Valve is an enormously successful company. Privately owned, it has succeeded in creating Steam, the world's largest app store on Windows, based primarily on selling video games. Despite the PC industry's current double-digit decline, Valve's sales are up 76 percent year-over-year.
But ever since the introduction of Apple's iPhone, no part of the computer industry has been untouched, and Valve faces new existential threats. Valve's recent announcements of SteamOS and Steam Machines are the company's response to this changing world.
Why Valve had to do SteamOS
Valve's most immediate threat was Microsoft's entrance into the app store business. Rather than simply sticking to creating an operating system, Microsoft decided it wanted more control of the app distribution chain and the accompanying revenue. Since Microsoft controls the Windows operating system, on which Valve's business depends, Microsoft has the ability to lock out third-party players and effectively kill Valve/Steam. In fact, Windows RT mobile devices are already locked down and allow only apps from Microsoft's App Store to be installed.
In an interview with NewMediaRights.com in 2012, Valve founder and managing director Gabe Newell was asked about Windows 8 and Microsoft's direction of closing the platform. "I'm really, really worried with Windows 8; as Microsoft tries to figure out how to come up with a strategy for dealing with Apple's resurgence, and Microsoft's failure to take market share away from Google, and so on, that they're going to make a set of bets and gone down a set of paths that's going to be very bad for the rest of us."
[ Demand for mobile data is skyrocketing. Read Smartphone Sales Poised For Rapid Growth. ]
So, Valve had no choice but to look for a contingency plan. The company turned to Linux and announced SteamOS, a Linux distribution designed for playing video games. Unlike prior Linux distributions, Valve was able to use its clout to get video card manufacturers such as Nvidia to fix their drivers to work well on Linux. (This is in stark contrast to Linux creator Linus Torvalds's expletive-laden dismissal of Nvidia, only a year ago, for their terrible drivers and lack of cooperation.)
While Linux on the desktop has failed to gain traction over the years, and the performance and support of games in Linux usually lags its Windows counterparts, Valve may actually have the resources, expertise, and discipline to finally make Linux a viable first-class gaming platform. And by doing this, Valve frees itself from being locked out by proprietary OS vendors.
Steam machines and the console wars
Microsoft's lockdown of the Windows App Store is actually nothing new to Valve; all the video game console manufacturers have locked down their consoles since the original 8-bit Nintendo. With Valve depending on video games for revenue, Valve was no doubt concerned about being locked out of the entire video game console market.
While the Windows App Store may have been the tipping point, Valve likely was already working on ways to address this situation.
SteamOS demonstrates the technical path by which Valve can free itself from Microsoft's control, but it won't necessarily encourage people to switch away from Windows. Valve's answer to this is Steam Machines, a specification with an alliance of hardware manufactures to build machines dedicated to gaming. Essentially, this is Valve competing in the console business.
Video game consoles exist in part today as an acknowledgement that a large number people prefer specialized devices that are good at video games over general-purpose computers. However, to judge by the numbers, the current business model used by the console industry is a complete failure. Microsoft has sunk billions of dollars into its Xbox division since its inception and still has failed to recoup its costs. Analyst group Nomura, breaking down Microsoft's earnings per-year, says $2 billion in losses are attributable to the Xbox platform.
Sony's picture for the PlayStation 3 is no better. Astute readers putting together Sony's financial reports from 2007 (PlayStation 3 launched in late 2006), can estimate Sony may have lost between $4 and $6 billion on PlayStation 3.
Nintendo may have escaped the dire losses suffered by Microsoft and Sony, but it is now under siege for losses with the Wii U and 3DS.
The console industry based its business model on selling proprietary hardware consoles at a loss, and recouping costs (and eventually earning a profit) through games sales. All they players have a tightly controlled ecosystem and steep SDK prices, which limit who may ship games on those platforms.
While this business model may arguably have worked in the past, there have been both major and subtle changes in the industry that have disrupted it. The biggest change was the entry of iPhone and the emergence of the mobile market. In addition, the industry just saw the longest period in history without a console refresh -- about eight years. This is an extremely long time in technology terms. It's worth noting that current iPhone and Android phones now equal, if not exceed, the current generation of consoles in terms of power.
Meanwhile, Valve, with its rising Steam revenue, has continued to demonstrate that the PC gaming market is still profitable. And the company has not had to rely on subsidizing hardware to achieve profitability.
So, as the console business model is imploding, Steam Machines offers disruption to the normal lockdown model as well as the long hardware refresh cycle time, while still potentially offering the appealing interface simplicity of game consoles. Steam Machines expose and exploit the fact that there is no longer anything special or unique about video game consoles that commodity PC parts and a specialized fork of Linux can't do too. And because Steam Machines relies on standard PC parts, it benefits from not having the R & D costs of Microsoft, Sony, and Nintendo. And though the latter subsidize their hardware, over the course of a few years, thanks to Moore's Law, it will become harder to justify buying outdated hardware when a new Steam Machine (or your next phone upgrade) will become better and cheaper while also giving you a superior gaming experience.
