Valve Corporation is an American video game development company based in Washington, USA that was founded in 1996, and was made famous by its first product, Half-Life, which was released in November 1998. The success of Half-Life spun off popular modifications such as Counter-Strike which was the main driving force behind the emergence of cybercafés and LAN-gaming in the late 90’s, particularly in countries such as Australia, South Korea, Thailand and Singapore.
In 2002, Valve announced the launch of the Steam content delivery system which looked to be a method of streamlining the patch process common in online computer games. Steam was later revealed as an online portal with a built-in distribution system for entire games. In 2008, Steam is now the largest distributor of computer games in the world and has now sold more than 200 million copies of computer games. This was mainly due to the fact that Steam allows Valve to sell games online at a lower price than the usual ‘brick-and-mortar’ retail outlets without high rental, manufacturing, distribution and packaging costs incurred.
Steam is a digital distribution, digital rights management, multiplayer, and communications platform developed by Valve Corporation. It is used to distribute and manage (sometimes exclusively) a wide range of games and related media entirely over the internet, stretching from one-man independent efforts (open-source) to some of the world's most popular games. Steam is set apart from its peers in terms of functionality primarily by its residency in the system tray and the ease of navigation.
As of February 2008, there were over 450 games are available on Steam and about 15 million active user accounts.
How Steam works
Steam allows users to purchase games through a digital distribution system. Instead of receiving a box, disc, or even CD key, purchased software is immediately attached from the Steam servers to the user's Steam account (which is registered for free), from which it can be accessed and downloaded from anywhere that allows the use of the Steam client. Games can either be bought individually or as part of a package of multiple games. The advantage of Steam is that it allows mobility on part of the user and the user is freed from carrying a physical copy of the game from one computer to the next. For example, the same person would be able to log on to his/her account in Beijing, China to play any game(s) bought under his/her account, and have the exact same games available to him/her on a different computer in Sydney, Australia.
The system itself works similarly to a feed reader. The user selects the game they want on their computer and Steam then automates the process of downloading the content and keeping it up to date. This process happens every time Steam is started online, not just when a game is installed, ensuring that as many users as possible have the latest software. Steam transfers content over its own protocol, as opposed to a standard protocol such as HTTP or FTP. It downloads only from dedicated "content servers" spread out across the world by Valve and authorized third parties, connecting to several at once to try to ensure a fast and stable connection (similar to the BitTorrent concept). It is not uncommon for users to be able to reach download speeds of 1.5 mbps (and above). In a bid to curb piracy, games downloaded via Steam are encoded in a different format, thus preventing users from simply copying an entire game onto a disc. While downloading, the game is concurrently being installed onto the user’s system, saving valuable time.
Pricing
Games available on Steam are priced on varying levels, where older games tend to be less expensive, and newer releases tend to be the same as the retail prices. Users with a hint of nostalgia may decide to purchase much older titles such as ‘DOOM II’ and the like for a bargain price of US$4.99. Much like Amazon.com (Obscure titles that are not amongst Amazon’s top 10 best-selling titles account for over a third of Amazon’s sales), the Steam portal allows Valve to sell certain obscure titles that may not be feasible in a physical store due to low demand and shelf-space costs.
Steam has also allowed Valve to run the subscription-based Valve Cyber Café Program, which is the only legal way for a cyber café to offer Steam-based games. There are two pricing models: a flat-rate per-client fee per month, or the "Valve Time Tracker" system that offers a pay-as-you-go model. By introducing the Steam application software for all of Valve’s games, they have managed to solve a major issue threatening most software developers – piracy. Since Steam accounts cannot be forged, pirated or used simultaneously, users and cyber cafés have no choice but to purchase an original copy of the game. The authentication system (with CD-keys) used by other developers for their various software has met with abject failure since CD-keys can be easily replicated or hacked. Given the flourishing piracy market in South-East Asia, many developers and companies were reduced to very low profit margins and some were even driven to bankruptcy.
