The Steam Business Model – How Does Steam Make Money?

Executive Summary:

Steam is an online platform that allows users to purchase, play, distribute, as well as discuss video games.

Steam makes money by taking a percentage cut from every game sold on its platform, fees for developer tools, licensing fees, as well as by selling physical hardware.

Launched in 2003, Steam has grown to become the world’s leading digital store for PC games. It now counts hundreds of millions of users.

What Is Steam?

Steam is an online platform that allows users to purchase, play, distribute, as well as discuss video games.

It is most notably known for its online store within which users can buy thousands of games. It serves a variety of categories, including adventure, sports, racing, strategy, and many more.

Steam also promotes the distribution of gaming titles, for instance through discounted bundles or by featuring them across the store.

Apart from its online store, users can also engage in a community of like-minded individuals. This entails a forum to discuss games, a workshop section that hosts user-generated content, or live streams of other gamers (called Broadcast).  

Steam further incentivizes engagement by issuing points, which users can earn through shopping on Steam or by contributing to the community. Points can then be redeemed for badges, animated stickers, and other digital items.

In the past, Steam had also released various hardware products, such as a gaming controller. A gaming console, called Steam Deck, is set to release in 2022.

Steam can be accessed by visiting the platform’s website or by downloading its desktop (macOS, Windows) and mobile (Android, iOS) apps.

How Steam Began

Steam, which is maintained by Valve Corporation (headquartered in Bellevue, Washington), was launched in September 2003.

Valve itself was founded seven years prior, in 1996, by Gabe Newell and Mike Harrington. Newell dropped out of Harvard University in 1983 to work for Microsoft.

At Microsoft, where he ended up meeting Harrington, Newell was primarily working on the Windows operating system. His contributions also entailed releasing a port for the first-person shooter game Doom, which allowed it to be released on Windows 95.

After 13 years of putting out world-class software, he felt that it was time for a change. His former colleague Michael Abrash, who went on to launch the hit game Quake vis-à-vis id Software, served as the perfect blueprint for his greater ambitions.

It certainly helped that he reportedly walked away with $500 million after selling his Microsoft stake in 1996. He used that cash to incorporate Valve LLC together with Harrington. Two years after starting the company, in November 1998, Valve released its first title Half Life.

The team was able to license id Software’s game engine, which it had used to develop Quake, to work on the game.

Initially, Valve had some major issues finding a publisher for its upcoming game. Back then, games were mostly distributed through physical stores (in the form of CDs). As such, game developers needed to work together with dedicated publishers who would then market those games to store operators like GameStop.

Luckily, Washington-based Sierra On-Line took a chance on the young company – a choice it would not regret. Within a span of six months, Half Life was sold over a million times, with the game being distributed in both the United States and abroad.

As a result, Valve was mostly focused on maintaining and improving the game, for instance by releasing multiple expansion packs. Moreover, it released a free software development kit (SDK) that allowed users to modify the game, which not only expanded adoption but made Valve beloved by traditionally critical hardcore gamers.

In 2000, however, co-founder Harrington departed from the company, which left Newell as the sole leader of the business. Around the same time, Valve was able to renegotiate its contract with Sierra (while it commenced work on Half Life 2), which ultimately provided Valve with the rights of digitally distributing its games.

Moving to a digital distribution format was a strategically important move for the company due to the problems it faced with the first version of Half Life. Multiplayer games would always break because players would use differently patched versions of the game. It would often take multiple days until everybody caught up.

On top of that, platforms like Napster had led to the distribution of pirated versions of the game. Lastly, players were using bots to cheat, which negatively affected gameplay. Distributing its own games through a digital storefront would allow Valve to solve all of these problems.

At the same time, broadband adoption was rapidly accelerating. Most of Valve’s users had already a fast and stable internet connection in place. On March 22nd, 2002, during the Game Developers Conference event, Valve finally released the beta version of Steam to the public.

Throughout the testing phase, it was able to amass over 300,000 users. The official version of Steam was eventually unveiled on September 12th, 2003.

