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01. Case Study Steam and their Steam Machine


Valve Corporation & Steam

Case Study Steam

Case Study Steam: Steam is very well known for being the go-to platform for PC gaming. Valve Corporation’s (the company who owns Steam) platform is the most used for purchasing and playing games worldwide. It attracts dozens of millions of users who love playing on their platform. In March 2020, 20,3 million people were playing simultaneously on their platform, and Valve claims to have over 94million active users monthly. Quite a huge accomplishment.

They are also very well known for some of their games. Half Life 1 & 2, Portal, Left 4 Dead, Counter Strike and especially DOTA 2, are some of their franchises that attract casual, hardcore and professional (e-sports) users alike.

Even though Steam is the most used platform to purchase games and Valve Corporation single handedly controls it, they are a private company owned (50%) by Gabe Newell (CEO & Co-Founder). They can be and are very secretive about their numbers. Obtaining accurate and up-to date information on their numbers is extremely hard. Nonetheless, we have done a lot of research and found some figures.

Quick glimpse into their financials

In the chart below, we can see the revenues Steam generated selling games. The information shows the years 2014 to 2017. This article in 2018 tells us that Valve adapted their revenue terms and moved to charge 30%, which seems to be the standard for app platforms (i.e. Google & Apple).

The information in the chart shows how revenue Steam generated from the sales of games and their respective DLCs. This information is very interesting, but it needs to be read carefully. This number is not the cut Valve took, but the whole amount. Therefore, we have to take into account that Valve would become 30% (or more, before the change in their terms). This data does also not take into account the sales of Software, also available at Steam (i.e. Video Editor 15 Plus, RPG Maker or Liquid Rhythm).

Revenues based solely on Steam’s game sales.

This following chart shows us the actual revenue Valve generated in 2005, 2010 and 2014. In other words, this number represents the cut Valve got from their 30%, including Software, and also including any other revenues from the sale of Hardware and other revenue streams, such as events, partnerships, grants, etc.

Valve Corporation’s Revenues

The gap between game sales and revenues can be clearly seen in 2014, the only year where I could find both data. It might seem like there is a huge difference, as it goes from 1,5bnUSD from game sales, down to 730mUSD of total revenues. Yet, if we take the 30% cut as the average (even though for some smaller companies, Valve might take less of a cut for the first X-number of games sold) this means that 450mUSD were the commissions from games and 280mUSD from everything else. Or in other words, game sales represented about 61,6% of Valve’s revenues.

The Data for the most recent year, 2017, shows a large increase in the game sales. The biggest jump was from 2014 to 2015, with an increase of 233%. Yet, from 2014 to 2017, Valve has had a CAGR of 42,06% which is very impressive.

To end this financials section, let just let this sink in. In 2017 Valve generated only from the sale of games 4,3bnUSD. Which means that their revenues were approximately 1,29bnUSD (30%). And this does not take into account all other revenues. Even if we take today’s known employees at Valve (360), this represents a revenue/employee of 3.583.333,33 USD.

Case Study Steam: The Steam Machine

Steam Machine by Alienware, their mayor provider.

The year is 2012. Windows released their Windows 8 in August. There were very harsh critics for this version of Microsoft’s OS. Gabe Newell, Valve’s CEO, was one of the most critical ones. Well known are his remarks:

“I think Windows 8 is a catastrophe for everyone in the PC space. I think we’ll lose some of the top-tier PC/OEMs, who will exit the market. I think margins will be destroyed for a bunch of people.” – Gabe Newell

Nobody really knows if that was the trigger or they actually had it planned before that. In 2012 there were already some rumors of Valve considering developing a console (known back then as the Steambox). But the official announcement came at the end of 2012. In Valve formally announce they were working on developing a console.

The years passed and after some delays, the Steam Machine finally came out in November 2015.

What is the Steam Machine?

The title perhaps could be more accurately portrayed as what “was” the Steam Machine, as it was kind of discontinued in 2017. But let’s first focus on the idea of the Steam Machine.

Valve’s console aimed to be a hybrid between a PC and a Console. It would run on Linux’s Debian 8 and offer the player an efficient and open OS on which to play games with. Steam OS was the brains of the Steam Machine. However this brain required a very specific heart to run. The system specifications for the Steam OS to run on were, and still are, very limiting when compared to PCs that run on Microsoft or Linux. However, when compared to consoles, they allowed for quite some possibilities.

