Group Chairman
Masayuki Otsuka
Masayuki Otsuka
Chief Executive Officer
Lee Wee Chen
Class-Code: F4
Background of Valve Corporation
Valve Corporation, (also known as Valve Software or simply as Valve), is
an American video game
development and digital
distribution
company based in Bellevue,
Washington, United
States. Founded in 1996 by former Microsoft employees Gabe Newell and Mike Harrington, Valve became famous from its critically
acclaimed Half-Life series, (the first game released in November 1998). It is
also well known for its social-distribution network SteamTM and for developing the Source engine, which has been used in every Valve
game since its introduction in 2004.
Prior to SteamTM, Valve had problems releasing updates for
their online games, such as Counter-Strike, wherein a patch would result in the
disconnection of the larger part of the online user base for several days. They
decided to make a platform which would update games automatically, and
implement better anti-piracy and anti-cheat measures. After Valve approached and was
turned down by several companies including Microsoft and Yahoo!, Valve began
development of the platform which was eventually known as SteamTM in 2002.
When SteamTM was first made available for download in 2002, its primary function was streamlining the patching process common in online computer games. Gradually, Valve began negotiating contracts with several publishers and independent developers to release their products on Steam. In 2005, the first third-party games began to appear on SteamTM. Valve also announced that SteamTM was starting to be profitable. Although digital distribution was still no match to retail in terms of sales volume, profit margins for Valve and developers were far bigger on SteamTM than at retail.
In 2007, big developer-publishers such as id Software, Eidos Interactive and Capcom started to distribute their games on SteamTM. In May 2007, 13 million accounts had been created on SteamTM, and 150 games were for sale on the platform. As of August 2012, there are over 1800 games available through SteamTM, and 54 million active user accounts. The concurrent users’ peak was 5 million on January 2, 2012. Although Valve never releases sales figures, Stardock, former owner of competing platform Impulse, estimated in 2009 that SteamTM had a 70% share of the digital distribution market for video games.
Analysis of the 8 key elements of Valve Corporation’s e-business model
Valve Corporation is a “Pure play”, B2C business model and can be summarized as follows:
1.
Value Proposition:
Valve markets SteamTM to
the consumer as “The ultimate entertainment platform”. Valve Corporation’s
online value proposition can be summarized into four main points; the ability
to allow instant access to games, the presence of an online gaming community,
allowing users to create and share contents, and providing entertainment
“anywhere”.
Instant access to games: SteamTM guarantees
instant access to more than 1,800 game titles and allows users to enjoy
exclusive deals, automatic game updates and other great perks. Using SteamTM,
consumers can easily browse though over a thousand game titles in the comfort
of their homes (saving travelling time and costs); something which the consumer
cannot experience under the traditional “brick and mortar” business
environment.
Online gaming community: The SteamTM platform allows its 54 million active users to connect with each other
allowing users to meet new people, join game groups, form clans, and chat
in-game. This creates an effective gamers’ community (users providing reviews
on game titles, sharing game walkthroughs, discuss about game strategies, etc),
giving its users a unique gaming-cum-networking experience; which the users
will not be able to experience in traditional online gaming systems.
Create and share content: Allows consumers to send gifts to
their friends, trade items and even create new content for games in the SteamTM workshop. Being able to send gifts through SteamTM saves the
consumer the trouble of having the “physical copy” of the game shipped to their
loved ones, saving time and avoiding high postage costs in the process.
Additionally, the fact that SteamTM workshop
enables consumers to create new content for games gives them the freedom to
customize various aspects of the game to their liking.
Providing entertainment “anywhere”: Unlike games sold in the traditional
disc format, digital copies of games purchased from SteamTM can be accessed from any personal computers with internet access. With
just a click on the mouse and a valid SteamTM account, users can download and install games they have previously
purchased anywhere and anytime without the need for a physical disc. This gives
them the freedom to play their games whenever they want to. Users can also be
updated with the latest sale and news of games through multiple platforms,
including PCs, Mac, mobile devices, or even their television.
2.