SteamOS, Steam Machines, and the desktop wars
There's a running joke within the Linux community: "This is the year of the Linux desktop." It never comes true, and is thus repeated every year. SteamOS is -- at least initially -- being positioned as a living room OS. However, its roots are in the desktop, and there is a potential for SteamOS to be utilized for desktop purposes.
If you consider the iPod Halo Effect, Apple did substantially increase its market share with the Mac. However, Microsoft Windows still has a commanding dominance. If wildly successful products like the iPod and iPhone could not lead to the overthrow of Windows on the desktop, SteamOS should not expect to do so, either.
However, SteamOS could still disrupt Microsoft's business and bottom line. Scrambling to gain traction in the mobile sector, Microsoft made two conscious decisions to help its mobile business that alienated its desktop customers.
The first was to unify the desktop and mobile experiences in Windows 8. Microsoft customers have made it very clear that they do not like the changes, as proven by lower-than-estimated sales of Windows 8 and the volume of public complaints about the missing Start Menu and other elements. Steam's own user research, which Valve makes available for everybody to see, shows that the vast majority of Steam users do not want to upgrade to Windows 8. While this does not mean these users will jump to SteamOS, it does suggest that a number of users might be open to the idea -- not something Microsoft wants to deal with right now.
Microsoft's second decision was to build its own mobile devices instead of maintaining its historical role as an operating system provider. Microsoft's entry into the mobile device business angered many of its former hardware allies, such as Dell and HP. These companies had not established contingency plans for market changes such as declining PC sales, lack of interest in Windows 8, and competition from Microsoft.
SteamOS and Steam Machines offer PC manufactures an interesting new contingency plan. They now have access to a free, Linux-based operating system that hopes to be more consumer-friendly than any Linux desktop OS before it. But perhaps just as important, PC manufactures have been in a race to the bottom for years to provide the cheapest PCs possible with very small margins. Steam Machines offers a way out of this, because the machines are designed for customers who want high-quality machines that can play quality games. And Steam customers have already proven that they're willing to spend money to get what they want.
Even assuming that this market share was a fraction of what Apple got from the iPod/iPhone Halo Effect, the combination of users who are unhappy with Windows 8 and PC manufacturers producing Steam Machines to solve their profitability problems seems likely to intensify Microsoft's headache. Valve can erode whatever power Microsoft still holds over PC manufacturers by offering an operating system that appeals to Windows gamers, a particularly valuable demographic constituency.
Games for Linux and exclusive titles
To be successful, SteamOS and Steam Machines need games. At this year's LinuxCon, Gabe Newell did something unusual: he gave a presentation slide to SDL (Simple Direct MediaLayer, created by Sam Lantinga), a low-level cross-platform abstraction layer that end users never see. To developers like me, this is interesting because Valve is putting its full resources behind SDL to make Linux both a good platform for games and an easy platform to port games to. Experienced cross-platform game developers know that SDL is one of the best cross-platform foundational layers around. If a game is cross-platform, there's an excellent chance it uses SDL in some manner. (Disclaimer: I have had the privilege of being a contributor to SDL.)
Newell also announced that Valve is working on a Linux debugger, because that's the most requested developer tool. This again shows Valve's commitment to its platform. (In contrast, the Android NDK completely falls down here, but I'll get to that later.)
Traditionally, exclusive titles are what really drive console sales. Valve may have some answers to that as well. Most notably is the widely anticipated Half-Life 3. As Half-Life 2 put Steam on the map almost a decade ago, it seems appropriate and rational to use Half-Life 3 to do the same for SteamOS and Steam Machines. However, Valve's Doug Lombardi said, "It's against our philosophy to put a game in jail and say it only works on Steam Machines." While there might be some wiggle room for spreading out launch dates for different platforms, which is common in the industry, it doesn't sound like Valve is interested in that either.
By forcing itself to compete on a level playing field, Valve is making an important statement about its confidence in the quality of its products. And it indicates that the company expects to deliver better performance and a better gaming experience on SteamOS than on Windows or Mac.
In addition, other PC game companies may find SteamOS and Steam Machines appealing if Valve can succeed in eliminating the problems many Windows users have with drivers and incompatible hardware. If Valve can attract companies such as Blizzard (best known for World of Warcraft, Starcraft, and Diablo), SteamOS/Steam Machines has a real shot of succeeding.
