The most advanced business model in the universe? The PC/video games industry

COVID-19 accelerated interest in business model transformation. Not only does the PC/video games industry' model serve y the 21st century business and customer well -- but its completeness and "reusable components" are ideal for the post-COVID world.

First things first: It's great that we're all seeing innovation everywhere (legit) and claiming disruption all over the place (illegit, so quit). We are seeing new, hot forms of communication (e.g., social audio – evolutionary, potentially important), new business models (subscription –  been around now for a while, definitely here to stay – and it keeps evolving) and even seeing the democratization of technology (low code/no code – citizen developers, citizen apps here to stay).  

As I said, all great. But things like social audio or low code/no code aren't redefining business -- they are adding tools and media for business (and for personal efforts too) to use. Subscription models have redefined business and are the foundation for a lot of the evolutionary changes and revised business models that we are seeing as digital efforts heat up at the cusp of emergence from the pandemic.

One caveat: That's probably a hyperbolic statement given that there is no ONE all-defining business model. However, there is a singular one with all the elements that can be, let's call it, repurposed to help define multiple business models that will shape the present and future of business as we emerge from the pandemic, with the right mix of digital and real life assets and elements and also the technological backbone and strategic framework to be a defining one if there isn't to be a definitive one.

Let's start with a story...

Back in 2007 (I think) I gave the Power Breakfast presentation at the Gartner Customer 360 conference (though it may have been called the CRM Summit at that time). I was kind of proud of this, BTW, because to my knowledge I'm the only non-Gartner analyst to speak at a Gartner event – and I did it multiple times. I loved it and Pascal Winkel, followed by Juan Gonzalez -- who ran programming for Gartner -- couldn't have been more gracious about working with me. They were (and are) wonderful people.

The  presentation was on 21st century Business Models and I got the chance in a packed room to talk about   business model transformations that were going to be necessary as the century progressed but about one that I thought was a prototype for pretty much the most successful single model for a majority of working environments and contemporary businesses.

That was the PC and gaming industry.

It's not a prototype anymore. It is THE most advanced mature (and maturing) business model – one where all the elements are in place and the model is proving both its immediate success and its likely longevity.

What I'm going to do

When it comes to technology infrastructure, we've been talking about "reusable objects" for forever. I'm going to discuss a "reusable" nine elements that constitute a new business model. Each element can be used and mixed with other elements and things that I'm not smart enough to have seen without hurting a new business model. You do NOT have to have all ten to be successful with a new business model. But I would venture to say that you do need to have some of them.

Please also cut me some slack. I know there will be people who will read this and say "well, what about….? And then excoriate me for leaving out whatever it is that I left out. I don't pretend to be THE or even AN expert in anything. I'd like to think that I have well considered opinions on things that I can defend. But I'm SURE that whatever it is, whoever you are, has validity and legitimacy as an element of a new business model or even is a complete one in its own right.  I'm just telling you my thinking on it and showing it to you via a case study.

Finally, in the interests of disclosure: What I am writing involves a combination of an excerpted part of my latest (2019) book: "The Commonwealth of Self-Interest: Business Success Through Customer Engagement" and a lot of updating, rewriting and new thinking. So, it's not the same but has some similarity to the book. If you don't like that, don't read it. Not a problem.

Onto the nine elements…

The nine elements

Element #1: Interest is driven via new forms of distribution.

Element #2: Customers have the tools to co-create the products and services, and access to the media to help distribute it.

Element #3: Customers also have the means (often via communities and user groups) to actively participate in the evolution of the products, services, and tools.  These are typically either sponsored by or at least supported by the companies that are involved.

Element #4: Customers are treated as partners of the company, not just consumers.

Element #5: There is a mutual value exchange. This is defined as value as each sees it. Meaning for a company it is likely to be profitability, revenue increases, shareholder, or stakeholder value. For the customer, it is the feeling that they are valued (and all the attributes that go to fostering that feeling).

Element #5a: Monetization works both ways, for company and customer. Thus, part of the mutual value exchange is (can be) transactional. In a way this is more of a subset of Element #4 but I'm calling it out separately. It is NOT identical to feeling valued but can be associated with it.

