3 Billion Dollars – What makes a game studio worth so much?

Jeff Wong investigates the Steam behind Valve, one of the must successful video game studios in history.

Gabe Newell on top the Valve Studio Offices
Gabe Newell on top the Valve Studio Offices

So here’s the thing – video games are the fastest growing form of entertainment, outranking visual arts, film and television. For example, Activision and Blizzard, two major game studios, have generated nearly $16 billion US dollars in revenue since 2008, a figure that is still rising. Another of the leaders in PC gaming is Valve, the company behind the online gaming marketplace and multiplayer server system, Steam. Now, I know what you’re thinking, “but Jeff you knowledgeable bastard, what exactly is the ‘x-factor’ that provides Valve with the cutting edge that puts it above the rest?”

Why I’m glad you asked that, strangely aggressive reader! The jewel in Valve Corporation’s crown is its ‘virtual distribution network’, Steam. Originally created back in 2002 to streamline patches and other updates to their games, the Valve game developers eventually turned on their brain-bulbs and realised that Steam would be a brilliant way to provide players with an online marketplace to digitally purchase games without leaving the comfort of their swivel chairs and the warm embrace of their pocket-pizzas. Steam also provides a brilliant entrance for younger indie developers to gain a huge audience of potential customers; frequent ‘Steam Sales’ allow users to purchase game bundles at a reduced cost to get new devs some spotlight, and in total there are over 30 million people with an active Steam account.

Nowadays, the Steam platform dominates the PC market, providing a quick, easy and safe way for people to buy games and play with their friends, standing up to other providers such as Origin (Electronic Art’s platform that serves the Battlefield 3 community) and Games for Microsoft Windows (which does…something). Simply put, comparing other companies to Valve’s Steam system is like comparing a gnat to Jupiter.

But some of you are saying, “well hold on there, Jeff, aren’t Valve’s in-house developed games the contributing factors to Valve’s ongoing success in everything?” You can bet your left pectoral they are lopsided reader! The main boon that Valve has over other gaming companies is that it has a direct hand in development as well as marketing, seeing as it controls its own virtual distribution through Steam.

Alright, now it’s time to get a bit deeper here. On the business side of things, Valve has always been a private company, and has never even amused the thought of outsourcing itself. This is most clearly summed up within the first page of the Valve handbook for new employees, “Valve is self funded. We haven’t ever brought in outside financing. Since our earliest days this has been incredibly important in providing freedom to shape the company and its business practices.”

Here’s the crux of the situation; when a company as big as Valve is privately owned and worth approximately $3 billion US, it holds no duty as a public company (such as Nintendo or Microsoft) to cater towards its shareholders and grow perpetually by churning out periodic content. Because of the privatisation of Valve, it is not governed by what the stocks say and doesn’t commit to business decision based on their growth or decline in the public arena.

Look at other companies and their success. Activision’s Call of Duty, a public domain, has been forced to annualise the games release in order to maintain a consistent consumer base and satisfy demand. On the other hand, Valve’s Half-Life: Episode 3, has been called for by their fan base almost immediately after the end of Episode 2, but it has been mysteriously absent from Valve’s release table. Whilst the demand for it is infinitely growing, there isn’t a worry that dragging out the release will greatly harm them financially.

But where are they getting all their funding if it’s purely private? As I mentioned earlier; in-house control of development as well as distribution. According to Gabe Newell’s (Valve Managing Director) keynote speech in 2009, “since 2004 there’s been a 100 percent year on year growth of Steam users leading to $20 million US today”. Valve also had a 100 per cent increase in purchases of Team Fortress 2 after every update, which is supplied directly through Steam as well. Staying on the subject of Team Fortress 2, introducing the ability to gift items increased sales by 71 percent as well.

And, the infamous ‘Steam Sales’. Cutting the cost down for certain games for short periods of time has worked phenomenally. In 2009, a weekend deal was offered which allowed users to purchase Left-4-Dead at half price which showed a 3000 percent increase in sales. Valve themselves have analysed these figures and produced these following numbers: “A 10 percent price reduction creates an increase of 35 percent in income, while a 25 percent discount gives an increase of 245 percent. 50 percent discounts create average increases of 320 percent, while a price slash of 75 percent off will push income up by 1470 percent.”

These numbers have been referenced by Joe Martin of Bit-tech.net, who finishes with, “The single most impressive figure though is that one (unfortunately unnamed) third-party game saw an increase in sales of 36,000 percent in a single sale weekend. Wow.”

Phew. So there you have it, a small insight into why Valve manages to be so successful. Now all we have to do is wait until Half-Life: Episode 3 is release. Then we can all ride narwhals to Jupiter and play with the space- faeries.

Jeff is a regular game blogger: