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Introduction ……...………….……..………..….……………………………………………………………………………….. 3
External Analysis …………….…………….…………………………………………………………………………………….. 3
PESTEL Analysis ……………….……………………………………………………………………………………………. 4
Political Factors ……………………………………………………………………………………………………. 4
Economic Factors …………………………………………………………………………………………………. 4
Socio-Cultural Factors ………………………………………………………………………………………….. 5
Technological Factors ………………………………………………………………………………………….. 6
Environmental Factors ………………………………………………………………………………………... 7
Legal Factors ……………………………………………………………………………………………………….. 7
Five – Forces Model ……………………………………….……………………………………………………………. 8
Supplier Power ……….………….…………....………………………………………………………………… 8
Buyer Power ………………………...……..………………………………………….…………….…………… 9
Degree of Rivalry ……………………….………..……………………………………………………………. 10
Threat of New Entrants ……….………....……….……………………………………………………….. 10
Threat of Substitutes …………….……….……………………………………….………………………… 11
Conclusion ....……. ………………..………………………………………………………………………………………….. 12
Problems and Solutions …………………………………………………………………………………………… 12
Works Cited ………………………………………...…………………………………………………………………………... 14

Introduction

Gabe Newell, a Harvard drop out, began working for Microsoft in 1983. Newell spent thirteen years at Microsoft and emerged as a “Microsoft Millionaire.” Newell and his co-worker Mike Harrington left Microsoft in 1996 to begin their own company. The inspiration came from another former Microsoft employee named Michael Abrash. Abrash departed Microsoft to assist in creating the video game Quake at ID Software. In 1996, Newell and Harrington signed an LLC contract and founded the private company, Valve Corporation. Valve started off as purely a video game development company. By 1998, Valve had completed their first game titled Half-Life. Half-Life won over 50 game of the year awards and is considered one of the most important games ever created (“Awards and Honors.”). By 2003, Valve released their Steam social gaming platform that would change the way games were played on PC. Currently, Steam has over 6.6 million users and has an estimated share of 50-70% in the digital distribution PC market (Mudgal). Valve is a U.S. based company that resides in Bellevue, Washington. The founder of Valve, Gabe Newell, is currently the president and owner of more than 50 % of the company. Newell, has an estimated net worth of around $1.5 billion dollars. The analysis of this report will demonstrate that the Valve Corporation is extremely successful and continues to dominate the video distribution industry.

External Analysis The following segments of this study will be using the PESTEL analysis and the Five-Forces Model to examine Valve Corporation as a gaming industry giant. The PESTEL Analysis will feature the political, economic, socio-cultural, technological, environmental, and legal factors of the company. Additionally, The Five-Forces Model will include how the supplier power, buyer power, degree of rivalry, the threats of new entrants and substitutes have and will influence the Valve Corporation.

PESTEL Analysis

Political Factors The Valve Corporation enjoys numerous benefits most traditional companies have only dreamt about achieving. Being a privately owned company, employees enjoy the freedom of not having any managers overlooking their shoulders constantly. The 250 employees who work at Valve decide which projects they want to work on and for whatever duration they so choose. Valve believes, “when you give freedom to creative people, it creates the opportunity to liberate their talents and creativity, instead of waiting around to be instructed. It builds respect, which in turn should build pride in the work and the company” . Workers do not have to worry about external political or governmental factors interfering with their creative work. If any such restrictions are or would be placed on the company for any reason, they would have to conduct their inquiries directly to the owner responsible of the policies and procedures issued at Valve.

Economic Factors Although, the U.S. economy has had its difficulties the last several years, the Valve Corporation has had continuous growth since the company first opened in 1996. Since, Valve is a privately owned company; it is not required to release financial information to the public. Yet, as of March 2012, Valve had an estimated value of $3 billion dollars. Forbes estimated its worth by consulting video game industry insiders, equity analysts, investment bankers, and technology analysts . Valve is the largest video game distributer in the PC gaming market and the introduction of its Steam platform has made it the most popular video download website ever known. In one year alone, research conducted by Forecasting and Analyzing Digital Entertainment (FADE), said Valve’s Steam service accumulated $1 billion dollars in revenues in 2010 . The economic strength of the company is doing exceptionally well. Valve will continue to expand and evolve in their innovative technologies. Conversely, to some industry analysts, the video game industry is considered a “grey market”, also known as a parallel market. Grey-market goods refer to "legal goods" which are sold outside normal distribution channels by companies which may have no relationship with the producer of the goods . While Valve requires users to enter a validation key to activate purchased games through their Steam platform, many users buy CD keys from cheaper market retailers outside of their region. Valve will deactivate accounts that use CD keys purchased outside of consumer territories in order to maintain the integrity of region-specific licensing . This ensures that Valve’s customers are abiding by their end-user license agreements and are not violating any Economic factors that correlate to the regions they reside in.