Element #6: The business has advocates who are actively participating due to their own self-interest.

Element #7: The establishment of an ecosystem of companies and customers. The recognition of value derived from each side begins to blur the lines between the company and customer in a good way. They are integrated parts of a whole ecosystem. That implies not only the participation of the company and the customers but partners for ancillary (or corollary) services and products and experiences.

Element #8: It provides a  continuous highly personalized data-driven experience and engagement.

Element #9: There are broad, deep, and highly varied levels of engagement driven by the level of personal interest to customers. All levels can be accommodated.

The PC/Video Games Industry: Best Case Study There Is

The electronic games industry is one of the world's largest entertainment segments. In pre-pandemic 2019, the world's gaming revenues were projected to be $120 billion.  Now, the 2.8 billion gamers on the planet are projected to spend $189.3 billion by year end 2021 according to newzoo who are hyper focused on this market. What they define currently as "the industry" consists of PC games, video console games, and smart-device (i.e., mobile) games, as well as some in-game advertising. That number, obviously accelerated by the pandemic, is staggering.  We sit here and utterly preen about the fact that we (meaning I and others like me) made the right hands down bet by betting on CRM which has become the world's leading business software market – and that market is projected at around $45 billion – which is less than ONE FOURTH the size of the PC/Video Gaming market. We are bragging at 25 percent! I'm going to lock my lips on this subject from now on. That's not even counting the hardware used explicitly for gaming (or bitcoin apparently). 

This market segment isn't -- contrary to popular mythology -- limited to or dominated by millennials or Gen Z or those under 13. According to a 2020 survey done by Statistica, it is actually proportionately distributed among all generations with those from under 18 to 34 representing (male and female) 59 percent and those 35 and above represented by 41 percent of the market.

This level of success is not surprising for more reasons than I can cover here. There are dozens of studies on the success of this market segment that cover the economics, the sociology, the psychology, and the anthropology. For me, and for customer engagement, this is the perfect storm when it comes to the commonwealth of self-interest—perhaps the best possible example of how the commonwealth of self-interest can work in practice. The gaming industry, for more than a dozen years, has focused on providing products, services, tools, and consumable experiences to create highly personalized relationships. While many of the PC and console games released each year provide some customization options, a significant number of the games are platforms for customization, so you can use the game you purchased as a base and rebuild it any way you want. (This is called "modding.") Now, we are starting to see data plays, i.e., the use of real-life activities interspersed with game activities, to not just gather data for marketing purposes but to customize the individual gamer's experiences and do it in real time, though we are still at the cutting-edge with the latter.

History of ages past

What fascinates me about history is how a singular, innocent act can dovetail into something much greater.

In 1983, a game called Castle Wolfenstein was released for the Apple II. It was a simple, early first-person shooter. You were an Allied spy and you battled Nazis. Apparently this wasn't good enough for one of the fans and he took the original "actors" (game characters) and text and replaced it with new text and actors modeled after the Smurfs. And from the Smurfs and a modification of someone else's game to Castle Smurfenstein, one of the foundations for a mature advanced and appropriate 21st century business model was born. What is now called modding was born with this effort. The game was now more than a game – it was a potential platform, one that gave the gamer the opportunity to change the game to the specifications that he or she wanted.

But it was the release of Duke Nukem by Apogee Software in 1990 that started the rocket launch. Fans began to modify not only the characters in the game but also the different levels. But the "aha" moment here is that they had no tools to do that – so they invented their own.  Level editors were fan-created and fan-distributed freely so that other fans could modify the levels of the game.  The industry was starting to change hands – control of the games began passing to the gamers from the game companies – but maturity in that area was still a long way away.

Rather than being horrified, legendary game publishers John Carmack and John Romero saw the possible value in this fan-creation effort. Give the fans what they want, let them have what they create and the model becomes very interesting – and very different.  In 1992, as co-leaders of id Software, Carmack and Romero acquired the rights to Castle Wolfenstein and created a game based on it called Wolfenstein 3D. In parallel with the fan created modifications, they established a new business model for PC games and, eventually, even for software, with the first "freemium" model. The first few levels of Wolfenstein 3D were free of charge to play, and you could do just that by downloading and installing the game. If you wanted to continue to play after you beat those free levels, though, you would need to buy a registered version. In the meantime, because the initial distribution was typically the freeware version, fans began to modify the base game by providing free additional content on a larger scale, including weaponry and other game extenders. 

