment options into their offering. They’re also cheaper than the typical gaming PC. Under this combination of conditions, that they could further drain users away from the Steam ecosystem is at least a possibility that can’t have been lost on Valve.
However, Harding-Rolls doesn’t see it as necessarily a defensive move. “I think there are two drivers to this. One is commercial: they want to extend their proposition and they’re already in the home so the next move from their perspective is to make their proposition more mainstream and to shift it into the living room. The next move after that—their roadmap—is to go mobile and have more complete access on smart devices.” (A mobile storefront was added to Steam in Jan. 2012, although it did not immediately have e-commerce capability and, unlike the PlayStation Network or Microsoft’s Xbox Live, games can’t be played on the service.)
Although console and PC gaming run on different mediums, there has always been a high degree of overlap between the audiences, with consumers frequently owning one or more consoles in addition to a PC. On that basis, there has been for the last decade or so an undeclared struggle of sorts between the two sides, with each introducing features that could be interpreted, if generously, as a response to the other’s move. Valve’s Steam platform pioneered digital distribution back in 2003, almost singlehandedly rescuing PC gaming from oblivion while simultaneously putting a significant brake on piracy, getting consumers to accept the often widely hated digital rights management and increasing profitability for publishers and developers by cutting out physical retail.
It would be several more years before Microsoft and Sony took their first tentative steps into digital distribution, but their coming consoles have made that ability a pillar of their feature set. Meanwhile, the console makers began their invasion of the living room, partnering with various content providers and social media, and positioning their devices as movie players and e-commerce fronts in a bid to do more than just video games. This means potentially even more time spent on the couch. Now as consumers increasingly demand to access content across a range of devices at any time, and move casually from watching TV to surfing the Net to playing games, the mindshare any one type of activity can expect to exclusively command is diminishing. The solution—so far—appears to be to offer all of it. In that context, Valve’s move is forward looking. (Can deals with Netflix and others be far behind?)
Another development in this vein: Valve has over the last five years moved aggressively to court independent developers. Now both Sony and Microsoft have announced similar support as a significant part of their next-gen console strategy.
The Steam Machine will apparently come in different versions, in keeping with Valve’s long-held admiration for open-source computing and Linux, and the PC audience’s penchant for customization. Valve said in its announcement that it will be working with a number of vendors who each will produce machines that focus on factors like size, price and quietness.
It’s here where Valve differs markedly from the consoles whose space it is attempting to enter because historically, one key advantage consoles have had over PCs is that the hardware is of uniform design. This saves developers from the costly work of having to account for different user configurations and it also guarantees the user experience will be consistent and relatively hassle free. Some are puzzled by Valve’s direction.
“The advantage of a console is … you don’t have to worry about upgrades and ‘Do I have this version to play that version?’ and all this kind of stuff,” says Jason Della Rocca, co-founder of Montreal-based Execution Labs. ”So I thought that was a weird choice because the way technology is today I can take the computer that is in front of me right now and plug it into my TV and then I’m playing all my Steam games on the TV. If the advantage is to sort of streamline the experience, then they really should have just provided one box and said, ‘Here’s the box,’ and away you go.”
Heitzmann voices a similar concern, although more from an operational point of view. Calling the strategy “odd,” he notes that hardware is a very different business from software. “A number of different SKUs could be difficult.”
Price point will be key in determining whether or not Steam Machine competes against the incumbent consoles or occupies a niche above them. The latter is more likely, say some observers, because of the nature of the components needed to run high-end PC games. In this case, it’s unlikely to pose much of a threat to the PlayStation 4 or Xbox One, says Harding-Rolls. It otherwise needs a killer feature, but so far nothing has been announced by Valve.
“Where we feel it could become very interesting is if there is a potential to roll out a streaming based service, which means that you wouldn’t have to execute everything client side, on the box. If you could bring games through Steam on to the TV through a streaming solution that works sufficiently, then that obviously becomes a very significant competitive threat to the consoles. So you can then roll out a much cheaper box in that category.”
(Once again, all the players seem to feeding off each other’s moves. In June 2012, Sony purchased streaming company Gaikai for US$380 million and will use the technology to deliver games via streaming. And though light on explanation, Microsoft has announced that its Xbox One will use the cloud to deliver some content as well.)
It’s still early and in typical Valve fashion, details were handed out in a mysterious reveal over the course of a week, so how the company plans to execute on its strategy and fund it is unclear. Valve has made no announcements about seeking additional capital in the public markets or going public. But without the pressure from investors to make quarterly numbers, Valve co-founder and boss Gabe Newell has always had the advantage of working at his own pace and in his own way (frustratingly so for some fans of the company’s generally critically acclaimed games) .
Nevertheless, says Della Rocca, “They are quite courageous. They do have a certain level of boldness to them that they’re willing to sort of gamble on certain ideas. … It may fail completely—who knows until it happens. Or it may in fact be revolutionary and really kind of steal the thunder from Xbox and PlayStation.”