In those early days, not many titles were available on Steam. Furthermore, many essential features like simple log-ins weren’t working properly. As a result, users didn’t really bother installing it. However, all of that changed with the release of Half Life 2 in 2004.

In order to play the successor, users had to sign up for Steam and download the game via the client. This caused a huge uproar within the gaming community, which traditionally doesn’t like to be told what to do. The users that did end up (or at least tried) installing the game found themselves faced with crashing servers and extensive download times.

Despite the backlash, Steam was able to pick up users left and right. Growth further accelerated when, in 2005, Valve began signing on external publishers, with Ragdoll Kung Fu and Darwinia becoming the first non-Valve games to arrive on Steam.

Over the coming years, Steam continued to add new titles and features to the platform. In 2007, for instance, it updated its search functionality, inserted Metacritic ratings, and improved discoverability through the introduction of Top Sellers and New Release sections. Additionally, it released the ancillary Steam Community, which allowed users to engage with each other. It capped the year off with close to 20 million users.

2008 continued to be just as significant. In May, Steam added its own SDK, which enabled anyone to publish games on Steam without Valve being directly involved. Later, in September, it released Steam Cloud

One of the major achievements of Steam was that it was able to convince people to stop pirating content and actually purchase games. It did so, for instance, by introducing “Under $5” and “Under $10” categories which promoted impulse buying.

On top of that, its now-famous quarterly sales were first made available in the winter of 2009. Some people would even hold off purchasing a game until Steam released its quarterly discounts, which offered games at up to 80 percent off.

By 2011, Steam had amassed a user base of more than 35 million gamers. However, it also started facing an increase in competitive pressure. Amazon had previously opened its own gaming store. Startups like Humble Bundle were making headwinds by offering grouped discounts.

Electronic Arts, in an effort to boost its own digital store dubbed Origin, even decided to stop distributing new releases (such as Battlefield 3) on Steam. Despite the increase in competition, Valve continued to plug away.

That same year, it introduced Steam Workshop, which enabled designers to create in-game items for some of Valve’s best-performing franchises, including Team Fortress, Dota 2, and Counter-Strike. By 2015, Valve had already paid out a total of $57 million to Workshop creators.

Throughout 2012 and 2013, Valve continued to add new features and products to the Steam platform. These included the release of Android and iOS mobile apps (January 2012), a Steam release on Linux (May 2013), or the ability for families to share games (September 2013).

That same month, in September 2013, it also released SteamOS, a free Linux-based operating system that would enable users to watch movies and listen to music (released in February 2014). The reason why Valve introduced its own operating system was twofold.

First, Gabe Newell and the team at Valve grew increasingly worried that Microsoft would use the release of Windows 8 to promote its own digital store and hamper access to Steam. Ironically enough, Newell had been at Microsoft when it pulled off similar anti-competitive practices against the Netscape browser in order to promote Internet Explorer.

Second, Valve had been working on releasing its own hardware product that it could run SteamOS on. With the introduction of audio and video, its goal was to not only compete against gaming stores but the likes of Roku.

By the beginning of 2014, Steam had already grown to more than 75 million users. The platform became so dominant that an estimated three out of four PC games were sold through Steam.

In an effort to expand its use cases and player base, Valve introduced its own method for live streaming gameplay called Steam Broadcasting in December. Four months prior, industry leader Twitch was acquired by Amazon for $970 million, highlighting how much potential live streaming still had.

In November 2015, two years after releasing its OS, Steam finally entered the hardware market with the launch of Steam Machines and its ancillary hardware. These included its own Steam Controller as well as Steam Link home streaming box. On top of that, manufacturing partners like Alienware and CyberPower released their own SteamOS-powered gaming consoles.

Unfortunately, Steam Machines and the ancillary hardware didn’t really sell as well as expected. By June 2016, it had ‘only’ sold 500,000 hardware pieces, which meant only a maximum of 250,000 consoles (since gamers needed at least one controller and console to play). For comparison, Sony had sold over 10 million PS4 consoles over the same timespan.