Thus Elements #1 and #2 of the Business Model:

Element #1: Drives interest with a new form of distribution.

Element #2: The ability of the fans/customers to co-create, with the tools to help drive the model and the media to help distribute it.

Carmack didn't stop there.  When Doom was released in 1993 by Carmack's id Software company, the game incorporated the tools that gave fans the means to modify and create new content into the DNA of the game itself. The only "ask" that id Software had was that the modifications be done and distributed with the registered version. Most of the modders complied, and, in fact, in many cases, the modifications were coded so that they could only be used in the registered version.

Element #4The customers were partners of the company, not just consumers of its products.

This was so successful that, in 1997, Carmack released the source code of Doom, thus increasing the velocity of modifications to the game and, in fact, making Doom a platform, not just a game with tools. Something that customers had done in an ad hoc way was now being institutionalized by the company so that the partnership could evolve. In fact, there had been a hint of it the year before with id Software's retail release of Final Doom, a product that was a compilation of fan-made levels of the game. The revenues from this were shared with the creators of the mods.

Element #5: Mutual value exchange

Over the next 20 years, modding became an integral part of the value of the game, extending it well beyond whatever its plain-vanilla state had been.

One exceptional mod is indicative of how well the this business model can work in practice. Sega has a series of wildly popular games called Total War. This series, with titles like Rome: Total War, Medieval: Total War, Total War: Attila, and, more recently, Total War: Warhammer I and Total War: Warhammer II, and now as of a week ago Rome Remastered: Total War. has sold more than 20 million copies since its founding in 2000 with Shogun: Total War. Its popularity skyrocketed with the release of Rome: Total War in 2004. The game sold extremely well and was a lot of fun to play, trust me, but there were continuous complaints by its devotees about the historical inaccuracies of the game. A group of roughly 30 developers, graphics artists and writers from multiple locations, banded together in 2005 and announced a team that would create an historically accurate version of Rome: Total War with the tools that were provided by the game company. They called it Rome: Total Realism (RTR). What made this a remarkable effort is that it was done entirely digitally; and the community, though more limited than at its peak, still exists to improve the mod (which is now in beta for its eighth iteration).

Element #3: Customers (via communities in this case) actively participate in the evolution of the products, services, and tools.

A look at their site back in 2005-2006 now shows that this 30-odd-member team wasn't just a ragtag gang of hackers or developers, but an organized entity. It consisted of writers, 3D designers, graphic artists, a public relations person, and historians among others. If you look at their current site, you'll see that this is what the team is made up of: historians, researchers, administrators, community and forum moderators, web infrastructure specialists, IT managers, a public relations person, coders, graphic artists, and a mapping specialist. They have freelance support for writing, art, beta testing, and design. They have social media specialists and YouTube influencers who helped them with promotion. That's just the (unpaid) staff. The fans of their mods have supported the betas by building out highly specific technical assets for the mod. Some examples would be unit textures, "campaign pine trees," and original accurate maps.

What this tells you is how phenomenal the level of active engagement is. There are even mods built by gamers on top of the RTR mod. Sub-mods? 

The forums' topics range across the standard software stuff you always see, such as bug reporting, feature suggestions, and so forth, but also include historical discussions that, over the years, have ranged from the size of the epaulets worn by a specific phalanx in the Roman Republic to the economic state of the Gauls or Visigoths at the time of the fall of the Republic. And these get heated.

Element #6:  Advocates actively participating in the "commonwealth" due to their own self-interest.

