Steam: An examination of a multi-sided network
When most people think of video games they think of Xbox, Playstation, and the Wii (Consoles). For the last 20 years Microsoft, Sony Entertainment, and Nintendo have attracted millions of users and thousands of game developers to drive demand for video games and build a large customer base. Although the differentiated features of each platform keep it from a “winner take all” structure, the big players are battling for dominance with the newest platforms: Xbox One, PS4, and Wii-U.
A fourth platform that takes a unique approach is largely overlooked: Steam, the video game platform on personal computers. In this post I will examine the general network effects of the Steam network and the role an open platform strategy plays in it.
Steam has almost the same network rolls as the Xbox and PS4:
Demand Side User: End Users
Supply Side User: Game developers
Platform Provider: Steam
Platform Sponsor: Valve
Its difference lies primarily in the pricing structure of the platform.
Subsidy Side: The gamers make up the subsidy side as they do on the consoles. The most important difference between Steam and the Consoles is that Steam users typically do not require additional hardware. Steam is an application provided freely on the internet, and there are free to play games available for download. This is a significant subsidy afforded to users that already have a personal computer.
Money Side: The game developers make up the subsidy side as they do on the consoles. The largest difference here is the reduced distribution costs to participate in the network. While recent Consoles have started to promote digital distribution, most gamers use physical disks. In the UK, 74% of console gamers exclusively buy disks. Steam, on the other hand, operates purely digital downloads. As information goods have negligible reproduction costs, the capital investment required to join the steam platform is much lower than on consoles. As a result, there is a significant number of independent game developers in the Steam network that cannot afford the console network.
Cross-Side Network effects:
The gaming industry has very strong positive cross-side network effects. Gamers want access to the best games, and game developers want access to the most gamers. Because the homing costs is so low, the user base of Steam has grown rapidly. It currently has 100 million active users (Valve 2014), compared to Xbox at 76 million and PlayStation at 110 (PlayStation figures account for PlayStation Network, which includes PS2, PS3, and PS4 – 10 years of console iterations). This user base has certainly attracted game developers. Most console developers have their games on Steam, and there are hundreds of independent developers whose games are not on consoles but available on steam.
Same-Side Network effects:
The same-side positive network effects for gamers on Steam are similar to Consoles. Users want to play with friends, and can do this through the steam network.
More interesting is the same-side positive network effects for independent developers. A large restriction on indie developers is marketing and advertising budgets. They typically invest most capital into the game and hope it gains traction through online media. Steam, however, has a portal dedicated to indie games where users can interact with developers and contribute to their development through pre-orders. As more high quality independent games are available on Steam, users demand for indie games rises and Steam becomes more attractive to independent developers. As there is significant variety in game genres there is low negative same-side network effect for developers.
In conclusion, the heavy subsidy for the gaming side and the relatively lower costs for game developers has created an incredibly successful gaming platform set aside from traditional gaming consoles. As technology continues to develop and personal computers continue to outmatch technical specifications of gaming consoles Steam may very well envelop the console networks.