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Gathering Steam: Valve's service doubles every three years
by Matt Matthews on 12/31/13 09:33:00 am   Expert Blogs   Featured Blogs

The following blog post, unless otherwise noted, was written by a member of Gamasutraís community.
The thoughts and opinions expressed are those of the writer and not Gamasutra or its parent company.

 

Ten months after the launch of Microsoft's Xbox Live, Valve Software launched its unified online service, Steam. Over a decade later, Microsoft's service has over 48 million accounts while Steam surpassed 65 million a few months ago. Sony's network -- under the name PlayStation Network (PSN) or Sony Entertainment Network (SEN) -- now has 110 million accounts, far more than Steam. However, that figure includes web-only accounts and accounts for services like Music Unlimited which need not be related to video games at all.

So while Valve's customer base would seem to sit between Microsoft and Sony in size, it is far more likely that Steam is actually closer to the leader.

However, the growth of Valve's network over the past seven years suggests that it will exceed the size of Sony's service within the next three years. To get an idea of just how quickly Steam has been accumulating new accounts, I've put together the following diagram showing the total number of active accounts (in blue) and the peak concurrent connected accounts (in red).

From the data that Valve has reported about its business, the peak concurrently connected account figure is usually 10-15 percent of the total number of active accounts.

What is particularly interesting to me, from a mathematical point of view, is that the data from 2007 through today, is almost exactly exponential, with a continuous annual growth rate of 25 percent. That works out to doubling in size every 36 months.

To see what I'm talking about, just look at this exponential curve fit to the data above, with the pre-2007 data point excluded.

If that rate of growth continues, Steam will have exceeded 130 million accounts on its system by the end of 2016, putting it ahead of Sony's consolidated service population, in my estimation.

What's particularly interesting is what will happen once the Steam Machines begin shipping in 2014. If these systems see strong uptake, then Valve could see the growth curve bend up even further, but that will take time. Given the number of accounts already installed on personal computers, the number of Steam Machines sold to new consumers would have to be several millions per year.

Let's Talk Money

Of course, Valve's interest is surely in making money but has historically held revenue and profit data secret. As a bare minimum, if we imagine that each active account spends a single dollar per year, then the company would have earned over $200 million in the past seven years. Again, that's just a bare minimum.

But we can easily see that the revenues are well beyond that meager figure. The company has declined to report revenue, but it has reported annual software unit sales growth rates for several years. For example, it showed over 100 percent growth in unit sales for each year from 2005 to 2011, with over 200 percent reported for 2009 and 2010.

Let's assume that the six million Steam accounts in 2006 averaged sales of 2 software units each. Then using the sales rates reported by Valve, Steam software sales would have reached over 800 million units per year by the end of 2011. That's an annual rate, not a cumulative number.

How big is 800 million units of software in 2011? Well, for a sense of scale, all the software sold at retail in the U.S. for consoles and handhelds in 2011 was around 230 million units.

That 800 million figure is so big that it makes me a bit uncomfortable, since it works out to 16 units of software per active account. However, my assumption of two units per account in 2006 seems perfectly reasonable to me, and the growth rates are directly from Valve's own press releases and comments to the press.

I asked Joost van Dreunen, CEO and co-founder of SuperData Research, how to make sense of these huge figures, and he suggested that "there's likely a definitional discrepancy" between what Valve counts as a unit and what I think of as a software unit. Rather than a full game, "a single, virtual item (e.g. a hat in Team Fortress 2) might also be considered a software unit".

That explanation makes sense to me, and it highlights one of the key differences between traditional retail tracking and modern hybrid markets that straddle the boundary between physical and virtual goods. A unit of software twenty years ago was a physical thing -- today it can be the same kind of data that was stored on a physical medium, but also smaller pieces that can modify the experience like hats or levels or entire episodes.

And that means that the revenue per unit is probably lower than the cost of an actual game, even on discount on Steam. Rather, the unit average will be brought lower by the cost of smaller virtual items. If we assume a rather modest $1 per item in 2011, then the service made close to $1 billion that year.

And if it continued to grow at 50 percent per year in 2012 and 2013, then it is likely making well over $2 billion per year at this point, again with that very modest $1 per unit assumption. If 2012 and 2013 saw even greater sales rates, or if the average per item is higher than $1, then we're talking about significantly more than $2 billion per year in revenue.

Remember, those are just estimates, back-of-the-envelope guesses to get a sense of the scale behind Steam. Until Valve actually reports something more precise, it's probably all we're going to have.

(There are companies, like SuperData Research, which do the really hard work behind making solid estimates of these kinds of things. But as far as I can tell, everyone is estimating -- there are no third-party trackers who can do for digital what groups like GfK and the NPD Group have done for traditional retail.)

