Game industry's Steam-powered war
By selling games directly over the Web, Valve is experimenting with a model that could substantially transform the video game industry--for gamers, as well as retailers and publishers.
For weeks now, bits and pieces of Valve Software's Half-Life 2, one of the year's most hotly anticipated computer games, have been trickling onto nearly two million computers around the world.
Along with Tuesday's release of Halo 2 for Microsoft's Xbox, the game is one of a series of sequels that the game industry is betting on for a record sales season. Half-Life 2 won't be out until next week, but Valve's new broadband content distribution network, Steam, has been slowly loading players' computers with the game so they'll have it at their fingertips the moment it's released.
The network, which has been used to a lesser extent over the past few years to distribute updates and less-anticipated games, is getting its toughest market test with Half-Life 2. By selling the games directly over the Web, the company is experimenting with a model that could substantially transform the video game business, which now rivals Hollywood in annual revenue.
But the network has also gotten Valve into hot water with Sierra Entertainment, the Vivendi Universal subsidiary that is publishing the Half-Life 2 game, but doesn't get the same cut of copies distributed online. Even as they jointly promote the new game, the companies are locked in a court battle over the broadband network that could help shape the increasingly profitable gaming world for years to come.
"A lot of the time game developers feel like they're not being taken care of by their publishers, and there's a lot of friction," said IDC analyst Schelley Olhava, who follows the gaming industry. "Utilizing Steam could be Valve's way of getting around that."
Valve's Steam network is one of the most ambitious online projects aimed at pushing more software distribution online, a trend that could ultimately bode ill for retail stores and middlemen such as game publishers. The growing penetration of home broadband connections, along with increasingly efficient file-distribution technologies such as BitTorrent, now make it relatively simple to download even massive packages like a video game or the Linux operating system. These budding broadband distribution services are also being closely watched by video-on-demand services, which are hoping to find ways to provide consumers with instant access to movies online without choking home Internet connections.
The game's release, scheduled for Nov. 16, has been eagerly anticipated for several years, both by fans and the wider technology community. Like id Software's Doom 3 a few months ago, it is viewed as a title that will drive fans to spend potentially millions of dollars on hardware that can best handle the cutting-edge graphics and gameplay.
A science-fiction sequel that will owe as much to H.G. Wells' War of the Worlds as to conventional "twitch" shooting games, Half-Life 2 will set a research scientist on a planet overrun by malevolent aliens, trying to figure out how to preserve his own life and that of the community around him. It's an old plot by video game standards--but Valve has won acclaim for breathing life into its storytelling before, and fans expect something several cuts above the average.
The Steam network itself was originally as much an offshoot of the company's online multiplayer games as a way to reinvent the way games are distributed. The company was looking for an efficient way to create on-the-fly online matchmaking between players and update games, and ultimately decided to create a broad system that would allow for full distribution of games as well.
Valve settled on homegrown technology that draws elements from content distribution networks like Akamai Technologies and peer-to-peer services like eDonkey, without being identical to either. Steam consists of bits of software that sit on each player's computer, checking central servers for updates to games and keeping tabs on servers that can be used to create multiplayer games at any given moment.
When Valve has a new game to distribute, it uploads bits and pieces at a time over the course of days or weeks, so that no player's Internet connection is overwhelmed by downloading several gigabytes of data all at once. According to the network's Web site, it has about 10,000mbps (megabits per second) of bandwidth available for content distribution and matchmaking purposes.
"There are still a lot of people who are 'anti-Steam,' but now it is completely mandatory to play all of Valve's back catalog," said Chris Deeming, lead editor of fan site HalfLife2.net. "People have learned to live with it, and most actually quite like it now."
The same can't be said of Sierra Entertainment, Valve's publishers. The two companies are suing each other over several aspects of their relationship, and one key aspect of that is the Steam network.
Sierra says that Valve hid the development of Steam from it when they were renegotiating a contract in 2001. Under that contract, the publisher doesn't get the same cut of revenue for Internet distribution. Even worse, Sierra contends, by including Steam components in each of its retail games, Valve is forcing the publisher to distribute the very technology that will ultimately undermine its own business. "Valve was aware of its business plan for Steam long before" the contract was signed, said Annette Hurst, a lawyer representing Sierra in the case. "They considered that Steam would be revolutionary technology that would take sales away from the traditional retail channel. None of that was disclosed."
A representative for Sierra Entertainment itself declined to comment.
Valve says it's not doing anything wrong, and is operating under the terms of the contract. There are revenue protections for Sierra in place, where the publisher gets extra funds if Internet distribution winds up undermining retail sales.
"I think the retail channel will continue to be very important," Doug Lombardi, director of marketing at Valve, said in an e-mail interview. "I think there will always be customers who like to buy products at a store and customers who would prefer to purchase products directly--and some who will do a little of both."
Nevertheless, Lombardi said that Valve would be happy to license Steam to other developers who similarly want to distribute their products directly to consumers.
The case won't be heard until next summer, at which point Sierra is hoping to win absolute rights to the Half-Life 2 game, and Valve wants the case dismissed. For now, the game will pop up on players' computers next Tuesday as planned.
Industry insiders will be closely watching the success of Steam sales to see how the relationship between publishers and developers will change, however. And that's up to the players themselves, who still fall on both sides of the debate.
"There are certainly a lot of people canceling their retail pre-orders and instead buying...over Steam," Deeming said. "But there will always be those that much prefer to have the CD or DVD, box and manual in their hands. I don't think that'll ever change."
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