Keep in mind this isn't a "company." It's a group of modders who communicate digitally, have never met, and whose homes span the globe. This mod has been done for free for all the years from 2005-2018. This is not a for-profit project. In fact, a plea that is still up on their website from 2015 says they know it's been a while since they asked for money, but it costs $120 a year to maintain the site and they are dependent on contributions to do so. $120. That shows what value is to the customer-producers in this case—the love of the game itself, the pleasure they derive from playing it, and the visceral value of the feeling they get as a crew that this RTR mod is doing something to drive the pleasure of the game for the community. When the first edition of the mod came out in 2005, it was nearly a gigabyte. Despite the lower Internet bandwidth and download speeds of the time, they still had 800,000 downloads the first week. That's an indication of the value they created for Sega and for the game's fan communities. The value continues more than a decade later.  In fact, with the release of the Rome Remastered edition (a high definition graphics enhanced edition of the original) came the release of RTR: Imperium Surrectum, an early stage but fully working mod on the new game – but this time released on the Steam Workshop. That has a lot of bearing on this business model as you will see soon.

Element #9: Broad, deep, and varied levels of engagement driven by the level of personal interest to the gamers.

The value of modding can't be overestimated. This kind of user-created content was the subject of a study done by two University of Haifa researchers in February 2017 called "Placing a Value on Community's Co-creation: A Study of Video Game 'Modding' Community." It was a comprehensive study, but the net result is that, with the adoption of open platforms by game companies that allow for mods in some way, even with license restrictions that allow the game companies to control distribution at some level, there is a direct impact on the bottom line. The study found that:

…when the firm supports the modding community, the average increase in sales per game (selling at 97,000 units) would be in the sum of roughly 15,000 units… Thus, the value proposition for supporting the modding community is a 15% increase in sales.

This isn't lost on the game companies. Blizzard, a game maker known for several iconic games (e.g., StarCraft, Diablo) brought modders to BlizzardCon, their annual gamers' conference, to get their feedback on future games and future releases of existing games, providing the gamers with what had historically been highly protected information. Sites began to spring up to support mods of specific games, as did sites that aggregated mods. The world's biggest mod aggregation site is Nexus. This is a paid-membership site with varying plans, including a £49.99 lifetime membership. When I wrote the book, I had  2018 stats for Nexus so you could see the scope and interest from the gaming community when it came to mods and here they are:

We host 265,632 files for 625 games from 85,854 authors serving 15,809,168 members with 2,915,704,888 downloads to date.

Here we are three years later and as of May 2, 2021 here are those same Nexus stats:

We host 308,435 files for 1,272 games from 125,264 authors serving 26,550,587 members with 4,666,697,427 downloads to date.

That is staggering and that is one site. 

Element #5a: Monetization works both ways, for company and customer. Mutual exchange of value takes place at a transactional level.

Modding is a very powerful addition to the gaming world's business model because most interactions occur in communities and user forums, providing the means to scale the discussion. Aggregators like Nexus support individual mod sub-forums so that, as an individual gamer, you can provide inputs that are not only monitored by the creators of the mod but also by the game companies themselves. These are coupled with the sites like Rome: Total Realism where the same sort of engagement goes on but focused on a single mod and its adherents, developers, and users. One byproduct of this engagement has been that some of the mod developers end up with full-time jobs from the company that produced the game they built the mod for. 

Element #7: The creation of an ecosystem of companies and customers. The recognition of value derived from each side begins to blur the lines between the company and customer in a good way. They are integrated parts of a whole ecosystem.

But the satiation of demand for personalized content doesn't stop with mods or the communities built around the customization of games. The increased availability of personal data is now part of how game companies and other entertainment entities work together to provide gamers with an optimal gaming experience that is based in individual gaming preferences.

Charlie Shin, who was at the time the vice president of engagement for Major League Soccer (MLS) (he's now the vice president of data strategy and analytics at the Indianapolis Colts) was a pioneer of that model – not surprisingly since he is one of the true innovators in the sports world. Here's what he did with MLS.

At MLS, an internal study found that an EA FIFA video game was identified as one of the key drivers behind fan interest in MLS. In collaboration with EA SPORTS, MLS developed a pilot program to drive greater video game plays and a performance model to measure the impact on club engagements using the game-play data. The pilot program included a variety of interactive engagements between the fans and MLS clubs through offline and online platforms. Fans would see the EA FIFA video version of the MLS player goal celebration in-stadium during a live game or be asked to play the MLS rivalry match scheduled for the weekend within the EA FIFA game for a chance to win special game packs. The pilot campaign resulted in very active digital and social engagements among EA FIFA gamers with its participating clubs. In addition, the campaign drove greater game plays, which helped drive greater interest in MLS clubs.