Which brings me back to one of my persistent refrains: we need far more transparency when it comes to digital sales figures.

At least Valve has the excuse that it's a private company. Nintendo, at the very least, is reporting digital revenue every quarter -- something that Microsoft and Sony have yet to do for their services.


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Comments


Greg Pryjmachuk
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Iíd take the value of the account numbers with a pinch of salt. Itís an ever increasing popularity to create numerous accounts on Steam. Be they Smurf accounts for getting easier matchmaking on the F2P DOTA 2, voting on the Christmas sales to receive a free collectable card (worth ~16p on the market at last check), hat farming on TF2, or the infamous coal rush of 2011.

This is probably why valve choose to champion the concurrent users and currently playing numbers rather than account creations.

Kyle Redd
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Yes. And also, though the exponential model fits the previous 7 years of membership growth, there is zero chance it will come close to matching the next seven years. Even if you think there is a chance that Steam machines will become wildly popular and Valve will hit the 130 million account marker in 2016 (very doubtful), what are the odds that they will then hit 260 million in 2019?

Kenneth Blaney
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"is almost exactly exponential"

This actually makes a certain amount of sense. That is, since advertising for Steam is almost exclusively word of mouth with no barrier to entry and no "killer app" that anyone is waiting for. More people on Steam means more people will hear about Steam (it appears in this case that one of every four Steam users recruits a new Steam user or makes a second account each year). Eventually, you will see Steam accounts fall away from this exponential as the number of people who haven't heard about Steam but might be interested in a Steam account reaches zero. At that point it will be modeled by a logistic curve.

Mathematically, this is comparable to a species of animal in the wild. With few members of the species (but enough to have a sufficiently large gene pool), the major limit to the birth rate of the species is the number of fertile members of the species. However, as the population gets larger, competition for resources starts to play a larger and larger role until the birth rate levels off to mere replacement.

Matt Ployhar
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Great article Matt - thank you!

I think the amazing thing here is that this is *just* for Valve's Steam Service. When you look at all the other services portals both domestically and abroad; then subtract for all the double, triple, users, etc; you still end up with an incredible figure of gamers that have migrated to digital services. Consider also services such as: BattleNet, EA's Origin, GoG, etc.

I also like to say that that it's not so much about the individual units anymore, but rather the individual users. For example; free to play games such as Legue of Legends or World of Tanks have technically sold -0- units. Yet who can argue with the 10's of millions of players on those games.

Couple Digital Services with Free to Play - and you'll see why I say that Retail has become a rounding error in the grand scheme of things.

Lastly; I agree, I'd LOVE to see the publicly held companies be more forthcoming in their *real* #'s. (Anyone remember Msft getting busted for pumping up their Xbox Live #'s a few years back?). The fact that these companies don't seems to indicate that they may not be performing as well as they'd like to have everyone believe.

Kenneth Blaney
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Valve has less incentive to pump numbers than Microsoft does because Microsoft is a publicly traded company and Valve is not.

John Gordon
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Valve has no need to pump numbers, because they simply do not report them.

Interesting numbers would be things like profit, revenue, or number or software units sold. Since we have none of those, we are instead looking at a totally meaningless statistic like number of accounts. I can tell you personally that I've created a Steam account and given them exactly $0.00 of my money. Accounts don't mean a thing.

Nejc Eber
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Yeah but that is you. I have 73 friends on Steam and they own 50 games on average. I am even friends with people who own 685 games. Steam developer Taylor Sherman revealed that most steam users spend more time buying games then playing them. I do think that Valve are really good at selling games so accounts do count for something.

fred tam
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Still, growth rate is questionable, look at how static steam stats top 10 games are, its dota 2 and team fortress 2...a game from 2007. Steams clearly got a different demographic than the consoles, and yes, the number of "idle" accounts from team fortress or whatever is rather significant.


Simple truth of the matter is that there is no real cost for installing a steam account, its required for online delivery of even one game, so it means a lot less than someone plunking down 400+ dollars on a console.

fred tam
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Well its kind of self selecting there, after all people who don't spend a lot of time on steam aren't going to end up on your friends list.

But yes lots of games on accounts are just decorative at this point, valves managed to gamify the steam account itself, so people just buy humble bundles and things on sales and never play them, I'm guilty of this myself. Its just that its not a particularly good indicator of anything outside that

David Lindsay
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Looking at the figures, Steam seems ready to be the next giant in the gaming industry, dwarfing EA and other developer/publishers. Will it change who/what Steam is? They will change, but I think they will preserve much of what is good about Steam. If anyone has seen their training manual and internal company PR, they should be able to retain their branded image without negativity like EA.


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