There’s a war brewing in the video game industry, and it’s getting uglier by the day. Steam, the longtime leading digital distributor for the PC platform, is facing a significant challenge from an equally large and powerful player: Fortnite creator Epic Games, which launched its own PC games store last year. The ensuing competition has morphed into a console war-like debate for a modern generation of players who grew up under the unhindered dominance of Steam, a platform now facing its first real form of competition since it arrived on the scene nearly 15 years ago.
Steam parent company Valve has enjoyed enormous success as a game developer, thanks to titles like Half-Life, Counter-Strike: Global Offensive, and Dota 2. But the company’s main moneymaker has been Steam, an iOS App Store-like marketplace for PC games. Without its own Android to challenge it, the store has for years been a de facto monopoly, earning Valve a 30 percent cut of all sales. PC gaming, while not as large as the mobile marketplace that now dominates the $137 billion game industry, has grown immensely in the past decade and now approaches the size of the home console segment at nearly $33 billion in annual revenue, according to market intelligence company NewZoo. And a lion’s share of all digital sales goes through Valve.
The only companies that have historically dared to defy Steam’s arrangement are the largest publishers in the industry, companies like Activision Blizzard and Electronic Arts that largely distribute only their own studios’ games outside Valve’s store. Smaller marketplaces like Itch.io and the Humble Store have managed to gain ardent followings among indie game fans, while chat app Discord has leveraged its social infrastructure to open a competing game store of its own.
“Valve has had the kingdom to itself for well over a decade.”
Yet none have made a visible dent in Valve’s store. In 2017, Steam is estimated to have made more than $4 billion for Valve through game sales alone, not counting any downloadable add-ons or in-game transactions, which are both significant sources of revenue. Software engineer Richard Geldreich, who worked at Valve for more than five years starting in 2009, has publicly referred to Steam as a “virtual printing press” exacting a “30 percent tax on the rest of the industry.”
“In many ways, Valve has had the kingdom to itself for well over a decade,” says Joost van Dreunen, a game industry analyst specializing in digital distribution and co-founder of Nielsen-owned analytics firm SuperData Research. “For a long time, as a PC game developer, Steam was the only place to go. You couldn’t go against them and it was in [Valve’s] benefit to hardline that conversation because Valve has so many players on Steam.” In January of this year, Valve said Steam had 90 million monthly active users.
Yet now, thanks to the meteoric rise of Fortnite as one of the most popular games on the planet, Epic has quickly earned the financial and industrial clout it took Valve more than a decade to build. Epic CEO Tim Sweeney has decided that he’d like everything to change, most importantly the size of the revenue cut platform owners like Valve have imposed on game developers.
“Valve had 15 years to develop and build Steam. The newcomers have a lot less time. In order to send your rocket into space, you need to overcome gravity. It costs a fortune,” van Dreunen says. “Epic now, with its success from Fortnite, suddenly comes into all this money. Suddenly, you have a player in the market sitting on a pile of money who says, ‘Let’s go after that.’”
Epic’s opening shot was shifting the once-standard revenue split for games, taking a 12 percent cut instead of 30, with an even more generous offer to waive the Unreal Engine’s 5 percent royalty fee if your game is built using the software and also distributed through Epic’s store. The showdown could reshape how one of the fastest-growing and most lucrative sectors of gaming sells its software. That, in turn, could affect how games are financed, built, and sold in a future where titles are increasingly developed for multiple platforms simultaneously.
“The truth is that most developers make a lot less than a 30 percent profit margin on a game. So the difference between 12 and 30 is not just a little bit of money. In many cases, it’s more than a majority of the profit already,” Sweeney told The Verge during an interview at the Game Developers Conference in San Francisco last month. “It’s about economic efficiency when you have these stores sucking out a huge fraction of the profits from games. Valve, Apple, and Google make more profit through there storefront fees than the devs make off their own games.” Sweeney has also expressed distaste for how Apple and Google operate their mobile app stores. And in the case of Fortnite for Android, Epic bypassed the Play Store and its revenue cut altogether.
Epic realized it could go after Valve’s margin by offering developers better terms
Valve did not respond to a request for comment for this story. The company has also stayed mostly quiet over the past few months, choosing to speak up only when Epic secured exclusivity on Deep Silver and 4A Games’ Metro Exodus, which had, prior to the announcement, offered preorders on Steam. Deep Silver agreed to honor the Steam preorders, but it pulled the game from Valve’s storefront, resulting in Valve issuing a rare public statement calling the decision “unfair” to players.