Socio-Cultural Factors As our evolving culture slowly moves more and more from a physical to a digital dimension, Valve has done an excellent job staying above its competition and meeting the needs of its modern consumers. According to Statista,” Physical retail sales of computer and video games are currently on their lowest levels since 2006” (dailyinfographic.com). The change in social attitude, perhaps with the popularization of digital distribution in 2003 by the iTunes music store, innovated the way consumers buy and receive their products. In 2009, an estimated 80% of video games sold were physical copies and 20% digital copies. By 2011, it estimated only 69% of purchased games were physical copies with digital copies rising to 31% (dailyinfographic.com). These changes in social attitude towards digital distribution can be beneficial for Valve, the dominant force in the digital market. According to Gabe Newell, Valve founder, Steam claims 70% of those digital sales (TechnoBuffalo). Since the late 1970’s video games has been a cult hit among the younger population. As this “Generation Y” continues to mature, so will the gaming industry. This demographic makes up approximately 53.9% of the U.S. population. Valves’ rated “teen to mature” games are aiming straight for this age group. A survey conducted by the Entertainment Software Rating Board (ESRB), responsible for assigning age ratings to software entertainment such as video games, shows that the average age of a gamer is around 34 years old (www.esrb.org).
This is Valve’s premier target demographic, the technologically experienced consumer with a credit/debit card. An increase in its customer base should drive Valve on a road towards new opportunities and larger markets.

Technological Factors Valve is a completely technology driven company that must keep up with the latest technological trends and changes. Valve has always been capable of moving ahead to please their consumer base. Before 2003, there was not a way of patching games or downloading games from a digital distribution service on a PC. Physical game CDs were still being purchased via retail and updating games was a headache. To solve these problems, Valve began development of their digital distribution service sometime in 2002. In September of 2003, Valve released their digital distribution service named Steam. The goal of the software was to provide solutions to issues such as piracy, game distribution, online multiplayer, and patch distribution. Any game or software purchase on a user’s Steam account can be accessed from any supported device as long as the user is logged in. Additionally, an offline mode is available for users who do not always have internet access. Steam’s Steamworks system enables users to play multiplayer games online with any other Steam users. Steam has come a long way from its initial release on the Windows Operating System. In order for Valve to expand their Steam service, they needed to make the service available for platforms other than Windows. Valve released their Steam service for Mac OS X in 2010 and for Linux in 2013. Steam is also available for the Playstation 3, smartphones, and tablets but with limited features. Many new features have been introduced as well, such as, cloud storage, social hubs, Steam Greenlight, Steam Guard, trading, and Steam Workshop. There are currently 1,860 games available and 54 million active users on the Steam service (“Steam (software)”). Valve is currently in the process of developing a game console. Valve’s new video game console is an approach at implementing Steam into a home living room. Developing video games on consoles has always been more profitable due to the ease of access game consoles provide compared to PCs (“Game Sales Database”). Valve’s own president, Gabe Newell, fears that Apple’s iPad may take over the living room (Peckham). Apple has had plans to find ways of putting their powerful portable devices on TV screens. The most recent iPad has a more powerful processor than the Xbox 360. Though Apple may be a fierce competitor in the game console market, Valve has an advantage towards entering this market. Valve’s new console will be completely Steam based which means current Steam users can access all of their currently owned games on the console. In order for Valve to expand their Steam service, the company must successfully merge into the game console market.

Environmental Factors Valve Corporation has various environmental factors that influence their company. The corporation has some of the most innovative and competent employees working to make their gaming atmosphere the most preferred among competitors. Valve is not a traditional hierarchical corporate company. Rather, employees have no bosses or middle management creating a flat organizational structure. As Newell, the founder of the company mentioned, Valve Corporation has a very controlled environment while still keeping things innovative and fresh. Valve’s number one priority is Steam, its online store and gaming environment for more than 54 million users. Instead of purchasing a disc format of a game, users can access games right from their personal computer with internet access via Steam. Having created a very user-friendly interface, Valve is easy to use. Each user must create an account and download the services directly to their computer. This gives the users freedom to access and update their games via Steam from anywhere and at anytime.