Revenue Model:
Valve Corporation derives its
revenue using a sales-cum-subscription revenue model. This can be further
broken down and elaborated as shown below:
Sales revenue: Valve Corporation’s sales revenue
is derived from the sale of the games it developed and also from its role as a
major channel for distributing games. Despite its transition into a digital
distribution
company, Valve Corporation continues to develop new digital games, resulting in
the release of wildly popular titles such as “Left 4 Dead”,” Counter-Strike:
Global Offensive”,
and “Dota 2” which have contributed substantially to its sales revenue. Other than selling
games it has developed, Valve Corporation’s main source of revenue comes from
the distribution of third party games on its SteamTM platform. Valve Corporation works
closely with major and freelance game publishers/ developers and helps them
distribute and advertise their products on its platform for a one-off listing
fee and royalties.
Subscription revenue: Besides its main role in developing
and distributing games, Valve Corporation collaborates closely with cyber cafes
by providing its catalogue of games in exchange for a yearly subscription fee.
This is made possible through its SteamTM network and Valve Corporation adds further value to this service by rendering
technical support, organizing tournaments to boost the profile of the
respective cyber cafes and helping to advertise games that these cafes carry.
Besides the above mentioned main
revenue models, Valve Corporation has adopted several other retailing
strategies to increase its revenue. One of these retailing strategies would be
the practice of holding “online sale” events for its products a few times a
year to boost sales. They would also have certain weekends for consumers to try
out full versions of certain game titles. These events help Valve to increase
the sales of its titles (especially older titles) as discounts of up to 75% are
offered and it proved to be effective in attracting more consumers to adopt its
network. Being a “pure play” retailer also allows Valve to tap on a niche
market by offering older and less popular games as part of the “Long tail” retailing
strategy as it will cost Valve almost nothing to make these titles available.
3. Market Opportunity:
There are a number of inherent
market opportunities in the case of Valve Corporation’s development of SteamTM.
Firstly, when Valve Corporation first started developing SteamTM before 2002, the online gaming sector which they were originally
targeting was still in its infancy stage. As such, being one of the pioneers of
online game developers, they could capture quite a huge market share, as
evident from the popularity of its first games such as Half-Life and
Counter-Strike. This created a loyal gamers’ base that would tend to support
future game releases by Valve Corporation, and form the base on which SteamTM would capitalize on for beta-testing and development.
Also, since the online gaming sector
were in the early stages of development, there were ample space for growth and
it meant only that more consumers would participate in online gaming. This also
implies more demand for games to be produced by developers, and there is a high
chance that Valve Corporation would end up distributing a large proportion of
the games being developed due to the large initial market share acquired by
them. This is evident from the fact that 80% of the online sales for the game
‘The Witcher 2: Assassins of Kings’ were done on the SteamTM
platform. Given that Valve also intends to venture outside the gaming industry,
there are definitely more opportunities in other markets for them to capitalize
on.
4.
Competitive Environment:
To analyze Valve Corporation’s
competitive environment, Porter's five forces analysis will be used by breaking
up the analysis of its competitive environment into the five forces:
Intensity
of competitive rivalry (Threat of direct competitors): Major direct competitors include Impulse,
Gamers Gate. These competitors are also in the digital distribution business
for personal computer games and provide services and game titles that are very
similar to what Valve Corporation provides.
Threat of
substitute products or services (Threat of indirect competitors): For indirect competitors, GameFly
serves to be its main indirect competitor as it is an online video game rental subscription service that specializes in providing games for game consoles and handheld game
consoles, including
personal computer games. The service that GameFly provides might draw some of
Valve’s customer away as these customers might feel that renting a game might
give them a greater value than buying it. (Due to the fact that gamers seldom
“replay” a game that they have completed and it is cheaper to rental rather
than purchase a game.)
Another indirect competitor would be
Microsoft through its popular gaming console, X-box. The X-box is an indirect
competitor as its online gaming platform, X-box Live, offers something similar
to Valve’s online distribution platform (SteamTM), but only for
games on the X-box system. However, there are certain game titles that are
offered on both PC and console platforms, and given the growing console gaming
market, this poses a threat to Valve’s sales figures. Also, due to Microsoft’s
sheer size in the market, there is a potential threat of Microsoft enticing
developers to develop games exclusively on the X-box platform by giving them
various incentives. This leads to lesser choice for PC gamers and there is a
threat on them migrating to console gaming, further impacting Valve’s sales.