The pilot program is an illustration of digital disruption and its impact on fan engagement well beyond the game and its players inside the white line. It also illustrates why marketers need to understand and recognize the importance of becoming a customer-centric organization. Advances in technology and communication, combined with the explosive growth in data and information, have given rise to a more empowered global consumer. A clear understanding of customer needs and behaviors across the organization will help drive profitable growth strategies.

Element #8: Highly personalized data-driven experience and engagement.

As time marched on, so did the gaming industry. The business models began to transition with the evolution of new forms of gaming via mobile, the emergence of the Steam platform and more recently, professional e-sports and the advent of (now Amazon's) Twitch gaming channel are both transforming and maturing the business model that drives the industry. If I am taking a well-educated guess, I'd say it's maturation defines about 80 percent of the current state – which means it is constantly improving the existing model. Innovation is perhaps 20% with a lot of room for growth, in areas around pricing and subscriptions and in distribution and consumption. 

To give you an indication of the scope – breadth and scale – of the industry, let's hack recent data:

  1. In 2020, the global gaming industry was a $179.7 billion market according to IDC's annual report on the industry, outperforming sports and movies combined. To be fair, movies and sports were severely curtailed , so I don't think this is as dramatically stunning as it sounds. The number is though. (Source:  Marketwatch)
  2. In 2020, Microsoft acquired ZeniMax Media the parent company of the icon game publisher Bethesda Softworks, for $7.5 billion. Microsoft understands what the opportunity because in their quest to be the end to provider to enable someone's life choices, they know that games have gone beyond just entertainment to lifestyle (see cosplay, the intermeshing of the gaming universe with movies, comic books and even style choices).  (Source: Microsoft)
  3. In 2020, there were an estimated 2.7 billion gamers across the globe (with 1.5 billion of them in Asia). That is 34 percent of the world's population. Think about it. (Source: Statista)

But it doesn't stop with this data. If the above were all that there was to the model, it would be enough to prove the opportunity the model presents for success in a massive market. But there is so much more.

It is the symbiotic relationship between the gamers and their gaming companies that leads to mutual value. The gamers get not only a highly personalized experience and the means to continually engage via multiple platforms and media, but they are also able to provide feedback that is listened to and develop a product that isn't just to their liking but often can be monetized and widely distributed. The companies are not only able to monetize the engagements with a variety of pricing models, but they are also able to collaborate with their customers to improve the experience they are having all the time by having those customers provide enormous quantities of highly relevant data about their game-playing behavior, as well as personal likes and dislikes. That is how you satisfy millions of customers—if that's how many you have—but let them retain control over the engagement and make them feel valued. Let's dig in and take a look at what that means in practice. This model is not speculative. It's in place and operating.

Steam Rises

One thing that makes communities part of a viable business customer engagement program is that, when the business offers them, they can be managed from behind the firewall and still provide the benefits that community brings. Products like Vanilla Forums, Slack, Tribe, Mighty Networks and even Facebook Groups, and others provide companies with the technology needed to build and maintain communities and measure results. They enable the cross communication between the company, customers and partners that support strong ecosystems of not just buyers and sellers but of innovators and practitioners. (BTW, please don't ask me "why did you leave whomever off the list, blah, blah blah. I'm not going to answer).

Valve, the creator of one of the most popular games in history, Half-Life 2, and a mod that still remains a revenue monster, Counterstrike, started a service called Steam in 2002. I'd like to say that they understood the organic forces that were driving the gaming world and also understood that there was a huge opportunity if they could capture all this electric activity, reproduce the relationships, and take the ad hoc and fragmented character of it all and aggregate and institutionalize it. I'd also like to be able to say that they knew that to do that they'd have to create and own the ecosystem that drove all of this. But that wasn't the case at all. Steam, which is now the largest gaming ecosystem, and, in fact, one of the largest business ecosystems of any kind, was started by Valve because they thought that it would be a good idea to have a platform that could update games automatically and also protect against piracy.

