A friend linked this to me.
I’ve written a small bit about Valve and their digital distribution system, Steam, but it’s from an outside perspective and admittedly, an amateurish one at that. A blog on one of my favorite video game developers combined with a professional economist’s analysis with what would seem to be unfettered access to all the data has got my attention.
Online digital distributor giant, Steam, has become a household name for gamers across the world. Shrewd business practices on the part of Valve, the makers of Steam, has kept the users of Steam generally happy and its competitors out. The very nature of Steam prohibits most users from using other digital distribution services. Who wants to run a handful of memory demanding programs in the background? In this respect, Steam already has a major advantage because it was the first to embed itself on our desktops.
To better understand why so many people use Steam, we need to first address the concept of network externality. Certain goods and services increase in value as more people use them. Take for instance, the classic example of the telephone. When one person has a telephone, he has no one to call. When there are two people, they can call each other. Each additional person raises the value of the telephone. Economists call this effect, network externality.
Valve understands very well how network externalities impact markets. Thanks to Steamworks, Valve has taken a step further to cementing our feet. Steamworks is the community building function of Steam; it encompasses everything from your friends list to your profile. Most of all, it’s a free service with the caveat that you have to purchase at least one game on Steam. Consider the telephone example. If you were the only person using Steamworks, how valuable would the service be? Since so many people already use Steam, the network externality must be immense, strong enough to prevent a competitor such as Impulse, another digital distributor, from entering. Impulse can technically match everything Steam does, but it cannot replicate the network externality effect without a substantial user base.
It is interesting to note that Steam is not flawless in its design. Origins, Electronic Arts’ digital distribution software, has begun hitting Steam in the one area where it is not invulnerable, titles. Origins has taken the approach of pulling away its loyal and diehard consumers in the hopes that it can build its own user base. While it is notably more successful than Impulse, it is unlikely that Origins will be able to sport enough exclusive titles to pull people off of Steam. Electronic Arts and Valve can realistically only make titles published under them exclusive. For the vast majority of titles, Electronic Arts and Valve will have to compete for sales licenses.