Threat of
new competition: The threat of new competition can be determined
by taking account into several factors. The one of these factors would be the
barriers of entry into the online gaming distribution market. For Valve’s case,
the barriers of entry are high due to the technological requirements in
creating an effective online distribution platform. This requires the employment
of info communication technology experts and hundreds of hours of testing to
ensure that the system created are reliable and able to handle a large volume
of transactions. Thus, it ensures that only big companies have the expertise
and financial resources to enter the market.
Another
factor that would determine the level of the threat of new competition is
customer loyalty. As Valve is an established brand with SteamTM being around since 2002, it is highly likely that the
consumers would trust Valve due to its proven reliability in the delivery and
maintenance of games. This is further supported by the fact that, as of 2009, SteamTM had a 70% share of the digital distribution market for video
games. Thus, it makes it hard for any new competitors to break into the market
with the kind of customer loyalty Valve commands.
Thus,
judging from the above mentioned factors, it can be concluded that Valve
Corporation is unlikely to face any significant threat from new competitors.
Bargaining
power of suppliers: In the case of the online game distribution
business, the suppliers would mainly 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 other to make SteamTM an attractive platform for consumers to purchase games
from. However, Valve does face several
challenges in its bid to attract and retain these publishers. Some challenges
that Valve faces include supplier switching costs, supplier competition, and strength
of distribution channel.
Firstly,
with regards to supplier switching costs, it can be assumed that such costs are
low as the games are distributed electronically and suppliers would face almost
no cost to switch to another competitor. The only cost incurred from switching
would probably be the difference in gross margins that the publisher has agreed
with the former and current online distributor. Thus, in this case, the bargaining power of
suppliers is actually quite strong and Valve would have to spend considerable
efforts in retaining its suppliers by agreeing to take a lower cut in the gross
margins.
Looking into
supplier competition, as mentioned before, there are two other direct and two
indirect competitors which the suppliers can switch to. Valve would have to
keep an eye on its competitors so as to ensure that the packages it offers to
its suppliers remain competitive.
Lastly,
judging the strength of distribution, Valve’s revolutionary online distribution
channel offers much advantage to its suppliers. Not only the suppliers are now
able to distribute their game titles more effectively due to its 24 hours
availability on SteamTM, 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.
This effectively discourages suppliers from switching to other types of
distribution channels.
Bargaining
power of customers: In the area where the bargaining power of
customers is concerned, four main factors must be considered; degree of
dependency upon existing channels of distribution, buyer switching costs, buyer
price sensitivity, and
differential advantage (uniqueness) of industry products.
In terms of
the degree of dependency upon existing channels of distribution, customers have
a choice of purchasing games through traditional retail channels and are not
entirely dependent on the online channel provided by Valve as the other
channels are as readily available as the online channels.
For buyer
switching costs, the consumers have almost zero costs when switching either to
another form of channel or to another competitor. The only likely cost of
switching would probably be the travelling cost (for retail channels) and the
possible price difference in the products. Thus, cost wise, it is unlikely to deter
the consumer from switching.
Looking at
both differential advantages (uniqueness) of industry product and buyer price
sensitivity, it can be seen that there is little product uniqueness to speak of
as game publishers usually publish their games across different channels and
competitors. This causes the consumer to be especially sensitive to the prices
of the products as they can easily switch to another channel or competitor if
there is a significant price difference.
Judging from
the above mentioned factors, it can be concluded that the consumers have
significant bargaining power over Valve under the current business model.
5. Competitive Advantage:
Some of Valve’s competitive
advantages include its distribution technique, first mover advantage, and its
asymmetries competitive advantage.
Valve’s online distribution channel,
SteamTM, presents consumers and suppliers an easy way to browse,
purchase, and for the case of supplies, distribute its products as compared to
traditional retail channels. As mentioned previously in the value proposition
section, the online distribution channel offers many advantages to consumers,
such as instant access to games, an online community, the ability to create and
modify game content, and ability to access their games “anywhere”. Consumers
also get to enjoy lower prices and the option of trying out games in “demos”
and looking through reviews before deciding whether to purchase a particular
game. For suppliers, distribution through SteamTM allows the
suppliers to receive a higher gross margin.