Secure Payment and Transaction Costs
Purchases are made via an encrypted connection and users are required to enter their billing details from scratch for each purchase as Steam does not store them between transactions. By going online, Valve is able to circumvent the usual distribution channels and other third parties, thus reducing their transaction costs and in turn, lowering costs for Valve and for the customer. By eschewing a physical store, Valve saves on manufacturing, property and operation costs. However, it should be noted that ‘going online’ does not rid businesses of all form of transaction costs (a common misconception), they simply gain new ones. For example, to ensure online transaction safety, sites employ secure payment services and certifications services such as VeriSafe and all these will bring about a certain cost to the company employing such services.
Instant Messaging
The built-in “Steam Community" also serves as a social network that allows Steam users to communicate with each other on a many-to-many scale, from both the desktop and an "overlay" program that can be accessed from within 3D-accelerated games. Steam's instant messaging tool, supports both one-to-one and many-to-many conversations, held publicly or privately, and Peer-to-Peer VOIP (voice-over-internet-protocol). It provides extended information about what games each user is playing, allowing others to join their contacts in Steam-integrated multiplayer games with a single click.
Marketing and Promotions
Valve also runs several promotions such as allocating users with “guest passes” that can be “gifted” to friends for a limited period of time. Once an activated guest pass expires, the recipient will be prompted to purchase the game in order to continue playing. Other promotions include “free weekends” where certain games become free to play for the weekend. When the promotion ends, participant users can no longer play the game, but the game's files can remain installed on their PCs which would save users time should they decide to purchase the game later on.
Valve has also marketed itself to certain hardware manufacturers such as ATi and nVidia by having tie-ups for after-sale promotions for their customers. For example, users with either manufacturer’s hardware would receive certain editions of the Half-Life 2 game for free and further discounts on other titles.
Developers at Valve have also created several short video clips using the Source graphics engine. The resultant series of videos (from Team Fortress 2) are tinged with humor and a good dose of action, drawing critical acclaim from critics and related websites. If successful in the long run, Valve should be able to produce, package and market animation videos and expand their product range.
Meet The Scout
Criticisms
Unfortunately, Steam is not without its fair share of criticisms. The Steam application collects and reports anonymous metrics of its usage, stability, and performance without notifying the user at the time of collection. There is also no choice for an opt-out for users.
Although Steam is a virtual entity, Valve allows developers and publishers to segment their markets and geographically restrict where a game is available (and at various price). Regional pricing is a controversial subject since it is widely used by publishers to artificially ensure that prices on Steam stay comparable to or above the retail price of a game in a user's area, which considering regional differences and exchange rate fluctuations can lead to dramatic differences. For example, Call of Duty 4: Modern Warfare costs $49.95 USD in the United States but $88.50 USD in Australia (April 2008).
Also, it is necessary to validate every Steam game online before it can be launched, although an offline mode is available. There are no alternate methods of activation such as via telephone or fax, which causes the system to deny access to those without Internet connections.
Unlike physical goods, Steam products suffer from resale limitations since games bought on Steam cannot legally resold due to the unsuitability of current proof of purchase laws. The only valid proof in an entirely digital transaction is the credit card used during the process, but as ownership of credit cards cannot be transferred, neither can that of Steam-bought games.
Other payment issues include Steam’s susceptibility to fraud due to the products’ ephemeral nature. Billing details entered must match with those held by the bank. Similarly, certain types of failed transactions (such as charge-backs) will cause the user's Steam account to be disabled until audited by support staff.
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Apple Inc. is an American multinational corporation with a focus on designing and manufacturing consumer electronics and software products. The company's best-known hardware products include the Macintosh line of personal computers, the iPod line of portable media players, and the iPhone. Apple's software products include the Mac OS X operating system, iTunes media browser, and other multimedia and creativity software. The company operates more than 200 retail stores in seven countries and an online store where hardware and software products are sold.
