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Speculate Iterate: Valve Exploring Hardware Options

by on September 14, 2012 at 4:45pm

If you pay any attention to the gaming industry whatsoever (which we can assume that you do, you’re here, aren’t you?) you know that there’s a respectably restrained buzz about Valve Corporation’s RFQ for an industrial designer. Coupled with Valve CEO Gabe Newell’s known…disdain may be too strong of a word for it, so let’s stick with “cordial disappointment in” unchanging User Interface and Operating Systems and you’ve got perfect fodder for me to overanalyze this little tidbit of news and do crazy things our esteemed editor-in-chief normally tells me not to do (like economic research, which apparently isn’t a “search term driver.” Whatever.)

not an actual steam box or valve box or source console

We imagine that the industrial designer’s resume had this as an attachment demonstrating his skills.

At any rate, because I’m the way I am, I started thinking about it in more detail. What if Valve decided to build a console? OnLive is going tits up, Steam is everyone’s favorite place to buy games (and with the BigPicture Mode just out) you have to wonder about other media. So: if Valve does build a console, how would they go about it? How much cash is it sitting on? What kind of human capital does it have? How would it deal with EA’s Origin service and Ubisoft’s new Uplay store in light of their competition with Steam?

Let’s Talk About Funding

Unlike Apple, Microsoft, Sony, Nintendo and…well, pretty much all of the large game-and-hardware makers, Valve is a privately held company. That means that, while it may be responsible to its shareholders, it’s not governed by the same kind of rules or behaviors that you find in publicly held companies. Unfortunately, that also makes it a little bit harder to research. However, there have been a variety of articles on the company including a couple of numbers that jump right out at you.

  1. Valve is more profitable, per employee, than Google or Apple. Google averaged approximately $350,000 in profit per-employee in 2010, according to Forbes, which means that if Gabe’s being truthful, Valve’s  minimum profit is something like $85 million.
  2. As of 2011, Steam controlled about 70% of the online download gaming market. Keep in mind that that market is estimated to have a value of approximately $4 billion/year. Steam’s take of those sales numbers is estimated to be about 30-40%, adding up to a cool $600-$800 million in revenue.
  3. In 2010, Valve estimated it’s year-over-year growth to be in excess of 200%; its conservative worth is appraised at about $1.5 billion.
  4. Valve has, at last count, approximately 30 million members. That’s a figure of questionable worth since some members may have downloaded The Sims 3 and stopped at that*, meaning they’re not return buyers, but it’s worth repeating because the only other direct-gaming-software companies with bigger footprints are Microsoft, Sony and Nintendo.

Unfortunately, we don’t have a 10K that we can reference to find out Valve’s market capitalization, we can safely assume that Valve has a decent reserve of cash and, if it wanted to, it could probably gain access to a goodly-sized chunk of venture capital and/or partnership opportunity.

Personnel Are Key

Until we hit the singularity, even companies like Valve are stuck with relying on actual, fragile human beings to create their products and services. Unlike most other companies, though, the scuttlebutt on Valve is that it may be the greatest place in the entire world to work. I can’t guarantee that Valve’s flat structure would work at, say, General Dynamics, but if you reference the per-employee profit numbers above, something’s gotta’ be going right. My completely uneducated guess is that, for some reason, the anarchic-on-the-surface structure lends itself well to making games and being a digital retailer. To carry it out a little further, I’d surmise that the kind of people who get hired at Valve are naturally internally motivated, like being left alone to get their work done and are most productive when they don’t have barriers in their way, like office politics and updating your superior’s superior for the third time that week.

This is Gabe Newell and he's a billionaire

If I had to guess, this was Gabe’s reaction when he first used Windows 8.

So if you have a company of self-motivated nerds happily hacking away**, you may have the right personnel for coming up with new UI because, hey, have you seen what some of the students at MIT come up with on their own? I have no idea what would happen if Valve decided to come up with new ways to control games or make a better mouse, but it would probably be something bordering on the awesomeness of the first time you built a potato cannon.

That said, I would have some concerns as to how well Valve would adapt itself to making an acutal console if it did it in house. This may just be an example of my regressive, conservative thinking, but part of me is saying that there’s a big difference between software and online retailing and actually making a physical “thing” that goes out into the world and might get dropped and needs to have smooth edges and its buttons need to work for a million presses, each. On the other hand: Portal. So, I could totally be wrong.