As Valve is the first firm to
develop such an effective and reliable game distribution channel, it would
inevitably enjoy a first mover advantage as consumers identify Valve as a
trusted online game distributor, handing them the advantage of commanding brand
loyalty among its customers.
Valve also enjoys asymmetries
competitive advantage due to it being the largest online distribution company
in the market. Using its financial capabilities, Valve is able to effectively
improve its distribution channel regularly to ensure that it remains unmatched
by its competitors. Valve has also built up an excellent relationship with the
major game publishers as seen from the fact that the majority of the game
publishers have chosen to distribute their product through SteamTM. This
gives them an edge over other competitors as it allows SteamTM to appeal more to consumers with its larger variety of games.
6.
Market Strategy:
As mentioned previously under
‘Market Opportunities’, Valve Corporation initially started out developing games.
Popular games led to Valve having a huge customer base to work on. They used
‘Counter-Strike’ as a test-bed for developing SteamTM, by releasing
patches through it and strengthening the anti-cheat systems. This proved
popular with the customers, and through their feedback, Valve improved on the
features of the SteamTM platform and gradually introduced new
features that improved the gaming experience. Customers would also recommend
SteamTM through online community forums and word-of-mouth,
increasing the customer base to an even greater extent.
Developers are also enticed by the
anti-piracy measures put into place by the SteamTM platform, and
they can save costs on developing Digital Rights Management (DRM) modules for
their games and using SteamTM platform’s built in features instead.
Soon, big-name publishers such as id Software and Capcom also looked to Valve
for online distribution of their games. Given the reputation of such
publishers, this would mean that even more customers would turn to SteamTM
to purchase these games, and possibly other games through the interactive
online catalogue. This would hence increase Valve’s profitability by many
folds.
Valve also made public their
intention to venture outside the gaming market, and they could capitalize on
their reputation gained from the gaming market to gain developers’ business in
the other industries they are looking at.
7.
Organizational
Development:
Internally, Valve employs a ‘flat organizational
structure’ i.e. an organizational
structure with few
or no levels of intervening management between staff and managers as compared to traditional organizational structures.
(Also known as horizontal organization)
This form of organizational
structure is acknowledged by Gabe Newell, the co-founder and president of Valve
Corporation and reiterated on Valve’s website: “We’ve been boss-free since
1996. Imagine working with super smart, super talented colleagues in a
free-wheeling, innovative environment—no bosses, no middle management, no
bureaucracy. Just highly motivated peers coming together to make cool stuff.
It’s amazing what creative people can come up with when there’s nobody there
telling them what to do.”
Adopting a “flat organization
structure” benefits Valve as employees are more involved in the decision making
of the company, rather than closely supervised by many layers of management. This results in
high morale among the employees. In turn, Valve would have greater productivity
and efficiency in its processes, and employees would have a lower chance of
conflicting interests should new policies be introduced in the company. In
addition, this type of organizational structure also allows comments and feedback to reach all personnel involved in decisions more quickly, leading to
the expected response to customer feedback becoming more rapid.
Also on Valve's career webpage, they
have also indicated that they see themselves as a full-spectrum entertainment
studio, and welcome passionate people with original and creative ideas to lead
them to new areas for diversification. It can be seen that Valve is very open
to new ideas and there are hardly any internal barriers to hinder their
potential for future growth, so long the staff have the capabilities of doing
so. As such, when the need to re-strategize arises, the process would be much
smoother as well.
Externally, to meet the needs and
demands of its customers, Valve also has an online support forum consisting of
specialists to assist customers with technical and account issues, and this is
vital for proper customer support as they expand their business in the future.
Other than Valve’s customers,
another important aspect for Valve’s organizational development would be how
the company is able to form strategic partnerships for future growth. To
achieve this objective, Valve has partnered with various Operating System
developers to bring the SteamTM platform to their operating systems,
like Apple’s Macintosh and iOS, Google’s Android, Linux, and Sony’s PS3 system.