“Epic is doing is the Amazon thing. [Amazon CEO] Jeff Bezos is always fond of saying things like ‘your margin is my opportunity,’” van Dreunen says. “Well, Epic realized the situation – the one thing it could go after is Valve’s margin.”
The Metro Exodus episode represents just a fraction of the overall controversy surrounding Epic and Valve’s ongoing competition. Just as the cyclical console war culture has and continues to pit Sony and Microsoft fans against one another, and Nintendo and Sega before that, the PC gaming community has drawn lines in the sand around Epic and Valve.
Particularly polarizing is Epic’s approach to securing exclusive titles for its store, including not just Metro Exodus, but also more recently the much-anticipated Borderlands 3. Publisher 2K announced that the Gearbox Games title would be an Epic exclusive for the PC platform earlier this month, generating boycott campaigns and intense furor from PC fans who are already convinced that Epic is poisoning the platform. These players have taken issue with tactics typically reserved for the home console market where exclusives are designed to convince people to buy and play on nearly identical pieces of hardware.
Epic will keep securing exclusives as a way to apply pressure to Steam
Despite the pushback, Sweeney says the company will continue this strategy, either until Epic’s store becomes popular enough to stand on its own or Valve acquiesces to more developer-friendly terms. “Epic is open to continuing to sign funding / exclusivity deals with willing developers and publishers regardless of their previous plans or announcements around Steam,” Sweeney said on Twitter at the beginning of the month.
Beyond the cultural battle over whether this is how companies should do business is an undeniable truth: Epic’s battle for the PC marketplace will inevitably impact the game industry, particularly the distribution and funding models of game studios both big and small. The real question is how much.
“As a developer, it’s scary to have one entrenched company dominating all of PC games since we are completely at Valve’s mercy. Fortunately, Valve has been careful not to abuse its position,” explains Dan Adelman, the producer of developer Thomas Happ’s hit indie game Axiom Verge, one of the few games distributed through both Steam and the Epic Game Store at the moment. “They’ve been good partners to developers over the years, but make no mistake, indie developers are relying on Valve’s goodwill and powerless if that goes away. If Epic can establish itself on a relatively equal footing with Steam, that could make a lot of developers rest a bit easier.”
For game developers, Steam has gone through a number of transformations that have earned it a polarizing reputation, namely around the ability to self-publish on the platform. In 2012, Steam’s Greenlight program started as a liberating paradigm shift in how PC games were sold and distributed. But over the years, it has steadily turned into a more ruthless data-driven marketplace. That’s made getting your game discovered as a developer more difficult due to the excessive number of titles sold on the platform.
“From an indie developer perspective, Steam’s impact really changed in a significant way when they decided to get rid of Greenlight and just open the floodgates,” Adelman says. “On the one hand, I get why they did that. A lot of the benefits of being on Steam were accruing to developers who had an in at Valve, while other talented developers couldn’t get onto the platform. On the other hand, discoverability took a big hit, though Valve has tried to improve in this area.”
Steam has been overrun by low-quality games and plagued by discoverability issues
Adelman says that in the last few years, Steam has transitioned away from being the biggest source of revenue for game developers. Traditionally, Valve’s cut was far less taxing than the one imposed by both console makers and physical retail chains. Now, Adelman says Steam revenue is largely on par with “most other consoles, though this varies a lot from game to game.”
The average quality of games on Steam has also taken a hit as a result. In 2017, Valve rebooted the Greenlight program as Steam Direct, streamlining the publishing process and removing nearly all barriers to submitting software to the store. A year later, Valve went even further by saying it would publish literally any game so long as it wasn’t illegal or “straight up trolling.” That’s led to an influx of games featuring graphic sexual content, although Valve has made an effort to curb the flood of so-called “visual novels,” lightly interactive text-based stories usually set to anime illustrations, that tread into outright pornography.
“Epic has two different philosophies,” Sweeney told The Verge with regards to moderating the Epic Store. “When we’re building tools, we respect developers’ complete creative freedom. It can be used for the development of anything that’s legal. You can make a game we disagree with.” But when it comes to the store, Epic’s marketing, and Fortnite, Sweeney says the company prioritizes “high-quality experiences.”
“We’ll turn down crappy games that are submitted to the Epic Store,” he added. “We’re not going to accept pornographic or shock content of any kind. We’re not in the porn business here. PC is an open platform, and those devs can reach gamers in any other way they want.”
It was Valve’s inaction on discovery and moderation, as well as its 30 percent cut, that gave Epic an easy opening. Just days before Epic announced its game store last December, Valve altered its revenue share agreement to allow for more generous terms once a piece of software sold a certain dollar amount in licenses, relinquishing to developers 5 percent more of the sales at the $10 million mark and then an additional 10 percent at the $50 million mark.
