Steam: The first platform-based publisher.
Understanding the evolution of the gaming industry is critical to foresee its future. Steam is one of the most exciting companies in the space. Let's see how Steam became what it is today.
I believe understanding the gaming industry's evolution is critical to foresee its future. Steam is one of the most exciting companies in the space. It was the first platform-based publisher. It allowed games to become venture-backed businesses, has the majority of the market share in the desktop gaming market, and has profited (+5B per year in revenue) from a good monopoly since 2003.
👀 How did Steam become the behemoth that it is today?
As in any other consumer industry, the gaming value chain is formed by the interactions of three main actors:
🛠️ Creators: the developers building games.
🔊 Distributors: the publishers selling games.
👤 Consumers: the players playing games.
Historically, the gaming market followed an industrial publisher standard where games were physical goods. The publisher had relationships with the retailers and controlled the production and distribution of the games. Developers were paid based on royalties and earnouts. The publisher was the one making the most profit mainly by:
Increasing the public awareness of the game.
Creating availability for sale.
Controlling the key resources (retailers and developers)
Steam changed the status quo by introducing its platform and allowing developers to auto-publish their games digitally in exchange for a fixed commission.
However, it wasn’t born like that:
Valve was about to release Counter-Strike (a Half-Life mod) as a standalone, competitive online game. They had massive post-launch maintenance needs: bug fixing, balancing, exploits, etc., so they needed software to force players to update the client to play with the latest version: 👉🏼 They created Steam for that.
Initially released alongside Half-Life 2 (2003), it was the software players used to manage their different mods, licenses, and game updates.
It accomplished its purpose well. However, they noticed that there was a more significant opportunity out there, and they did two additional movements that would completely change the industry forever and transform Steam into what it is today:
They acquire the World Opponent Network (WOM), a community of players for matchmaking. They bring the WOM players to Steam, attaching the platform to an existing community. By doing this, they aggregated the demand side: players inside their platform.
Once an audience was using the platform, they allowed third-party developers to distribute their new games as digital downloads.
As a developer, you can now upload your game to Steam and instantly reach ~150M of existing players with payment methods set up and ready to buy your game. Let’s compare your options as a developer:
Traditional: Negotiate a private deal with a publisher to distribute your game physically, delegate player targeting, and give up control of your unit economics in exchange for royalties.
Upload your game to Steam for a 30% fixed commission in every sale, and tap into a 150M players-only user base.
A no-brainer. Steam exploded, creating a virtuous loop:
♻️ The more games on Steam. The more players are on their platform. The more attractive for new games to publish on the platform.
The pure definition of an internet platform disruption according to the Aggregation Theory by @statecherry.
Nowadays, Steam is still a private company making $5B annually in revenue. They’re still growing and, just some weeks ago, set a new record of 33M players concurrently using the platform (source)
They aggregated the demand side (players) by integrating distribution into a proprietary solution. Games were modularized, and they joined Steam on their terms to be able to reach players. ⭐️ Steam is so successful because it retains the player. And Steam retains the player because it has a siloed data monopoly:
As a player, you can’t use any alternative if all your games, in-game items and friends are on your Steam account. You will lose everything if you stop using Steam. You’re not buying anything there, but renting it.
That’s the core of their defensibility, but for the first time in its story, they’re facing new challenges that risk their defensibility moat (web3) and their competitive positioning (EGS). We will cover them in upcoming articles:
There are some industry innovations, in particular, web3, that affect their defensibility moat directly: data (like we shared here)
They have a scary competitor: Epic Games Store, who’s innovating in the same space. As we talked in Twitter:
Epic Games Store is the first real competitor that Steam has in years. They're doing lots of things well and fast. Check some Epic Games Store stats: - 230M users and 725M Epic Accounts cross-platform. - 626 new games during 2022. A total of 1548. - $820M spent in the store,… https://t.co/fgmFZ2DgmH