This further expands their market out of the PC market they originally worked
on.
Valve have also looked to mods
teams, who create custom in-game content such as levels, to expand their
business. They offered the teams a game engine license and distribution over SteamTM
at a discounted rates so that they can appreciate the benefits that the SteamTM
platform brings to them, and hopefully develop more games for Steam in the
future.
Valve’s partnership with schools to
bring them the SteamTM software for educational use in classrooms,
under the 'Steam for Schools' program, is also worth mentioning. It involves
the provision of free versions of its game titles with a customized version of
the SteamTM client for teachers to conduct workshop-style lessons
with ample control over students' workstations through inbuilt authentication
features. This would hopefully pique students’ interest in game development and
related fields, and would contribute to the industry in the future.
8.
Management Team:
The main players in the formation of
Valve Corporation are Gabe Newell and Mike Harrington. These people are
ex-employees of Microsoft Corporation, suggesting their technical expertise in
this field. This is especially true for Gabe Newell, as he played a major role
in the first 3 releases of the Microsoft Windows Operating Systems. Gabe Newell’s
idea of a ‘flat organizational structure’ also helps in the development of
mutual respect between staff, vital to the long-term viability of the company.
Below is the list of key personnel
in the current management team of Valve Corporation. Please note that one of
Valve’s co-founder, Mike Harrington has dissolved his partnership with Gabe
Newell in 2000 to take an extended vacation with his wife, Monica and thus, is
no longer with Valve Corporation.
Gabe Logan Newell: Co-founder, President and Managing Director of Valve Corporation. Spent
thirteen years working for Microsoft Corporation and played a major role in the first 3
releases of the Microsoft Windows Operating Systems. Mr Newell also served in a
number of positions in the Systems, Applications, and Advanced Technology
divisions during his 13 years with Microsoft. His vision, strong leadership and
most importantly, his extensive technical knowledge was an important factor in
Valve Corporation’s formation and rapid growth. Under his leadership, Valve
Corporation grew to an estimated US$2.5 billion (2012) worth in total equity;
with SteamTM holding a 70% share of the digital distribution market
for video games.
Scott Lynch:
Chief Operating Officer of Valve Corporation. Prior to joining Valve, Mr Lynch
served as Senior Vice President at Havas Interactive where, he created and
managed the Sierra Studios business unit publishing a number of products,
including Half-Life. During his 5-year tenure at Sierra, he held a number of
different positions in business development, acquisitions, finance, investor
relations, and product development. Before joining Sierra, Mr Lynch worked in
the public accounting industry at Coopers and Lybrand where he worked in both
the audit and tax departments managing a range of clients from small start-ups
to Fortune 500 companies. Mr Lynch is a graduate of the University of
Washington Business School with a concentration in accounting and is an
inactive Certified Public Accountant in the state of Washington. Scott Lynch’s
experience in both the gaming and accounting industry is his greatest asset in
bringing Valve Corporation to greater heights.
Jason Holtman:
Director of Business Development and Legal Affairs of Valve Corporation. Prior
to joining Valve, Mr Holtman practiced law, specializing on intellectual
property and technology issues. In his current role, Mr Holtman focuses on
SteamTM distribution, Steamworks integration, and game development
on the Source engine. He also works with outside entities pursuing SteamTM
distribution and/or game development atop Source. Like the other key management
staff, Jason Holtman’s knowledge in law and his prior experiences adds value to
Valve Corporation.
Mike Dunkle: Director
of Café Operations of Valve Corporation. Mike joined Valve in 2000 after
spending 10 years in senior marketing and business development positions in the
semiconductor test and embedded software markets. At Valve, Mike is responsible
for general business development, including Source Engine licensing, SteamTM
content distribution, Asian distribution, and tournament licensing.
Doug Lombardi: Vice President of Marketing of Valve Corporation. Formally was Director
for Marketing of Valve Corporation. Mr Lombardi is responsible for managing and
coordinating third-party relations, marketing and press activities. He
previously served in Music industry and Gaming industry. During his time in
gaming, he worked on the launch of websites, magazines, and games.
