Letting off Steam

Valve's Steam distribution platform and Source engine make it absolutely unique among developers. The creators of Half-Life now find themselves encompassing every single step of the game production chain from source to consumer - middleware and software development, marketing and publishing, retail and distribution.

It's a privileged position the company has used to foster independent talent, and make it possible for small teams to think big and make money. Steam plays host to Source-engined games like The Ship, Garry's Mod and Turtle Rock's forthcoming co-op zombie shooter Left 4 Dead, as well as imported indie darlings like Darwinia and Rag Doll Kung Fu, and helps them all make serious money.

We spoke to Valve's marketing manager Doug Lombardi and production manager Eric Johnson about what online distribution means for the future of development and retail, where the PC market is going, and - with Half-Life 2: Episode 2 due towards the end of this year - how the company is adapting to the delivery of episodic content.

The surprising thing is that, despite the fact Valve enjoys a direct link to the consumer and a much bigger cut of revenues through Steam - and despite the failing retail market for PC games - Valve is far from proclaiming retail dead. "There's always going to be the customer that wants to go to the store and find something new," says Lombardi.

And some buyers remain attached to a box copy, even when the data's already on their hard drive. "The interesting thing for us was our free weekend promotions on Steam, how many sales that would drive at retail as a result," explains Johnson. "We had this huge spike of players, and we could see which of them purchased the product on Steam. Looking at it, we sold a bunch more, and it turns out 60 per cent of the sales were at retail as a result of the free weekend. People would play the promotion on Steam and then go to the store to buy it. The channels aren't as segmented, they're not fighting each other as much as people think."

Steam's birth as a developer-owned retail channel was almost accidental. Lombardi reveals that Valve was initially concerned with an efficient auto-update system for patches, "and while we were all doing that we could probably sell copies while we're there, we kind of stumbled into that thing."

But creating it themselves was a decision born of necessity, not strategy. "We went and met with Yahoo and Amazon and everybody else that we thought should have been making this, we even went to Cisco and said do you know of anybody else who's making this because we don't want to do it, it sounds really, really hard. And everyone was like âno, no maybe in the future', and we were like, âwe're going to need this now, the future's too far away.'"

Steam creates a very different environment for small developers to work in, both in the relationship with the âpublisher', Valve, and with customers. "We approach it as developers and creators of content," says Lombardi. "So folks that we work with, we tend to think about the problems of making sure the best product is there, and try to free up the thinking of the conventional templates of must ship for Christmas, must be twenty hours of gameplay, must have this many weapons."

"A lot of developers and game companies don't really have that feeling of empowerment," agrees Johnson. "A lot of developers have to get out of this thinking that we'll make this product for a publisher, send them the gold master and then we're off to the next project.

Steam lets them develop that relationship directly with their customers, hear what their customers want. That's the kind of thing that every developer would have a huge benefit from having, it's incredibly valuable for us."

So with online distribution for smaller, independent games now coming to consoles - in the form of Microsoft's Xbox Live Arcade, and Sony's PSN store - does Valve think developers can find similar opportunities in the living room? Johnson and Lombardi are sceptical. "I think there are some inherent difficulties with shipping products on consoles in that way," says Johnson.

"Yeah, well certainly the constant iterative design..." his colleague agrees. "Having the game constantly evolve the way Counter-Strike did would be harder in the console space, and having the user community contribute to the development would be harder too.

"Right now, all the services that have been created have been for casual game designers," Lombardi continues. "But for people who are making core games, it's still the retail publishing model that you have to go through. I don't think that we've seen something like Counter-Strike come out of nowhere, purely from the amateur community, to sell millions and millions of copies at a real price over one of those. Everything that's happening now on Steam is the grandchild, if you will, of the Counter-Strike model."

Steam isn't the only big shift in Valve's working methods in the last few years: the other was its break into delivering Half-Life games as a series of episodes, rather than discrete sequels. What was behind the decision to experiment with the much-discussed, seldom-tried episodic content? Lombardi sighs. "Five years and over $40 million to make Half-Life 2 just seemed like..."

"...a total pain in the butt," Johnson chips in.

"As we moved forward, if Half-Life was two and a half years and less than $10m, and Half-Life 2 was over five years and $40m, then Half-Life 3 is eight years and $65m? Hell no, it seemed like the spiral was out of control and change was needed." But isn't there a danger that by pursuing episodic gaming, Valve will get left behind in the technology arms race? Johnson emphatically disagrees, arguing that technology development is speedier and more efficient when you're working on more frequent, incremental releases.

"No, we feel like technology-wise we're building it and shipping it way faster than we were when we were building Source during Half-Life 2's development. There's technology that we built along the way while we were making Half-Life 2 that didn't work, it got thrown away. But it was code that since we weren't shipping, the product was pretty early and in flux, kept getting maintained, so there was a lot of loss in the system on that. Or instead of shipping HDR we have to do HDR and physics at the same time, how do those systems interact, well that's really complicated... we had ten systems that we were doing for Half-Life 2, they're causing bugs in each other, it's kind of a nightmare. But if you can do it piecemeal, once you've shipped a piece of code, it has an incredible amount of value, it's real. Before that, it has no value for you."

Valve remains a staunch defender of the PC, and refutes arguments that the decline of PC retail sales means the death of the platform, arguing that if you take alternative revenue streams into account, it's by far the healthiest market out there. "Sony and Microsoft both have armies of PR people whose job it is to cram that information down the throats of press and analysts every day," says Lombardi. "All those people do is say the PC's dying, the console's winning, and nobody on the PC side is championing that platform. And sales data tracks retail, and there's no doubt about it, PC sales at retail are declining.

"But World of Warcraft is making a whole lot of money outside of the retail channel, we're making a decent bit of cash off Steam, all the casual guys are not tracked - the PopCap games, Bejewelled, all that stuff doesn't show up. If you took WOW, Steam, PopCap and added it to the PC pool, all these huge revenues - just WOW by itself, right? If you took WOW's 2006's revenues and the 360's revenues and compared them, even then you would say I don't think the PC's really dead."

In fairness, Microsoft is showing increased faith in the PC platform these fays, with the Games for Windows and Live Anywhere initiatives tied in with the launch of DirectX 10 and Windows Vista seeming to put the PC on an equal footing with 360 in the company's plans. But Lombardi is doubtful of the Redmond giant's long-term commitment to strengthening the PC market.

"Right now it seems like it's part of the marketing push to help Vista. To really back a platform is a sustained effort over years and years, so we'll see if in two years Microsoft is still spending money to put Games for Windows sections in retail, and having PR people preach that message that we were just talking about, which is that the PC isn't dying, in fact it's actually bigger than all the consoles put together. You know, if it were to sign up for that, that's great. If it's going to use it to promote sales of Vista, that's really not good for the industry, it's good for Microsoft in the short term."

Doug Lombardi is marketing manager at Valve and Eric Johnson is production manager. Interview by Oliver Welsh.