But what it has evolved into is so much more than that. I'm not going to spend the time needed to run through its actual evolution, but I am going to give you an idea of what it has become.

Digital distribution platform for both Valve and third-party game companies

When I wrote "The Commonwealth of Self Interest" I showed that as of mid-2018, Steam had 21,406 different games that were available for purchase. Now, as of April 2021, the number is 50,731. Steam allows members to pay for games and for downloadable content (DLC) that requires the game to use it. Additionally, because the Steam platform resides in the cloud, games can be downloaded multiple times to multiple devices without additional fees, a huge advantage to the members. They also allow games being sold through third parties such as Humble Bundle or Fanatical to be downloaded through Steam with a product key.

If you want a good left-brained look at the data that proves the case, just read this blog post that Stream put up on their performance in 2020. Revenue? Think billions.  Data? Think exabytes or terabytes per second.  You get the picture. I highly recommend the blog post. 

Largest active-gaming community in the world

Steam announced that, by the end of 2019, they had over 1 billion registered accounts and by early 2021, more than 121 million active users per month, with around 62.6 million players per day. They allow sharing of games at no extra charge with family members and close friends. Interactions related to an individual game—ranging from community discussions to updates from the game developers to special deals to solving technical issues—are carried on via game hubs.

User-created content and co-creation

User-created content and feedback is the centerpiece of the Steam ecosystem. It creates ongoing interaction among developers, publishers, end users, and the overall actual Steam community. Steam's platform provides for user-created content in multiple ways.

First there is the Steam Workshop, which is both a toolset and a distribution platform for mods for the many highly customizable games out there. The value of mods isn't in monetization but in their ability to build community and provide customized content to satisfy individual gamer needs. This also generates business.  The mods go hand in hand with what is called DLC – Downloadable Content – which are add-ons and expansions at a price for existing games. So for example, Civilization (one of my all time favorite games) has gone through six different versions since the late 90s but has had its life extended greatly by multiple expansions – major and minor that cost something. They also provide the tools so that there is an extensive community building mods for the game.

Via the workshop, a gamer can not only find the mods that interest them to customize the game (if they don't want to build them) but incorporating them into the game is as simple as hitting the "Subscribe" button on the mod's page. The rest is automatically taken care of. The mod is available in game. 

You could still monetize content on the Steam platform. Independent developers are given the opportunity to develop and sell games to Steam's community. Originally, in 2012, they launched Steam Greenlight, where independent game developers could showcase their games. Whether or not Steam would allow them into the supply chain was dependent on the votes of the community. This didn't work as well as they had hoped because the platform became rife with people gaming the system. Game makers also complained of uncertainty and unreliability. In early June 2017, despite 90 million votes on thousands of indie candidates, Steam Greenlight was shut down. A week after it was shut down, it was replaced by Steam Direct, which involved a more traditional approval process—Steam decided directly on whether the game was greenlit. But the opportunity for monetization remained. If you were an indie developer with a good game and you got it approved, you could dream about a best seller.

Steam's brilliance is that it is not only thus, a content distribution and consumption platform but a content creation platform that provides access to 1 billion of the 2.7 billion gamers in the world and the means to both foster advocacy for the game by allowing the developers and the gamers to participate with each other in moving the game forward but providing a stream of income for smaller game studios and individuals in a highly curated ecosystem with a flexible platform. It's true co-creation and community.  It is a paradigm in a content creator's world for the business model that I am promoting here.

Feedback loops and personalization

In a lot of ways, it still all depends on the gamers themselves. Gamer recommendations are a key to game purchases. Not only are their mass recommendations on the microsite for each game—e.g., "Very Positive last two weeks (855), Mostly Positive overall (31,211)—but they have super-fans called "Curators" who apply and are selected to review games, often before others get the opportunity. Even the mass recommendations can be drilled into to view the individual recommendations in as much minute detail as you care to see. Additionally, because of the game hubs, community comments are aggregated to the individual game microsite, adding additional color and more content for decision-making. The community conversation has room for recommendations for specific improvements to the game that are addressed to the developers. So, the Steam community has the opportunity to reach the developers and the publishers and to directly provide input with the backup of the implied power of those monthly 120 million "listeners" to the conversations. This Amazon-like review system is word-of mouth-institutionalized. It allows the potential game purchaser to see what thousands think (quantitative) and what individuals think (qualitative) and what selected curators think (expert opinion). This is data that a potential consumer can use to help them decide on the transaction.