Opinion on Valve Corporation and its business model
Overall, we feel that Valve’s business strategy is good. It is unique,
albeit a little ambitious. Valve is in a sense quite lucky, as they happened to
develop SteamTM at a time when online gaming was still in its
infancy. There were plenty of opportunities to grow, and Valve capitalized on
them. They also had the determination to push through even when their idea of
collaboration were rejected when they approached Microsoft, Yahoo!, and
RealNetworks to develop the SteamTM client. This might actually have
been a good thing for Valve as they would have a lesser share of the profits
should they have collaborated with them.
Valve’s online distribution model for PC games is revolutionary in a
sense that it is a radical departure from the traditional boxed retail versions
that had to involve the consumer going down to a physical store to purchase the
games. With SteamTM, consumers can purchase and even try out games
before committing to their purchase, right from the comfort of their own home. This
is in line with the current computing trend where everything seems to be
turning digital. From statistics, current retail sales however, is still larger
than the digital sales of the games. Given SteamTM’s increasing
popularity among gamers, there is large room for growth as digital sales are
undoubtedly set to overtake retail sales in the future. Digital sales also
carry with them cost savings for the developer as there is no need for the
boxes and CDs, so there are room for increased profit margins as well.
Their ‘flat organizational structure’ is radical, but is well suited in
their business where game development occurs and constant, clear communication
between team members is vital to their success. It also has its downfalls;
since there are no hierarchy, the management would have an issue getting staff
with outspoken and stubborn personalities to take in their ideas. Also, there
are talented people who simply prefer to work in a traditional hierarchical
organizational environment, and by insisting on this radical system, Valve
might miss out on hiring these people.
Valve also plans to expand into other business areas as mentioned
previously. Although this is a good idea and opens up more lines for revenue,
there are risks involved. Valve needs qualified analysts to assess and research
on their intended industries to expand into, to avoid pitfalls that previous
e-businesses fell into and led to their failures. An example would be Boo.com
where they expanded overseas faster than they can handle. They were not well
versed in the countries’ laws and regulations, and lacked experience in
cross-border transactions. There were also communication problems arising due
to the different languages spoken. All these factors led to Boo.com’s failure,
and Valve would certainly benefit by learning from its mistakes.
As companies expand, they need more capital to sustain their increased
expenditures. As Valve is still a privately owned company, they run the risk of
insufficient funds if they expand too quickly. Being privately owned has its
perks such as more financial freedom, and the lack of the need to answer to
shareholders. They can therefore operate more freely and be more efficient in
their operations. However, if their growth rate cannot be sustained by their
sales, they would definitely need to look for external financing. When this
happens, Valve could opt for equity financing by listing the company in the
stock market. Based on the current outlook, there are plenty of parties
interested in Valve, and this is a good thing for them, as it means their share
prices would rise in value. Valve could also approach banks for loans, but
there is a need to keep an eye on the debt-to-equity ratio, as well as other
ratios through ratio analysis, as too much of any one kind of financing is bad
for the company.
To counter the internal dissatisfaction that may arise from public
listing, which is highly likely due to the long history of being privately owned,
Valve may give shares to its employees as a token of appreciation for their
service to the company. This boosts their morale and make them feel recognized
for their efforts, and increases their productivity, adding value to the
company. This would also help in the public’s valuation of Valve’s firm value,
increasing the share price.
As there are also a number of small players in the industry such as
those mentioned above in ‘Competitive Environment’, Valve can consider
acquiring these companies once they have the financial ability to do so. This
has many benefits for Valve. One major benefit is the integration of the
customer bases, which would undoubtedly bring them more sales. This also means
that there are lesser competition so Valve can focus more on their business
rather than worrying about its competitors stealing their market share. For big
players such as EA and its Origin games store, which is something similar to SteamTM,
acquiring is not very feasible, and as such, they could consider collaborating
with them and work out some kind of profit-sharing scheme to achieve a win-win
situation for both parties. This would also do the gaming industry good as
their synergies would help to fuel future innovations in the industry that
would bring added value to the consumers.
Useful Links and references