Valve’s Distribution Strategy:

Introduction:

Digital game distribution is the simplest, cheapest, most convenient way to sell games and has been possible for a decade. “Digital distribution accounts for 24% of [game] sales in the US, up from 20% in 2009” and is more profitable to game companies over physical sales (Okalow a, 2012). You may ask yourself: why are there still physical retailers if digital distribution is so much better? This is one of many problems in the current game retail industry we will be exploring.

The Steam Client is a digital game retailer and a multiplayer and communications platform created by Valve Corporation in 2003. Steam has over 1500 games available and over 54 million active users and is estimated to control roughly 70% of the digital game market. Steam will be the future of game retail and it is positioning itself perfectly to do so. This paper will discuss the current state of the game industry and how and why it has gotten there. From there it will focus on how games are sold today and how retailers are positioning themselves for the future. Lastly the paper will dissect the Steam client and all it has to offer; specifically comparing it to current physical and digital retailers.

As technology goes digital, entertainment media seems to be stuck in the physical past; at least for the time being. This is changing rapidly as more and more gamers are realizing the benefits of digital distribution. DFC Intelligence is forecasting that boxed retail will have declined from $29 billion in 2011 to $24 billion in 2016. Meanwhile, the market for digital distribution will grow $15 billion, to US$39 billion in 2016, up from US$24 billion in 2012 (Okalow b, 2012).

The game industry has been in a slump for several years now (partially due to the recessionstate reasons: 1,2,3); however, the upward trend of digital sales gives hope for the future of gaming. The trend from physical to digital game distribution is undisputable and is making physical retailers worried that they might be forced out of business. However, it is non’t easy so to determine which gaming companies are supporting this trend and which aren’t because while some companies say retailers are an integral part of game distribution, almost every single one is making changes that allow them to distribute content online. Steam is leading the way for the trend from physical to digital PC game distribution and is doing it by focusing on what gamers want. Valve is positioning itself to become the next OEM (Original equipment manufacturers, i.e. Nintendo, Sony, and Microsoft), however the path to widespread digital distribution is not set in stone; Valve still has to pave the way.

Reasons behind the trend:

The trend from physical distribution to digital distribution is obvious, but why is it happening?The reason for the transition from physical to digital distribution can be contributed to: “The reality is that digital is the best solution,” says Jason Della Rocca (Okalow a, 2012). The savings a first party or third-party publisher can see in moving from physical to digital distribution range between 10%-30% of gross margin (Okalow a, 2012). EA’s David DeMartini, SVP Origin stated that “over time the console side is just on a slightly slower continuum than the PC side is” (Peterson). Apple’s iTunes showed the world how effective a centralized digital retailer can be if it can win-over the large majority of users. Software sales were $255.4 million, down 32% from $375.9 million a year ago (Savitz, 2012). Including PC, software sales were $335.2 million, down 16% from $400.1 million a year ago (Savitz, 2012).

The physical-to-digital trend goes hand-in-hand with other trends in the game industry: mobile gaming, social gaming, casual gaming, the rise of indie games, and the shift from console gaming to PC gaming. These trends are increasing both the total number of gamers the total number of customers who are buying games digitally. (Expand here)

Game retail

There is resistance to the movement to digital, mostly from OEMs and their partnerships with physical retailers. “Sony’s [Vice President] Turvey isn’t completely incorrect when he points out that Internet databases would have problems handling significant amounts of very large simultaneous downloads” if the market was completely digital” (Okalow a, 2012). The effect of that, however, would only be noticeable during days or weeks when large, triple-A title games are being released. “Having that retail presence is still a very important part of driving consumers to the product, and really getting them to rush out to the store to get the latest title as it comes out, that’s almost become like an event. And also that point-of-sales marketing of having a display where you can get that impulse purchase is still very much an important part of things overall” (Okalow a, 2012). This is Sony’s stated reasoning for maintaining this developer-retailer relationship, however they leave out the underhandedness of the situation. Many, if not most, big games that are released in physical stores now have exclusive content that comes with them. This means that if someone wants to get those in-game items/maps/etc., they need to buy the game from a particular store. Both the developer and the retailer profit from this while the gamers who bought the game digitally lose by not having access to that content. It seems that these kind of deals are just artificially prolonging the inevitable collapse of physical retail so it will be interesting to see how long they last. In the end, it is clear that because OEMs are publicly traded, they want to keep their bases covered in case digital distribution takes much longer to become widespread than the current trend is showing. (consider including the problem first, then explaining the reasoning/example behind it)