There's been much speculation about how Apple plans to strengthen its hold on the consumer living room through AppleTV. One approach would be to bring the App Store and its huge inventory of games to your television. After more than a decade of developers complaining that they had no game controller API, iOS 7 has finally delivered on this. However, AppleTV with an App Store is still vaporware.
Steam Machines poses a new and interesting competitor to Apple because unlike many of Apple's other competitors, Valve has actually managed to build a successful App Store that makes money without the need to subsidize anything. Since nobody has won this market yet, a successful launch by Valve may force Apple to react sooner than it planned to avoid losing the market entirely.
Hollywood, Amazon, Netflix, AppleTV
There's an ongoing battle among players who want to deliver movies and television shows to your living room. AppleTV sells a set-top box that talks to iTunes. Amazon is rumored to be developing its own set-top box that connects to its store. Netflix is working with cable companies.
But Steam Machines bring a full-blown computer to your television. This makes Valve's hardware a prime candidate to compete in the video download business. Valve already has a massive cloud infrastructure that can serve multi-gigabyte games -- it would not be a stretch to add streaming movie downloads. Also, Valve/Steam is no stranger to DRM, which should keep Hollywood happy.
Despite the financial success of legal music downloads (a change brought about largely by iTunes), Hollywood has, for the most part, resisted the changes brought about by digital distribution. The movie industry is very afraid of giving Apple too much power, but it is also fearful of Netflix, Amazon, and pretty much all the other existing big players. Valve might have a chance to slip in under the radar to become a major player.
Entry into Mobile?
While people are preoccupied with what Valve's announcements mean to the desktop and console market, the real long-term story is about mobile. Mobile gaming is already huge and is expected to continue growing like crazy. But more worrisome for Valve is that the closed app store ecosystem is prevalent everywhere in this market. In fact, it was Apple's App Store that inspired Microsoft to develop its own store, which in turn pushed Valve toward SteamOS. However, Valve should know full well that it needs to do something to compete in the mobile market.
While some may think Android is the obvious entry point for Valve, Android poses serious challenges for the company. As a gaming platform, Android's fragmentation makes it difficult to develop high-quality games because the hardware and OS support is so varied. Meanwhile, vendors like Amazon and Samsung are trying to lock down the platform with their own app store ecosystems. In addition, the Android platform still has serious deficiencies for soft-real-time performance, which is essential for games. Aspects such as the audio system are so bad, they are considered unusable by certain classes of games and music apps. What's more, the development environment is awful for game programmers.
For non-developers, the Android development environment is broken into two schizophrenic parts: the Android SDK (Software Development Kit), where you develop in the Java language; and the Android NDK (Native Development Kit), where you can additionally develop in the C or C++ languages. The legendary John Carmack of id Software (Doom, Quake) spoke at this year's QuakeCon about his revisiting of Android development. "I looked at it three years ago and I thought it was really pretty awful, especially compared to Apple," he said.
Carmack went on to give good marks about how much the SDK improved. "Developing like a Java app on Android is really not that bad right now," he said, adding, "It's only when you get into the Native Development Kit that things fall apart in terms of not really looking well cooked at all."
Unfortunately, the NDK is where most game development takes place. These problems have been there since the beginning in 2008 and Google has demonstrated by its lack of urgency that it doesn't care. The truth is that Google is an ad-based company, and it has already won the market share race. Google doesn't have a strong incentive to make Android a superior user experience platform. It's enough that Android is adequate -- it makes more sense to keep the costs down and focus on serving more ads to more users.
An additional problem for Valve and Android is the openness of the platform. While some may call Android an open platform, there are many shades of gray as to what "open" really means in the Android universe. To become a member of Google's Open Handset Alliance and get permission to use all the software that Google provides, you are contractually obligated to not produce devices that run incompatible versions of Android. The main problem with this is that Google is the sole authority that decides what is and is not allowed. As Acer and Aliyun discovered, this is not a fun position to be in.
It is not hard to imagine a case in which Valve wants to make improvements to the OS, such as fix the audio system, but the changes are not directly compatible with the current Android, or with their ultimate vision. While you might think squabbling would never happen for something that is intended as an improvement, we witnessed a similar situation earlier in the year, with Google announcing that it is forking and breaking away from WebKit because it was too difficult to cooperate with Apple.
Valve already made this same mistake once with Microsoft and Windows, which was a fairly open system when Valve started. It would be foolish to jump right back into a similar arrangement with Google and Android.
Another crucial point is that Gabe Newell and Valve believe deeply in the importance of open platforms. The people involved with Valve are not interested in simply building an app store or games. They are thinking about much grander problems. For example, they are fascinated by the potential of their customers adding "value" to games, whether by creating new content or being spectators who can watch events and buy or sell virtual fan gear.