Building a better box

Instead of going into debates about the actual guts of the console (which I wouldn’t be terribly well qualified to discuss, anyway) let’s focus on what would need to happen if Valve actually decided to make a “box” of some kind, whether it was more akin to OnLive or closer to a true “console” like the Xbox or PlayStation. Although Valve makes products, it doesn’t actually make “things;” it doesn’t have a massive supply chain setup and it doesn’t have volume-discounts with component makers. This isn’t to say that Valve would be incapable of generating those kinds of contacts, but if  it decided to make some sort of hardware, it seems most likely that it would need to find a hardware-manufacturing partner. That’s not terribly difficult, but there are likely to be some trials and tribulations revolving around the actual design of the thing – we all remember the “Duke” controllers from the original Xbox, Red Rings of Death, and the first-gen PS3′s heat issues. That said, if Valve were to make a box, I would tend to think that they would shy away from physical storage media – they’ve already got Steam up and running, Gabe Newell’s a fan of Linux and there’s no particularly good reason to rely upon disks or cartridges*** when your entire market base on Steam is already connected. Further, many of the indie games that Steam vends come from developers that would have a hard time shouldering the cost of box art, design and burning all of those CDs or DVDs. But would this hypothetical box have onboard storage? I’d think it would have to – streaming Civilization V just doesn’t seem all that practical.

Beyond those slightly more mundane concerns is the fact that Valve (and Steam) are digital retailers. Not only have they never had a brick-and-mortar presence, they don’t make physical “things.” You can certainly argue that that was Microsoft’s position prior to the first Xbox (excepting some computer peripherals), but I’d hazard a guess that the transition to actually retailing would be a little more difficult. That said, attempting to make the box an online-only purchase could be fraught with problems, too. While Amazon had no problem selling its Kindle Fires, Google’s Nexus launch (where you could only buy the phone online, from Google) was, at best, troubled.

Competition’s Rough

Valve decided to skip the whole “console” thing and go straight for neural implants.

Finally, we have the matter of two of the largest game developers out there – Electronic Arts and Ubisoft. Both companies have recently started their own online stores hawking their products: Origin and Uplay, respectively. To this point, Activision|Blizzard hasn’t set up its own closed-ecosystem store, but it’s certainly a possibility, particularly if the predictions are right that other big guns like Microsoft are looking at that model with desire (see Mr. Newell’s comments in Ars Technica, above). This is a potential bottleneck for a model where Steam is an open retailer, selling not just Valve products, but thousands of other games made by diverse developers. If it were to start making a box, as well, would it be hindered by the fact that it wouldn’t play some of EA’s smash hits? Or would these larger houses change their tune in exchange for a more profitable model than their current revenue sharing relationships with Nintendo, Sony and Microsoft?

Speculation: Busted

To conclude: Could Valve make a “console” of some sort or another that integrates Steam and takes on Sony, Microsoft and Nintendo? Sure. No doubt about it. They’ve got the cash, they’ve got the reputation to attract talent and they’ve already got the architecture set up to distribute games even if they don’t have any experience in manufacturing physical products. Will it? No, not exactly. See, I think that they already have. That’s what Big Picture is for.

It’s already fairly common to stream content from your PC to your television, whether it’s a smart TV or using Windows Media Center. The disparity between computer displays and televisions is narrowing and often times, it’s difficult to tell the difference. When you think about it, Mr. Newell’s gripes about UI and OS seem to dovetail with the speculation that Valve might try and enter the living room. In a sense, with Big Picture, it already has…but there’s no great way to use your mouse and keyboard on your coffee table. Operating system user interfaces aren’t designed for relaxing on your couch, they’re set up for sitting 2 feet away from a monitor at a desk. If I were in charge of Valve and I realized that there was no reason to re-invent the wheel to get Steam in the living room, I’d be busy hiring an industrial designer or two to figure out a better way to interact with my digital store and the games it sold, too.

*EA now retails its own games on Origin, but it wasn’t always that way and it’s a convenient example.

**That was an envious compliment, not  a derogatory meathead statement.

***Yep, I just dated myself.

Speculate Iterate – Speculation on rumors in the gaming industry is well and good when you call it what it is. Take our ideas for what they are and feel free to add your own.

Sources

Forbes (articles)
1up (link)
GiantBomb (link)
Examiner (link)
Bloomberg Businessweek
ArsTechnica (link)
New Statesman (link, image)

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