To make matters worse, a former Valve employee, in May 2016, sued the company for more than $3 million, alleging that her former supervisor had referred to her as “it” following her sex reassignment surgery.

The negative sentiment continued well into 2017. In January, the Australian Federal Court ordered Valve to pay AU$3 million in fines for breaching the Australian Consumer Laws.

A month later, the European Commission has opened three separate investigations. Its intention was to determine whether Valve was actively preventing customers from benefiting from cross-border purchases which normally yield lower prices.

Then, in April, Valve slashed the royalty payments for Steam Workshop creators for its Dota 2 game (from 25 percent to 5 percent), which severely affected their earning potential. Lastly, access to the Steam Community was banned in China in December.

While Steam continued to grow, it also began to gripe with the effects of its ever-increasing relevance. In February 2018, for instance, it had to ban a Maltese publisher for attempting to manipulate the review scores of its latest release. Steam had initially released reviews back in 2013 and over the years continued to fight review spam on its platform.

On top of that, with releases on the platform exponentially increasing, Steam also found itself increasingly moderating game releases. In May 2018, for example, it removed a controversial school shooting game.

In order to minimize its responsibility, Steam released a new policy in June which stated that it wouldn’t be the one to choose what games were allowed on the platform. Only in exceptional cases, for example, trolling or illegal content would Steam intervene.

The platform capped the troubling year off by discontinuing the Steam Link due to lackluster sales numbers. In February 2019, it also removed the audio and video section of its Steam Store to solely focus on game distribution.

Despite its various problems, Steam managed to cross one billion registered accounts in April. However, a viable competitor would soon emerge. Fuelled by the billions of dollars it made from Fortnite, Epic Games released and began pushing its own digital store.

In order to convince gamers to join, it invested millions into releasing games for free and was even able to negotiate exclusive deals with game publishers (such as Anno 1800 or 2K’s Borderlands 3). Steam itself remained unphased and continued to double down on its platform approach.

In May, for example, it released its Steam Chat apps, which enabled gamers to communicate via text messages all while playing. The move was intended to grab market share from the likes of Discord.

It also introduced various updates to its platform in an effort to improve its recommendation engine and increase discoverability. Over the previous years, uploaded games on Steam had risen from a few hundred to thousands a year, which made it tougher for games to be discovered. Indie developers, in particular, suffered from the increase in competition.

In October, Electronic Arts also announced that it would bring some of its exclusive titles back to Steam, ending the almost decade-long clash between the two. The first games were finally brought back in June 2020.

However, Steam also had to admit defeat when, in November, it discounted the Steam Controller (a year after stopping Steam Link production). Despite its hardware woes and increased competition from Epic Games, Steam remained the undisputed leader in the digital store space.

Throughout 2020, the platform was able to have one of its best years in terms of user growth. The coronavirus pandemic, which forced people across the world into lockdowns, led to an increase in new players. Steam ended the year with over 25 million concurrently logged-in users, up from around 17 million in the prior year.

Steam started 2021 with the launch of its own store in China. The platform partnered with local publisher Perfect World to be allowed to operate the store. Two months after the launch, in April, Indie developer (and Humble Indie Bundle creator) Wolfire Games filed a class-action lawsuit against Valve, alleging that it is abusing its leading position to extractan extraordinarily high cut from nearly every sale that passes through its store.”

Meanwhile, Valve gave hardware yet another go. In July, it announced the Steam Deck, a handheld gaming console that would allow gamers to play AAA games. Unfortunately, due to worldwide supply chain shortages, it had to postpone the release of the Deck from November 2021 to February 2022.  

How Does Steam Make Money?

Steam makes money by taking a percentage cut from every game sold on its platform, fees for developer tools, licensing fees, as well as by selling physical hardware.

Steam operates on a marketplace business model. It essentially connects supply, that is game developers and the titles they develop, with demand from players.

It then takes care of all associated steps, such as payment processing, product discovery, and authentication of the games. The platform essentially acts as a trusted layer between the customer and developer to ensure purchases go as smoothly as possible.

With that in mind, let’s take a closer look at each of the platform’s revenue streams in the section below.