Legal Factors In 2011, Valve users were excitedly awaiting the release of Portal to Android devices. There was a great deal of success in this direction, partly due to developers in Russia. However, after Valve began to receive threats, the developers were told to call it off by Valves legal team . Valve should consider creating a port for their games on mobile platforms because the demand to game on a mobile device continues to grow. Valve could either use crowdsourcing and have outside developers make their games mobile, or create it themselves and reap all of the benefits. The first major legal dispute Valve was involved in was in 2002, against Vivendi Universal, its publisher, Sierra Entertainment, under Vivendi was accused by Valve of illegally distributing copies of their games to Internet cafes . Vivendi countered with saying Valve’s digital distribution system (Steam) was attempting to circumvent their publishing agreement. Consequentially, Vivendi continued to sue for intellectual property rights to Half-Life. Valve won the case with the idea that Vivendi Universal was never allowed to distribute Valve games in the first place. In 2005, Electronic Arts (EA) games announced that they would be collaborating with Valve in a long-term deal to distribute their games. Valve received $2 Million dollars from the case and parted ways with publisher Vivendi. Sometime in 2012, Valve faced charges in Europe stemming from Steam’s new terms of service . Users were unable to use their purchased games and were shut out of Steam forums unless they agreed to have fewer legal rights against the company, without refunds. Valves rebuttal to the angry letters they received was that customers could now only bring individual claims and no class action lawsuits. In their eyes, class actions did not provide any benefit to their users and instead brought about expenses and delays that were inefficient to the issue.

Five –Forces Model

Supplier Power
“In Valve Corporation’s online game Supply business, the suppliers would essentially be the game publishers. Major game publishers include Bethesda Softworks, Activision, Rockstar Games, Electronic Arts, Square Enix, 2K Games, Namco, LucasArts and Sega and it would be essential to hold on to as many of these publishers as possible in order to make Steam an attractive platform for consumers to purchase games from.” (Group MOLWC Report on Valve Corporation).

If Valve wants to continue being successful they need to keep as many of these publishers as they can. However, Valve will encounter numerous challenges to attract and retain the publishers. Firstly, suppliers will incur little to no switching costs by changing to a competitor. This means that competition will have bargaining power and Valve will have to extend more resources to keep them in their corner.
Secondly, Valve constantly needs to look at its competition. They have direct and indirect competitors in their industry. As long as Valve keeps their content current and focuses on the needs of their users, they should be able to stay in the lead among competitors. Lastly, Valve’s new online supply chain offers plenty of advantages to their suppliers. Today, suppliers are able to distribute their game titles more successfully due to the 24-hour convenience of Steam. “Global reach and the “instant” delivery feature; suppliers are also able to achieve gross margins of 70% of purchase price, compared with 30% at traditional retail distribution methods” (Group MOLWC Report on Valve Corporation). This successfully discourages suppliers from switching to other types of distribution channels.

Buyer Power
Video game enthusiasts have tremendous buyer power and can choose from a variety of games they want to play and buy. Often times, the video game market is under a great degree of pressure to release products quickly or updates as soon as possible. Gamers will sometimes camp for days outside of department stores in order to be the first in line to purchase a specific game. Fortunately, Valve’s Steam allows online customers to purchase rights to a particular game or software the moment it is released. Thus, eliminating the need to wait in line and fight other customers for a specific game title. In the end, buyers ultimately carry the most power. They decide when and where to buy the video games and software they desire.

Degree of Rivalry
Valve’s degree of rivalry can be measured on two different facets, the first of which is
Valve as a software developer. As a developer Valve experiences a very large range of rivalry from recently created companies to well established veterans in game development. Worldwide there are hundreds of video game development companies all endeavoring to construct the next big titles. According to Develop’s “Top 100 Developers” chart of 2010, Valve ranks in at number 22 below video game titans such as Nintendo (www.develop-online.net). In order for Valve to compete with rivals it must find a way to emerge from the multitude of competitors. Valve accomplishes this feat by developing creative titles like Portal, a first person puzzle game in which the player must use a set of portals to clear obstacles to traverse a stage. These completely original creations have earned Valve so much praise as a developer and gained them a loyal fan following among hardcore gamers.
The second facet that we must examine is of Valve as a digital distribution client. In this aspect, Valve experiences a very low degree of rivalry, not to mention that they practically dominate the market. As of 2011, it was estimated that Valve controls 70% of the pc digital market with Valve’s biggest rival Impulse claiming only 10% of what is left (www.geek.com). One of the many reasons why Valve’s digital distribution system Steam is so successful could be the fact that Steam was the first to enter the market. This gives Steam the opportunity to establish itself before there is even a competition. Another competitive advantage Steam has is the diversity of the content it can offer. Steam distributes a combination of software including exclusive content developed by Valve, officially licensed software from big name developers, and “indie games” from smaller newly established companies. Although, game developers may try to create programs to emulate Steam, such as Electronic Arts with its Origins system to sell its own products. It may be smarter to license your product to sell on a popular distribution client such as Steam. You know what they say, “If you can’t beat them, join them.”