“We’ll turn down crappy games that are submitted to the Epic Store.”
But the changes were too little too late and disproportionately aided large publishers with hit games while leaving out small indie shops, which suffer the most from the current revenue share agreement. By then, Valve had also tarnished its reputation in some gaming circles not just for how much money it demands, but also for letting its store overflow with cheap knock-offs and titles designed only to shock or offend.
A recent and telling example was the visual novel Rape Day that Valve ultimately decided to remove from its platform before it went on sale, citing not the glorification of sexual violence against women, but the “unknown costs and risks” the game posed for the company. Numerous other examples, including a mass murder game called Hatred and a school shooting simulator, have prompted similar outcries around Valve’s philosophy on moderation and its hands-off approach to storefront curation.
“This opened an opportunity to re-create what Steam had been for developers: a curated marketplace with only the best games. This is where Epic is hoping to position itself. The consumers will vote with their wallets whether this is something they really want,” Adelman says. But there is a risk that, without Epic cutting an exclusivity check, most games will be available on both platforms, and consumers seem more willing to buy on Steam than Epic. “Over time, if there are enough [exclusive] titles, then that inertia of just building your entire PC gaming library on Steam will start to erode. At least, that seems to be Epic’s plan.”
Another serious hurdle for Epic’s store is that it launched with a tiny fraction of the feature set offered by Steam, adding credence to the arguments that Epic is unfairly trying to strong-arm its way into a position of power using an inferior platform. The Epic store launched without key features, including even a simple shopping cart option for buying multiple titles. According to a public Trello road map, that feature could take as long as six months to implement.
Additionally, Epic hasn’t truly staked out a position for why consumers should be welcoming a Steam competitor when the benefits seem to mostly be centered on developers, while consumers are forced to fragment their libraries even further just to play a game Epic paid to keep off Steam. “The idea of a fragmented library on PC has been around for a decade. You could have a dozen of these shortcuts on your desktop, and every time you want to play a game you have to remember which of these buckets did I leave it, where does it live,” van Dreunen says. He’s unconvinced that Epic has all of the ingredients to fix this issue, instead of just making it worse.
Epic may only make fragmentation on the PC platform worse
Regardless of the eventual outcome, Adelman says it’s an exciting time to be making games, especially if you’re an indie developer, because there are companies lining up to pay large sums of money for exclusivity. Just this past weekend, the Financial Times reported that Apple may be spending north of $500 million on game development for exclusive titles to go into its upcoming Apple Arcade subscription.
“In the short run, the biggest beneficiaries are the developers who are being paid for exclusivity. Game development is an incredibly risky business. By paying for exclusivity, Epic has removed a lot of the risk of potential failure,” he says. “Just as with Netflix and Amazon, the more platforms are willing to underwrite game development, the better that will be for the owners of the studios who get those deals — assuming they do a reasonably good job in negotiating them.”
Farther out, it’s likely Epic and Steam will approach parity in both content and features, so long as the Epic’s store can weather the controversies. “I imagine that, over time, Epic’s store will start to look like Steam with a lot of the excess fat trimmed off,” Adelman adds. “I’m not particularly worried that this will end badly for consumers or developers. Aside from the inconvenience of having to buy some games on one platform or the other and having to re-create your friends list, the addition of a viable Epic Games Store shouldn’t be a negative to anyone. It only adds.”
“Two years from now, are you just going to have two Steams?”
One thing is clear: developers are eager for change, even if consumers are not. Almost every company in the game and tech industries, from Apple and Google to Microsoft and Sony, are spending fortunes to figure out the future — be it with cloud gaming, game subscription services, or the kind of exclusivity deals that have shaped the modern TV streaming market. The status quo, in which Valve gets to take its 30 percent cut forever and never feels the need to develop another hit game ever again, is being challenged by an industry on the precipice of tremendous change.
“You can talk about the match that started the forest fire, but it’s really about the drought that occurred for three months that led to that forest fire,” van Dreunen says. Fortnite was very clearly the match, sparking a huge transformation at Epic and earning it enough money to transform its run-of-the-mill game launcher into a genuine Steam competitor.
But it’s not clear how long that game’s success will last or how much of a threat Epic will pose to Steam in the long run if it doesn’t set out a clear vision of what it wants its store to become and to what end Valve fits into that vision. “Two years from now, are you just going to have two Steams?” van Dreunen adds. “Or do we have a group of people who outsmarted one of the smartest monopolies in the industry?”