They want to develop systems that allow everybody to monetize the value they create, which will in turn encourage creation of even better things. Newell emphasizes that this is not something to dismiss: "Our customers have defeated us, not by a little, but by a lot. So I want to be clear -- it's not like, 'Oh, it's cute. You've put an antler on your dog in a game.' They're building content that is just as good as -- or better than -- what we're building, and they're building it at a spectacular rate." Valve believes this kind of innovation is possible only through open platforms.
Additionally, if you listened to Newell speak about the Linux Steam client a year ago, you might think he was actually talking about SteamOS:
Rather than sitting around and continuing to be a free rider on all the benefits of the PC and the Internet and so on, we're at a point where we should be making more of an investment ourselves. So what does that look like? How do we sort of put our money where our mouth is? I'm personally working on the Linux stuff to try to make sure playing our games on Linux, playing our partners' games on Linux, is a great experience.
So, while a Steam client for Android may still be possible (though rumors suggest that Valve's Android teams were dismissed), it seems unlikely Valve would invest as heavily in Android as in SteamOS. In fact, it would make more sense if Valve developed its own mobile OS, perhaps to leverage their investment in their desktop SteamOS. And in fact, it was just revealed in an exclusive interview with The Verge that the company is doing just that.
According to Newell:
So this [Steam Box] is called 'Bigfoot' internally, and we also have 'Littlefoot.' [Littlefoot] says 'what do we need to do to extend this to the mobile space?' Our approach will be pretty similar. We also think there's a lot that needs to be done in the tablet and mobile space to improve input for games. I understand Apple's [approach]; all the way back in '83 when I met Jobs for the first time, he was so super anti-gaming.
The idea of a new, viable mobile competitor named Valve entering the mobile space is exciting. But it's even more interesting if you consider one more player: Canonical, the makers of Ubuntu, one of the most popular desktop Linux distributions. The rumor on the street is that SteamOS is based on Ubuntu. What's even more interesting is that Canonical has been investing heavily in Ubuntu to develop a user interface called Ubuntu Touch that seamlessly unifies and transforms between desktop, tablet, and phone depending on your current usage.
Canonical is funded by its founder, Mark Shuttleworth. Despite Ubuntu's popularity, it remains not profitable after about a decade -- the company always seems to be in a state of "cup half full/half empty." A recent crowd-funding attempt to build a showcase phone called Ubuntu Edge for early adopters and tech lovers captures this. On one hand, the company missed its target by 60 percent. On the other hand, its target was ridiculously high, at $32 million, and the effort won a record-breaking $12 million -- the most contributions ever pledged in crowd-funding history.
Building a viable Linux distribution requires a lot of work, with lots of mundane details that need to be correct in all different corners of the operating system. Even for Valve's 330 employees, this is a large task because this is not the company's specialty. But if Valve were to partner with Ubuntu, with its 500 employees and dedicated OS expertise, both sides could potentially benefit. Valve could leverage Ubuntu's talents and efforts while Ubuntu could focus on a market segment that pays for its product -- or at least have a new way to generate income. Steam customers would be good for Valve because all the profits in mobile right now are being driven by premium devices, not low-end commodity devices. This might also allow Ubuntu's mobile solutions to gain traction in the marketplace.
For Valve, being able to leverage a general-purpose mobile OS will allow the company to leap beyond dedicated mobile gaming devices to compete with iOS and Android for phones and tablets. And of course, a Steam Store needn't be limited to games – it could also sell general-purpose apps to become a one-stop shop for this platform.
All this may be a long shot, but it shouldn't be entirely dismissed -- not even by current Android manufacturers. It is well-known that Samsung isn't completely happy being tied to Android while still being forced to pay patent royalties to Microsoft for Android patent infringement. According to Nomura, Microsoft earns an estimated $2 billion per year on Android patent royalties. Tizen (the alternative Linux-based OS, developed jointly by Samsung and Intel) looks like it is DOA. SteamOS is open, and it could be something Samsung and other companies might like to fork. While this may not directly boost Valve's profit line, it does open the door to manufacturers creating premium devices carrying operating systems that are better suited to running games. This might provide the edge needed to get more people to switch from Android. And since SteamOS is open, Valve could find a way for users to install Steam on Samsung devices running SteamOS if Samsung decides not to include it.
This would finally bring Valve into the mobile market.
We should all hope that Valve can make SteamOS and Steam Machines live up to their full potential. With so much potential to change the landscape in so many ways, it's hard to predict how things will play out. But at the very least, consumers will benefit from more choices.
There's no single migration path to the next generation of enterprise communications and collaboration systems and services, and Enterprise Connect delivers what you need to evaluate all the options. Register today and learn about the full range of platforms, services and applications that comprise modern communications and collaboration systems. Register with code MPIWK and save $200 on the entire event and Tuesday-Thursday conference passes or for a Free Expo pass. It happens in Orlando, Fla., March 17-19.