Commission

The vast majority of revenue that Steam generates comes from the commission that it generates for every game sold on its platform.

Steam takes a 30-percent cut for every game sold. If publishers manage to sell games worth $10 million to $50 million, they are only charged 25 percent. For anything above $50 million, the fee is equal to 20 percent.  

Additionally, Steam also makes money from in-game sales of cosmetic items that are created by its users vis-à-vis Steam Workshop. Here, its share can be as high as 95 percent.

So why would game developers and designers be willing to pair with close to a third (or even the majority) of their earnings?

The simple answer is distribution. Steam is visited by dozens of millions of avid gamers every month. Users not only use the platform to discover new titles to play but to engage with their friends (for instance through chats or the community forum).

Furthermore, Steam incentivizes continuous usage through the issuance of points, which users can then redeem to acquire badges and other items.

All of this has allowed Steam to become the world’s leading digital store for PC games. However, in recent years, it has faced greater scrutiny being the industry’s head honcho.

Competitors and selected publishers argue that the company is abusing its monopoly power to impose an unreasonable fee.

For comparison, Epic Games via its Epic Games Store (ESG) only charges 12 percent while Humble Bundle only imposes a 5-percent fee.

As a result, some publishers like Ubisoft have decided to not release their games on Steam and instead opted for releases on competing stores.

Hardware Sales

As previously mentioned, Steam had launched a variety of hardware products, such as the Steam Link as well as a gaming controller, over the years.

In the end, it managed to sell over one million Steam Machines and controllers combined. Unfortunately, that wasn’t deemed enough to keep production going, especially since those sales numbers were dwarfed by the likes of PS4 and Xbox One.

To make matters worse, Valve was ordered to pay a $4 million fine to SCUF Gaming in February 2021 after a US court ruled that it infringed on the controller’s touchpad patent.

Despite its previous failed endeavors, Valve decided to pursue another hardware opportunity with the launch of the Steam Deck in February 2022.

The handheld device comes in three different versions that cost $399 (64GB), $529(256GB), and $649 (512GB), respectively.

Releasing its own gaming hardware can serve as an important gateway to strengthen the position of Steam. Sony (PlayStation), Microsoft (Xbox), and Nintendo (Switch) don’t allow Steam on their devices, thus limiting its total addressable market to PC games only.

However, not everyone is keen on splurging money on a gaming PC. Offering handheld devices at extremely competitive price points (Valve came out and said the console will be a loss-maker in the beginning) can therefore open up a whole new set of customers.

Developer Fees

Steam offers a set of tools and services, dubbed Steamworks, for developers and publishers that help them build and distribute their games on the platform.

These include allowing developers to sell bundles and DLCs, announce events and updates on Steam, feature broadcasts, offer discounts, or grant players early access, amongst many others.

In order to get access to the API, users will have to pay a so-called greenlight fee. However, the fee is lifted for developers that already have a game on the platform (and are thus approved).

Licensing Fees

Lastly, Steam also generates revenue from licensing fees that owners pay if they want to set up a Steam PC Café.

Steam PC Café allows establishment operators to offer visitors the same Steam experience they have at home, meaning they can chat with friends, access their entire game libraries, and unlock achievements tied to their accounts.  

Steam imposes a one-time installation fee of $29.99 as well as a monthly subscription fee of $9.99 for every license.

Who owns Steam?

Steam is wholly owned by Valve Corporation, a game and software development company based out of Bellevue, Washington.

Valve, apart from maintaining and distributing Steam, is also known for a plethora of other products. These entail hit games like Dota 2, Half Life, Counter-Strike, as well as Team Fortress.

It has also developed free-to-use software for virtual reality (VR) devices dubbed SteamVR Tracking, allowing devices like the HTC Vive to know in real time where they are in real-time. However, Valve’s biggest money maker remains to be Steam.

Hi folks, my name is Viktor! By day, I lead a tech team of 10 for an e-commerce startup. At night, I work on expressing my weird thoughts through this blog. And if there's time, I cuddle my cat..