Bloomberg News

PC Games King Seeks to Dethrone Sony, Microsoft Consoles (1)

September 26, 2013

Valve Corp., operator of the largest online store for downloading video games to PCs, is developing consoles that would use its more than 50 million customers to challenge Sony Corp. (6758) and Microsoft Corp. (MSFT:US)

The closely held company, maker of the “Half-Life” titles, captures 75 percent of the global market for digital PC games through its Steam store, researcher IHS Screen Digest estimates. Valve has developed a prototype console and is working with hardware partners to start selling models in 2014, according to a statement yesterday on its website.

“The specific machine we’re testing is designed for users who want the most control possible over their hardware,” the company said. “Other boxes will optimize for size, price, quietness, or other factors.”

Valve is going on the offensive as its own turf is attacked, banking on a growing base of personal-computer gamers to carve a chunk of the $15 billion market for home consoles. Microsoft and Sony, which are introducing new machines for the holidays, have started their own online portals to duplicate Steam’s success selling games through the Internet -- as have Wii U maker Nintendo Co. and publisher Electronic Arts Inc. (EA:US)

Microsoft rose 1.2 percent, to $32.88 at 1:25 p.m. New York time. Electronic Arts fell 0.5 percent to $26.47, while Sony’s American depositary receipts added 0.7 percent to $21.26.

Harvard Dropout

While Valve doesn’t disclose sales, digital distribution of pc games this year will comprise $5.5 billion of the $21.4 billion computer games market, according to researcher DFC Intelligence. IHS estimates Valve generated $1.1 billion in 2012 from full-game downloads. Steam also offers downloadable game add-ons and multiplayer titles.

“This substantial user base makes Valve and its community of PC gamers a potentially significant threat to other established games platforms,” said Piers Harding-Rolls, an IHS analyst.

Doug Lombardi, a Valve spokesman, declined to comment.

Valve, based in Bellevue, Washington, was co-founded by Gabe Newell, a Harvard dropout who spent 13 years working on the Windows operating system at Microsoft, according to a September 2007 interview with the site ComputerAndVideoGames. He rarely speaks with the press.

The company is a pioneer of downloading games from the Internet and creating communities of players. It started Steam “as a little sleeper project” in 2002, according to its website, to let gamers download updates to its “Counter-Strike” action title.

New Consoles

Steam originally distributed games solely on Windows PCs, taking a cut of each sale, before expanding to Mac titles and Linux-based games. The new SteamOS that will power the consoles will be based on the Linux operating system and require developers to create games using that software.

It allows for media sharing across connected devices, live streaming, family sharing of content and parental controls, Valve said.

Like Ouya Inc., another challenger to incumbent console makers, Valve may struggle to get developers to make games for its operating system, said Michael Pachter, a Wedbush Securities analyst in Los Angeles.

“They only way they sell it is to give us a reason why we need it,” Pachter said. “If they make every game work better with this OS, that’s great, but I don’t see how it becomes a big threat to the console guys.”

PC Drop

While digital downloads of PC games have more than doubled since 2007, fewer people are buying personal computers. That’s forcing Steam to look elsewhere for future growth. PC sales peaked in 2011, according to research firm IDC, and are expected to decline 9.7 percent this year as more users migrate to tablets and other mobile devices.

Steam also faces pressure from Sony’s coming PlayStation 4 and Microsoft’s Xbox One, both reaching U.S. stores in November. They use a PC-like architecture, making it easier for smaller developers that now flock to Steam.

Last year, the number of consoles in consumers’ homes, including the Xbox 360, PlayStation 3 and Wii U, stood at 238 million, according to IHS Screen Digest. Spending on console software was $12.1 billion.

Sony Chief Executive Officer Kazuo Hirai, former head of the Japanese company’s PlayStation business, said in January any new competitors will have a tough time against incumbents.

“It’s really difficult to try and build a platform business,” Hirai said in an interview. “I’ve managed it personally, so I know it’s a gradual process, not an overnight thing.”

To contact the reporter on this story: Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net


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