The key players in gaming retail are GameStop, Amazon, Origin, Gamefly, Gametap, and Steam. The biggest physical game retailer in the U.K., Game Group, “which had 1,300 stores across Europe and Australia, filed for bankruptcy in March” (Okalow a, 2012). There couldn’t be much clearer evidence that physical game retail isn’t profitable anymore. (Expand here)

Where Steam fits in

So what does Steam offer that isn’t available elsewhere? Steam offers easy game retail, multiplayer services, a community section, and fun. Steam’s seasonal sales (usually one at holiday time and one in the summer) are one of the forces driving its success. The sales volume increases from the seasonal sales is tremendous, with a 245% increase for a 25% discount and a 1470% increase for a 75% discount (Leahy). Additionally, the community aspect of Steam keeps gamers in the Steam client longer, promoting brand loyalty and increasing sales. Most PC gamers will have Steam open when their computer starts and keep it open until they shut it down even if they’re not playing games. You can earn, purchase, or trade gifts, often in the form of in-game items, with the Steam client. Steam was created by gamers, for gamers and that is evident in every transaction with the service. Independent games make up a large portion of the games on Steam, and the recently-launched Greenlight feature gives these games even more attention. Whereas some game companies believe modding (modifying a game’s content) is synonymous with hacking, Valve accepts that gamers want to be able to customize their gaming experience so they have made modding much easier to do so. Valve isn’t publicly owned so their biggest concern is the gamer. Since they themselves are gamers, they know exactly how to treat their customers.

How does piracy affect game sales?
(I think piracy and the “transformation from physical to digital retail” are two separate issue)

Piracy is another issue that is often in the minds of game retailers, however the exact effect of piracy is something that game companies do a lot of research on but don’t necessarily release to the public. Just as has happened in the music, television, and film industries, piracy has gotten a lot of attention in the video game industry in the past couple years. It is a very controversial and multi-faceted topic that I won’t be able to delve too deeply into; however, I will show what Valve’s CEO has to say about game piracy: “piracy is almost always a service problem and not a pricing problem” (Tito, 2011).

Obstacles Steam faces

There are several obstacles facing Steam in the near-future. Overcoming the old structure of game retail will be a long process as long as OEMs aren’t in full support of moving to digital distribution. Steam’s competition is also ramping up as digital distribution becomes more popular; however, Steam, with its 54 million active user, is still miles ahead of the others as a retailer.

Conclusion

Steam was created to provide a legitimate source for buying games online anywhere in the world. It has been a driver for the change from physical to digital and has profited well from being the biggest and best digital retailer. Steam solves a large part of the piracy problem by both offering their games everywhere in the world as well as holding two huge sales every year. Since this is such a hot topic right now in the game industry and because Valve doesn’t have nearly as much market presence as other industry leaders, it is facing a tough decade ahead. Steam could continue to revolutionize the industry and become the iTunes of gaming or it could disappear in a flash (although the former seems far more likely to me). Over 170 million Americans consider themselves gamers today, ranging from 5-year olds who play Angry Birds on an iPad to 90-year olds who play solitaire on their PCs. Gaming isn’t just something teenage boys do anymore, it’s serious business. Gamers will always buy a game that is convenient to obtain and fairly priced. Steam offers both of these and much more and there is no reason to believe that they will ever stop.

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