In addition, you can always see not just what the Curator thinks but what is popular among those friends in the Steam community that you're connected to with a simple pulldown menu item click.

Algorithms are constantly running in the background, cataloging your entire journey across the Steam universe. If you purchase a game, the algorithm notices; if you read reviews of a game, it notices; if you rate and review a game, it notices. Steam generates game queues, i.e., games that the engine recommends based on the tag frequencies in your journey. Within the queue, as you go through the personalized set of recommendations, you can add a recommended game to your wishlist, follow it to keep abreast of news and developments, and either buy it or say that you aren't interested. More recently, you can customize the tags that you want the algorithm to stop considering. For example, I eliminated "gore" as one of the tags that showed up in a few of the games that I had tracked. Please, no judgment. I'm not that violent, even when I'm playing a game. I swear. The algorithms are constantly refining my likes and dislikes to provide me with a highly personalized experience across the entire ecosystem, which, of course, enhances my engagement with Steam.

Revenue model monetizes ecosystem—community-driven economy

Needless to say, Steam isn't a charity, nor is it a community whose sole purpose is for its users to be happy. It is a business that sells games and all the accompaniments to games. Because of its focus on its customers/members, the revenue model that they've built is organized, with some occasional hiccups, around making sure that both Valve and the members gain real benefit from what made Valve $4.3 billion from Steam game sales in 2017 (latest available revenue numbers) and valued at roughly $10 billion in 2019 (based on reported discussions with Michael Pachter, a Los Angeles-based analyst at Wedbush Securities in March 2019).

The revenue model has multiple levels. The most obvious is game activations. Steam had more than 559 million game activations in 2020, with a needless to say COVID-related boost.  Additionally, tied directly to many of the individual games were the fees for DLC developed by the game companies, which ordinarily range from $0.99 to $19.99, depending on what kind of content is added to the game. Valve's own "free to play" games, like the wildly popular multiplayer Dota 2, rely on in-game micro-purchases ranging from strictly cosmetic items (new outfits or hats) that have no impact on gameplay but are designed to provide a highly personalized in-game experiences, to new, more powerful weapons that can help you win the game.

Parts of this model benefit Steam Community members. You earn items to trade or sell based on in-game achievements or transactions. Those in-game items (trading cards in a manner of speaking) can be sold in the Steam Community Market. The money is placed in your Steam Wallet, which is a credit holder that provides you with money to spend on Steam games—Steam Community-only cash. Because these sales are real money, Valve takes 5 percent of the sale—and the users who sell the item have to use the cash to buy Steam games. Think of it: the customers have sold items they earned as extras for doing something in the Steam Community or in a game. They now own credits with which to buy games, and Valve is also making something from the sale—in their case, real cash, not Steam credit.

The developers are also rewarded. If Steam Direct greenlights their game, they can put it up in the Steam Store even as an "early access game." That means that the game could still be in alpha— which is a very early stage of development—and not only can it be purchased, usually at a good pre-release discount, but the customers can give feedback to help the game get from alpha to beta to release. Meanwhile, the game developer and Valve make money on the journey.

This multilayered, somewhat complex, revenue model provides value to both the user and to Steam. It rewards

  • the user for success in the games and for community activity
  • the developer for creation of the games
  • the company with sales, subscription fees, transaction fees, and distribution fees
  • Win-win all around the ecosystem.

Lessons to Be Learned

I want to start with the lessons from this case study that you should not learn. Interpretations of the incredible success of the electronic games industry are often narrow and stultified. "What we learn from PC and video games is that we need to make things more fun! More competitive!" Thus, we saw the brief flare up in popularity of gamification. There is nothing wrong with making things more fun, and even more competitive, so customers have a better experience. But the most powerful lessons to be learned here don't come from the games; they come from the gaming industry. The industry's business model is transformative—engaging customers in the most advanced way, treating them as your partners, and realizing a mutual value exchange. This is the business model driven by partnerships, ecosystems and platforms.

