Valve listens to gamers through economic experiments

In a recent panel discussion at the WTIA TechNW conference, the co-founder and president of Valve Corporation, Gabe Newell, explained the importance of listening to what consumer gamers want through the careful study of the modern economics surrounding the ever-shifting gaming industry.

Valve listens to gamers through economic experiments

The huge successes of both the Half-Life and Portal series, as well as the gargantuan PC (and recently Mac) gaming digital distribution system, known as Steam, and the unorthodox pricing of their games have helped to make Valve succeed as a private company in an exponentially changing environment of consumer gaming.

Valve has frequently provided free downloads to their games, such as add-ons like Day of Defeat for Half-Life, without reasons beyond giving gamers what they want for free. This has won them an allegiance.

It is this extraordinary way to go against the industry norm by providing gaming content that is often readily available to the public for free, and also directly through Steam (bypassing the middle-man of store distributors) that has won the company renown and Steam more than 35 million users.

Gabe talked with Ed Fries of how to truly fight piracy and the dependency of traditional economic methods:

Gabe Newell: “It’s interesting to touch on a number of pricing and service issues, because it will help convey the complexity of what we’re seeing in the entertainment space, and there’s probably also going to be lessons in it for other people trying to create value on the Internet.

One thing that we have learned is that piracy is not a pricing issue. It’s a service issue. The easiest way to stop piracy is not by putting antipiracy technology to work. It’s by giving those people a service that’s better than what they’re receiving from the pirates. For example, Russia. You say, oh, we’re going to enter Russia, people say, you’re doomed, they’ll pirate everything in Russia. Russia now outside of Germany is our largest continental European market.”

Ed Fries: “That’s incredible. That’s in dollars?”

Gabe Newell: “That’s in dollars, yes. Whenever I talk about how much money we make it’s always dollar-denominated. All of our products are sold in local currency. But the point was, the people who are telling you that Russians pirate everything are the people who wait six months to localize their product into Russia. … So that, as far as we’re concerned, is asked and answered. It doesn’t take much in terms of providing a better service to make pirates a non-issue.”

Gabe Newell: “The most recent thing that also is really puzzling is that we made products available for free on numerous occasions, without significantly impacting the audience size. We recently said, we’re now going to do something different, we’re not only going to signal that it’s free but we’re going to say, ‘it’s free to play,’ which is not really a pricing signal, even though that’s what you would ordinarily think it is. And our user base for our first product that we made free to play, Team Fortress 2, increased by a factor of five. That doesn’t make sense if you’re trying to think of it purely as a pricing phenomenon.

Why is free and free to play so different? Well then you have to start thinking about how value creation actually occurs, and what it is that people are valuing, and what the statement that something is free to play implies about the future value of the experience that they’re going to have.

And then the conversion rate, when we talk to partners who do free-to-play, a lot of people see about a 2 to 3 percent conversion rate of the people in their audience who actually buy something, and then with Team Fortress 2, which looks more like Arkham Asylum in terms of the user profile and the content, we see about a 20 to 30 percent conversion rate of people who are playing those games who buy something.

So that’s a fairly surprising and fairly recent statistic, which is that there seems to be something about the content that significantly changes how your monetization occurs, with apparently much broader participation than you would see out of something like FarmVille.

We don’t understand what’s going on. All we know is we’re going to keep running these experiments to try and understand better what it is that our customers are telling us. And there are clearly things that we don’t understand because a simple analysis of these statistics implies very contradictory yet reproducible results. So clearly there are things that we don’t understand, and we’re trying to develop theories for them.

It’s just an exciting time but also a very troubling time.”

Fries: “That’s some incredible data. … You talk about doing experiments. This is probably the biggest change that’s affected the gaming business over the last few years. It’s not just that we have digital distribution to our customers. It’s that we have this incredible two-way connection that we’ve never had before with our customers.”

Clearly Gabe, a favorite among gamers, despite the sequel to Half-Life 2 dragging on for more than half a decade, has his hand on the pulse of the industry, and he is not afraid to be innovative in Valve’s economic approach, its views on piracy, or its top-notch creative gaming content. Free games attract customers, but in varying ways, and Gabe notes this specifically.

As far as illegal digital content, he pushes Steam to continue providing better content directly to consumers than what someone could pirate to them, and this is ingenious. An important thing to note here is that the Valve president is researching to understand just what it is his consumers want, so that he can better serve them and keep his company making money so that the gears keep moving. With such gamer-friendly efforts, the gaming industry could very well tip toward the Valve methodology should Gabe’s efforts prove to be continually successful.