The machine came with the Steam Controller and was manufactured by different vendors (Alienware, iBuyPower, Falcon Northwest, CyberPowerPC, OriginPC, etc. ). Since the requisites on where to run the OS allowed for different Hardware to be used, the prices ranged from 499USD up to a staggering 6.000USD.

Valve was looking for a perfectly balance hybrid between Consoles and PC that allowed the user to freely access an open OS without any restrictions.

The idea behind Valve’s console was to find balance between enabling gaming and Media options. Players should be able to enjoy their games, playing with friends and family as well as enjoying the media options a computer had to offer (browsing & other media services, media sharing, family sharing, etc.).

Furthermore, Steam OS was, and still is, available at Steam for free for anyone who want to create their very own Steam Machine.

The theory looked very promising. End of 2015 the console was officially released and could be purchased by anyone who desired to do so.

No one really knows how many machines were sold, however, by mid 2016 it is estimated that less than 500.000 machines were sold. For the expectation created and Valve’s ambitions, this number is extremely low and clearly showed Valve had failed to enter the console marked.

But if the theory and the product looked so promising…

…What went wrong?

Unlike some other failures, where bugs, bad software, underdelivering or overpromising might be at fault, the truth is that Valve delivered exactly what they said they would. So, why did they sell so few units, eventually letting the Steam Machine die in less than a year?

Valve’s Strategy at fault

Simply put, something in their Strategy was or went wrong. Even though they did have a promising initiative, they failed to implement it the right way. Judging now is very easy, so let’s travel in time back to 2012 and analyze what they probably thought was a good idea, and what they did wrong when they moved forward with it.


This lustrum was a good time for the video game industry. In the graph below, we can see that Console (including handheald) gaming was still the biggest segment, however mobile was gaining more and more traction. PC gaming was big, however if we look at the evolution of the previous years, it was still quite smaller than consoles.

Windows 8 came out in 2012, prompting Valve to consider the consequences of relying on Microsoft’s OS as their sole platform (representing today still more than 95% of their users, as shown in the graph below).

Valve feared that if Microsoft decided they cut cut them off, create a monopoly or affect their business model in a way that profitability would be in jeopardy, they would have no way to fight back. If the performed an analysis fo the industry back then, they probably saw a trend for consoles being very much relevant. In fact, looking at the evolution, they could have easily thought that consoles would dominate the market for many years to come.

Entering this market, being a well known player already, looked certainly as a good decision.

Furthermore, their business model looked very enticing. They did not want to compete with the PC market, but rather create their own market in-between PC and consoles. They wanted to create a hybrid, leveraging their platform and library of games and enter this way the living-room space. This was clearly communicated and the discourse maintained by Valve in the years since they announced the Steam Machine until they released it.

After getting into what perhaps were the thoughts of Valve in 2012, we see it actually makes sense to enter the console market. It was a very competitive market, but it lacked certainly certain Media -related services some console gamers were very much looking for. If the idea and motivation behind this plan were so right, how did it turn out so wrong?

The mistakes

The problem was not with the motivation. The problems were with the Strategic details:

  • Customer Segmentation: Either their estimates on how large the customer segment that they were aiming for were too optimistic or they wrongly established their profiles.
    • You had two options to acquire the steam machine. Either purchasing a pre-made and pre-installed console by one of the vendors or doing it yourself. The latter relied on the customer being very capable to navigate around the installation, which required and still requires a certain technical capabilities. This option had no incentive for Valve, as they would not be selling any Steam Machine, but rather transform a user that already was using Steam on their computer, to do so in their living-room.
    • They were aiming at console players who either wanted gaming on a PC as well, or who were looking to use some media within their systems. The switching cost for a console user is and was extremely high. If (in 2015) someone using the Playstation 4 would had wanted to switch to the Steam Machine, they would have had to buy another console (at least 499 USD), and a complete new library of games.This shows that they targeted a very specific segment of gamers, but that required them to spend a lot of money to do the change into the Steam Machine. They better offered these users a lot in return…
  • Value Proposition: The value proposition was very clear for Valve. A hybrid between PC and a console, that “simplifies” gaming and enables the user to use the console however he wants, thanks to the Linux based Steam OS.
    • Issues: This value proposition was unfortunately not very attractive for their target users. If they were already Steam users, it was cheaper to just buy Valve’s switch, or connect their PC to their living room TV, rather than to buy a new computer/console. The OS was neither fully a computer nor a console. In other words, if you wanted to use it solely as a console, you already had very good alternatives that came with a great game catalogue and an established community. If you wanted to use a PC, you were not going to feel very familiar with a Linux-based system. Furthermore, getting a Steam Machine would not guarantee that you could play all games on Steam. Some required a more powerful Hardware than the basic versions would offer, and even worse, some games required specific Hardware to run.
    • Exclusives: Another big problem with the Steam Machine is that it was just a stand-alone device. There were no incentives to buy it. One of the key selling factors of a console are the games that can be played with it it. If you could simply play any game you could already play on a PC, why would you bother buying a special device? Sony, Microsoft and Nintendo had their franchises with their exclusive titles. Steam came with what they already had. The steam library.
    • Price & performance: The Steam OS did actually run very smoothly on the Steam Machine. However, if you wanted to really get all the juice this machine had to offer, you better prepared your wallet. The 499 USD was the most basic version. However, an average Steam Machine would rather run around the 800 up to 1.200 USD. Basically, same as a decent computer. This price was twice or trice the price of their competitors. With no exclusives, why would anyone buy a Steam Machine instead of any of the other consoles or just a computer.So far, we have seen that the customer segmentation was a very niche one and with very high shifting costs. And their value proposition did not really cover these costs. The last resort would had been for Valve to really to something very different to everybody else.
  • Differentiation: The risks when just building a hybrid model is that, unless you do it very well, you’ll just be “neither or”. Valve wanted to bring the computer to the living-room. Their motivation was an open and accessible OS to play games with to take away the risk of monopole from Microsoft. Unfortunately, they did not offer anything to their niche customer segment worth their switching cost. Neither did they really differentiate themselves from the competition, nor from what they were already doing on PC. The Steam Machine was nothing special. It did not differentiate all too much from a regular PC. Neither did it from a regular console. The few extra media capabilities were not enough to move console users from their valued console into a complete new environment. Furthermore, the trends in the console were already showing more and more media capabilities. When the Steam Machine came out it 2015, PS4 was already out for some years and Microsoft had released Windows 10, which did what Valve wanted to do much better, seamless and with Windows, which meant 95% of the users were already familiar with it.

Altogether, Valve had a nice dream for an open-based OS to bring gamers together. Unfortunately, they were not able to correctly address the needs their target customers had nor differentiate themselves enough from the competition. This led to very few consoles being sold and Valve ultimately discontinuing the production, even though this was never officially announced. They just let vendors put them in the background of their stores until with time, they just faded away.


Saying the Steam Machine was an utter failure would not be fair for Valve. There were many things that they did right. And even within the failure, they didn’t lose much, thanks to a very well thought of approach to the manufacturing process.

What Valve did right:

  • They identified a need currently not covered in the market. This would have allowed them to create a blue ocean and potentially acquire a totally uncontested market segment.
  • They minimized risks by not manufacturing themselves the machines. Since the vendors were the ones producing the hardware, mounting it and installing the OS, Valve had no operational costs. Their only losses were in the development of the OS and the marketing campaigns.
    • Furthermore, they were able to link their different hardware devices (Steam Controller and Steam Link), so that even if the Steam Machine, they would still be able to sell those separately, which they are still doing today.
  • They delivered what they promised. The few that actually acquired a Steam Machine, got exactly what they expected.

What Valve did wrong:

  • They did not accurately assess whether the market segment they targeted would be large enough for their console to take off.
  • They did not differentiate themselves from their competitors.
  • They did not take into account the Value Proposition. From Valve’s Point of View, they were offering a great deal. A complete new environment with a free OS for anyone to use, either by themselves or purchasing a finished machine from a Vendor. However, they did not take into account all the points discussed above that made this machine a very poor choice.
  • They were not fast enough. Three full years were needed for the Steam Machine to see the light. During these 3 years, the PS4 and Xbox One came out, offering already partly what made Steam Machine “unique”. In 2015, before the Steam Machine came out, Windows 10 already did what they would do, better. In other words, they were outrun by the competition.

Lessons learned

Just having a great idea or a great product is not enough if you are not able to design a good Strategy, covering all the details. And even if the Strategy is perfect, you need to still take into account what your competition is doing. If what you are doing is not truly something completely unique, it is very likely your competition will do it as well. If all you rely your Strategy on is being “the first” (AKA First Mover Advantage), you are exposing yourself for any delays (like in Valve’s case, the controller that forced the delay of the Steam Machine from 2014 to 2015) to dismantle your whole plan.

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