LEDZone, Pt. 2: Namco woos Valve

[Yesterday's Part 1 of this special report from Japan can be read here.]

TOKYO--Tetsuo Tsuchiya had prepared for his successful presentation to Namco management by taking a trip to Valve Software’s headquarters, where he secured the Japanese license for Counter-Strike. When asked how Valve responded to his initial proposal, he said the developer was quite positive. “Let me explain,” Tsuchiya began. “You see, Counter-Strike has been a huge success, but due to piracy, it hasn’t produced as much revenue as it should have.”

This introduces the larger issue of piracy to the LEDZone story and helps explain how piracy helped Namco obtain the license to one of the most popular multiplayer titles of all time.

According to Tsuchiya, Valve has sold 8 million units of the various versions of Half-Life and Counter-Strike in Asia and Russia, but he estimates that there are 30 million people playing the game in those regions. [If anything, Tsuchiya’s analysis errs on the conservative side, as the rate of piracy is likely much higher. One analysis of Blizzard’s game Warcraft estimates that there are 5 million illegal copies in China, even though packaged software sales amounted to only 100,000 copies.]

The high popularity of the game in Asia, combined with the high rate of piracy, was one reason Valve developed Steam, the company’s online software distribution infrastructure. Valve hopes that this system will cut down on piracy. Moreover, because Steam also bypasses a few layers in Valve’s distribution network, software sold and delivered through Steam results in much more per-unit revenue for Valve than packaged software sold by a retailer. For subsequent software releases, if Valve is able reduce piracy in Asia and Russia by even 25 percent--while receiving several times more revenue for each copy sold--the payoff could be tremendous. That’s the brass ring that Valve is chasing.

The Japanese Counter-Strike market, by contrast, hardly merits a second thought. Tsuchiya estimates that only 3,000 to 5,000 copies of the various versions of Half-Life and Counter-Strike have been sold there, and he puts the active Counter-Strike population for the whole country at around 2,000 gamers. Valve has bigger fish to fry.

As a result, Valve was happy to turn over the Japanese Counter-Strike market to Namco. The developers, Tsuchiya said, are more interested in figuring out how to maximize revenue in markets where the game’s already popular rather than trying to build a new market in Japan. And, of course, it didn’t hurt that the request came from Namco. “Scott Lynch [Valve’s CEO] is a Soul Calibur fan,” Tsuchiya confided. “That definitely helped.”

Tomorrow's Part 3: How Namco pitched console-centric gamers in Japan to give networked PCs a try.