Network effects; an example in the gaming industry
Thinking about a good example for network effects to potentially use in the exam, I realized that some software that I use weekly would be an interesting one. Below, I would like to indicate how a firm disrupted the gaming industry by introducing a platform with which it creates value through network effects.
Whereas the traditional PC gaming industry was crowded with relatively large amount of game developers (suppliers), toy & game stores (mediators), and gamers (buyers), the current gaming industry is dominated by one online platform. This platform sensed and seized the opportunity of providing games through an online network platform: Steam. Steam is a platform on which developers can sell content, and where users can purchase and play games. Furthermore, in certain games users are able to add modifications to a so-called “workshop”. Other users can download these modifications which might improve the gameplay. Thereby, users become co-creators of value on the platform.
Steam benefits from network effects, meaning that the value of the network depends on the number of other network users. The two users of the platform that will be focused on in this blog are the game developers and the gamers. The network effects are mainly direct, and are present in various forms.
First, same-side positive effects are effects for each side, where an increase in number of users at the own side will benefit that very side. Steam enables gamers to play games online with friends and unknown other online gamers. Many of the games have the opportunity to play with, or against other players around the world online. Furthermore, the platform provides a forum on which users can share their experiences in a large community. Here as well, the more users that provide input, the more users will benefit from being part of the community. For developers, some negative same-side network effects might exist, because they may end up as competitors in reaching customers. Gamers do have a high willingness to pay, but only for high-quality games. Hence, developers should aim to deliver superior value in order to become a community-favourite.
Second, cross-side positive effects are effects in each direction, where an increase in numbers of users at the one side will benefit the other side. In Steam, an increase in potential gamers benefits the side with developers as they have a larger customer base they can potentially reach with their developed games. And, as there is a potential customer base of 100 million users, even small developers who develop games that would not have enough potential to reach a customer base in the traditional market can now reach a large enough group of customers in the so-called “long-tail. Similarly, for gamers, the more developers that are developing games for the platform, the more choice there is, and the larger the chance is to find a game that is actually satisfying their personal needs.
In terms of pricing, Steam created a smart strategy by which the developers are at the subsidy side, and the gamers at the money side. Developers are seeking for high quantity of gamers, and can gain access to the platform for €90 euro (which will be fully transferred to a charity), and can subsequently develop as many games as they like for the platform. They can submit their developed games and once approved, it is published on the platform. Gamers are looking for high-quality games, which they can purchase on the platform. Steam takes a 30% cut on the revenues of the published games, which is their main source of revenues. In total, the platform raised about $1.5 billion in 2014, of which a third was raised by their self-published games.
To conclude, Steam has transformed the gaming industry by providing a platform where developers and gamers meet, and is now making a huge amount of revenues with that very business model. What do you think about the pricing strategy that Steam has chosen to pursue? More specifically, what is your opinion on the fact that the user seeking for quality is on the money side, while the user seeking for quantity is subsidized?