Threat of New Entrants
The barriers of entry into the digital gaming industry are low. It is becoming more prominent for users to download games onto their mobile devices. However, in the case of Valve, they distribute games digitally through their Steam platform making their barrier of entry high. It takes such high technological requirements to create a platform such as Steam that it is very unlikely to be better and released before Valve completely saturates this market. Another factor is that competition would need to have a great amount of financial resources to get their software created and maintained .
An example of a new entrant would be EA games’ new online store, Origin, to compete with other digital distribution platforms. “Electronic Arts has stated that it wanted Origin to match Valve’s Steam service, Origin's leading competitor, by the end of March 2012, by adding cloud game saves, auto-patching, achievements and rewards, and cross-platform releases” (Wikipedia, 2013). Origin has not been able to keep up with Steam, collecting 9.3 million users since February 2012 compared to Steam who had 54 million users as of December 2012.

Threat of Substitutes There are not many methods of substitution that could actually cause harm to Valve. All video games can be easily obtained illegally through torrent distribution sites. However, the only games that are even worth pirating are single player games. Most PC multiplayer games use Valve’s Steamworks system and cannot be played online unless the system is available. The only way to play a pirated game online with others is if the game offers a local area network (LAN) option. Services such as Hamachi and Tunngle can be used to create a virtual LAN over the internet to simulate connecting multiple computers together in the same local network. Single player games take longer to appear on torrent distribution sites because of Valve’s new approach towards distributing new games. When a game is pre ordered on Steam, the user can preload the game before it is released. However, the files necessary to launch the game are not provided until the release date (Lee). The Steam service itself is not complicated for other companies to replicate but they may find it difficult to compete. There are other PC digital distribution services out there but none come close to Steam which dominates 50-70% of the market (“Steam (software)”). Two of the most notable competitors are Microsoft’s Games for Windows Live and Electronic Art’s (EA) Origin services. Games for Windows Live is literally Xbox Live on PC with less features and forced product key digital rights management activation. Most games that use Games for Windows Live for network play and activation are already available on Steam anyways. Origin is EA’s attempt to avoid having to pay Valve royalties for having their games published on Steam. Unfortunately, for EA, their service has had nothing but negative feedback due to the hidden spyware aspect it includes. The Origin service is capable of scanning a user’s computer for information that could later be sold by EA to third party companies. Steam is capable of scanning a user’s computer information as well, but Valve offers an opt-out option to all of their users.

Conclusion

Problems and Solutions
Valve is a very strong and successful company with very few flaws. In order for Valve to maintain their current economic status and increase revenue, the company must be willing to expand out to new markets. As new technologies are developed, markets may change drastically or cease to exist. Fortunately for Valve, the company’s own president, Gabe Newell, is capable of predicting markets correctly and choosing which direction the company should head to next. Newell himself made this statement before the release of the Windows 8 operating system, “I think that Windows 8 is kind of a catastrophe for everybody in the PC space” (“Gabe Newell (Person)”). As of April of 2013, PC sales have seen a 14% decline which is the biggest decline in 20 years. Analysis at International Data Corporation are concluding that PC sales have dropped due to consumers avoiding Windows 8 (Farrell). Valve is fully aware they cannot just focus on the Windows PC market. Steam was recently released for the Linux operating system and now Valve is working on a Steam game console that will be Linux based as well. While Valve has pushed the Steam service to other platforms, there is little to no games and software available to those platforms. Currently, Steam for Linux only has less than 200 out of the nearly 2000 games available (“Featured Linux Games.”). Mobile devices such as smart phones and tablets cannot play games on the Steam software available. Valve has been making the right decision by porting Steam to other platforms. However, the lack of software and games available for other platforms will not convince the consumers of these platforms to adopt Steam.
The small library of games and software available for other platforms is not completely Valve’s fault. The solution to this predicament falls onto other developers. Valve needs to find a way to convince games and software developers to create products for other platforms. Valve has already ported most of their own games to Mac OS X and Linux. The first step Valve should take is convincing their consumers as to why they should switch to Linux. If more consumers used Linux this may result in developers creating and porting more games to Linux. Valve also needs to consider finding a way to make games and software available via portable devices such as tablets. The perfect opportunity may arise once Ubuntu, a Linux distribution operating system, is made available for portable devices (Tyrsina). Valve is in a great position to continue its dominance in the gaming industry as long as the company continues to expand into more platforms and maintain their original innovative ideology.

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