The iTunes Store was created on April 28, 2003 as an online digital media store operated by Apple Inc. It has paved the way for the viability of online music sales and is now the number one music vendor in the United States. As of June 2008, the online store has sold 5 billion songs, accounting for more than 70% of worldwide online digital music sales. Via iTunes, users are able to purchase and download songs for use on a limited number of computers and an unlimited number of iPods. Most of the songs purchased from the iTunes Store are copy-protected using Apple's FairPlay digital rights management (DRM) system. However, iTunes has begun a retroactive shift into selling DRM-free music.
The current iTunes Store (version 4) allows users to buy and download songs for use on a limited number of computers and an unlimited number of iPods. Most of the songs purchased from the iTunes Store are copy-protected using Apple's FairPlay digital rights management (DRM) system.
Interface
Apple’s expertise in designing user-friendly and sleek interface makes it a breeze to navigate through the iTunes store. It is both practical and functional as a media player, as well as being easily managed due to its smart data organizer and the new “genius” player (which assists users in creating playlists by tapping into past listening habits and favorite songs).
Since its inception, Apple has expanded the range of products being sold on iTunes and users are now able to purchase music videos, television shows, movies, podcasts, computer applications and video games. The iTunes Store now offers over 1,000 movie titles for rental and includes titles from studios such as 20th Century Fox, Warner Bros., Walt Disney Pictures, Paramount Pictures, Universal Studios, and Sony Pictures. Non-Apple product users are also able to gain access to the iTunes store by downloading iTunes (which can be used as a media player on the computer).
In contrast to several other competitors, iTunes differentiates itself by selling individual songs at the same price with no subscription fee levied. The pricing model has remained the same throughout different countries, with slight variations based on the artist. Music from the iTunes store is available in Advanced Audio Coding (AAC) format and is generally encoded between 128kb/s to 256 kb/s. Thirty second previews of tracks are available to interested buyers and complete albums are sold for a flat rate regardless of the number of tracks on that album. Feature-length movies and television episodes are available for rent or purchase. Movies tend to be priced below a DVD of the same film while television episodes are approximately double the cost of a song. Renting a standard definition catalog title will cost US$2.99, while new releases will cost US$3.99. High definition titles will cost US$1.00 more respectively. These movies will also be transferable to all 6th generation iPods. Games and applications (compatible with the iTouch and the iPhone) are also available at the iTunes Store.
Weekly promotions
There are weekly promotions available on iTunes where one to three songs are available for download for free (for logged-in users). Free downloads are available on Tuesdays, and would remain free until the following Tuesday. Some artists may also choose to have selected songs available for no charge. Several television shows are also available on “Free TV” where certain networks such as NBC or The CW may choose to air season premieres for shows such as “Gossip Girl” or “90210” to increase awareness, popularity and cement viewership loyalty. By profiling the users, iTunes has a veritable gold mine for marketing purposes. Apple is able to sell the usefulness of iTunes in reaching out to certain demographics, be it young hippies, or the working-class lounge lizards.
Availability
To make purchases on the iTunes store, users must pay with an iTunes gift card or a credit card with a billing address in selected countries such as Australia, the European Union, United Kingdom and the United States. Apple also offers other payment methods such as Paypal. It should be noted that the iTunes music store is not available in Singapore (2008).
With the release of the iPhone and iPod Touch, Apple introduced the iTunes Wi-Fi (or 3G) Music Store which allows users to purchase music directly on the portable music device over the Wi-Fi / 3G network. Apple also provides customer support for the iTunes Store over the phone through AppleCare. Most customer service inquiries are handled online, via the iTunes application. Criticisms
Apple's FairPlay digital rights management (DRM) imposes several restrictions which includes disallowing users to make more than seven copies of any particular playlist of songs (purchased on iTunes) onto a CD, limiting the access of purchased songs to a maximum of 5 computers, and restricting the playback of songs to the iTunes software or the iPod variants.
This has lead to the formation of a group called the Free Software Foundation, which is against the digital rights management technology. Users protest against the restrictions levied onto consumers and several cases of Anti-Trust infringement has been made against Apple since users are made increasingly dependent on Apple products. Competitors have accused Apple of using the iPod, the iTunes Store, and the FairPlay DRM technology to establish a vertical monopoly and form a binding “lock-in” for iPod users (since AAC encoded tracks are only playable on iPod variants and the iTunes).
Business Model
In the above-mentioned cases of Valve's Steam and Apple's iTunes, both operate via similar business models. The business model of iTunes store can be described as a "virtual storefront e-commerce business model" which complements Apple's "brick-and-mortar" operations. The songs and shows purchased on iTunes complement's Apple's media devices (iPod) quite nicely. Valve's Steam also operates via a similar virtual storefront e-commerce business model. However, the main difference (other than that of the product), is that Valve's Steam is less in-sync with Valve's physical retailing worldwide (since a significant majority of Valve's revenue is now generated online). In many ways, Valve's Steam cannibalises physical retailing of its products since anyone purchasing a game online would not purchase a physical copy of the game without a very good reason (since even games could be "gifted" virtually on Steam). The additional benefit of Steam is that it provides users with an online community, support and interaction opportunities. Steam also operates via a different application browser which eliminates much of the adware/spyware/phishing problems that the traditional (Internet Explorer) browser brings.
In Conclusion
In the above-mentioned case studies of Valve’s Steam and Apple’s iTunes Store, intangible digital entertainment is clearly the next big step forward. Both companies are able to leverage their strengths in technical expertise, product design and marketing, and sell products through the internet to anyone in the world with internet access, with no costs incurred in manufacturing, storage, shipping, inventory mapping, packaging and other intermediaries. Almost all intermediaries have been removed and transaction costs (for the company) and search costs (for the individual) have been reduced to a great extent. After product design and release, all the company needed to do was to host it on their servers (with minimum use of physical space or maintenance fees), update their portals, and ensure that their payment modes are secured with infomediaries such as SecurePay, VeriTrust and other reliable credit card schemes.
Once the internet becomes feasible (with no technical issues) for household television sets (and eventually, handsets and other mobile gadgets), there will be no need for users to continue their subscriptions to cable / pay-TV since they will then be able to stream or download everything they want for a much lower cost (or even for free). Convenience, ease-of-access, and need for variety now define what users want and Valve / Apple are able to provide them with that. There is no longer a need to make the trip down to the video game store, purchase a game (in a clunky box) and carry it home to install it. Neither is there a need to visit a music store and pay almost $20 for a CD where you can get the tracks you want at only 99cents per track from iTunes. With shortening brand loyalty and changing taste amongst customers, companies must now seek new ways to “stay afloat” (in the case of companies selling products at physical locations) or maintain first-mover advantage (in the case of Valve and Apple).
As we now live in a digital age. The possibilities and choices are limitless for both the individual and the organization. With the proliferation of technology, increase in education level, widespread computer literacy, and the arrival of Web 2.0, E-Commerce is now the new frontier for all businesses.
References:
1. http://en.wikipedia.org/wiki/Valve_Corporation (Valve Corporation)
2. http://store.steampowered.com/about/ (What is Steam)
3. https://support.steampowered.com/kb_article.php?ref=8360-WEJC-2625#acceptedforms
(Buying Games through Steam)
4.http://support.steampowered.com/cgi-bin/steampowered.cfg/php/enduser/std_adp.php?p_faqid=549 (Gifts and Guest Passes)
5. http://en.wikipedia.org/wiki/Itunes_store (iTunes Store)
6. http://www.apple.com/itunes/whatson/ (What’s on iTunes)
7.http://www.reuters.com/article/musicNews/idUSN0132743320071203?pageNumber=3&virtualBrandChannel=0 (Digital developments could be tipping point for MP3)
8. http://www.apple.com/pr/library/2005/oct/12itunes.html
(Apple Announces iTunes 6 With 2,000 Music Videos, Pixar Short Films & Hit TV Shows)
9. http://www.boosman.com/blog/2004/05/itunes_criticisms.html (iTunes Criticisms)
10. http://cheapapplestore.com/apple-itunes.php (More iTunes Criticisms)