Okay, then what are the universal lessons that you can learn from the PC and video gaming industry? 

Here are a few that might make a big difference to you. (If you want the details, I wrote 400 pages on this in 2019 called "The Commonwealth of Self-Interest: Business Success through Customer Engagement")

  1. The core principal of success for this business model  is characterized, first and foremost, by a mutual value exchange between the company and the customer. In this case, the gamer gets to participate as a partner in conjunction with the game company to build the kind of game they want to see as individuals, to interact at whatever level they choose to interact, and to be supported at no matter what that is. When I say build – I mean literally develop a game that can very possibly be sold on the very platform they play on.      
  2. The engagement of the customer and their experience over time are highly personalized, even when dealing with millions of customers. This is the signature of the PC and video gaming industry. Make the gaming experience and all the interactions associated with it "yours," in the form you want, from entirely new games to cosmetic in-game changes to existing games with skins for the interface to clothing for avatars. This is now enhanced by the rich data available about the journeys, the personal likes and dislikes, and the conversations among the gamers.
  3. To reach that state at scale, the business has to provide the necessary products, services, tools, and consumable experiences and place them at the customers' disposal. The industry institutionalized the customization opportunities for gamers by providing them with the tools, after the gamers themselves created their own tools to modify games in the earlier stages of evolution.
  4. The culture of the business has to be customer-engaged not just customer-centric, meaning the DNA of the company has to be focused on providing what the customer needs to be good enough to keep them engaged—even when it means leaving things that are ordinarily in the control of the business in the hands of the customer instead. Steam is focused on making sure that the gamer's experience is the paramount concern of the company, even with the customer-service warts. This engagement model is more the industry standard than not.
  5. The revenue model should be one that benefits all hands if at all possible. This means that if there is a way for the customer to gain something from the transactions, they should be given the opportunity to do so. One caution here: this can't always be the case. Steam has been in the forefront of seeing that gamers are rewarded with community currency and real currency, as well as providing the distribution network for independent game developers and publishers in addition to more traditional commercial firms.

To build what I call the commonwealth of self-interest takes both a platform and an ecosystem. This is not either/or. Steam provides tools to both the game developers and the gamers themselves and a deep community that allows them to interact and exchange value with the company and amongst themselves.

If everything in the world was beautiful, all our businesses would have the  framework that I'm suggesting here. The PC and video games industry has the most advanced DNA in this regard, and Steam is the reflection of something approaching a practical, mature and well-proven contemporary business model.

Is it possible to have that in other industries or at other companies? Sure. The beauty of this model is that the components/elements of the model are "reusable" – meaning you don't have to implement the entire framework in an all or none fashion. You can choose one, two, eight elements and ignore other ones.  The idea is to configure the model according to the needs of your industry and your company. In a future post, I'll go through the details of how to do that.  If you want me to write it that is. Let me know. 

As far as I'm concerned, we now have a business model that addresses what an engaged or potentially engaged customer base requires.  It has the collaboration, the personalized and even humanized capabilities, it is monetizable and provides both practical and emotional value to the customer and their customers. It is a B2B2C model that operates from understanding the needs and desires of the individual where ever in the chain they are sitting.  And what could be better than that?

So please feel free to respond here about what you think – or if you prefer on the LinkedIn, Twitter or Facebook references to the post.  Otherwise, have a great…whatever length of time you want.


Notes:

  1. CRM Playaz is going to be doing an Executive Roundtable on Social Good and CSR on July 1, 2021 from 1:30pm to 4:00pm EDT.  Watch for details here as they evolve.
  2. I am going to be launching a new show (In addition to the Playaz) in late June early July called "Engaged…with Paul Greenberg. This is unlike any show ever done in the industry – and I mean EVER. Think not the usual intro-show host-interview-see ya show. Think late night talk show. Think living theater brought to the industry. Think TV. Think people not personas. Humanization not personalization and think not only business matters.  Then you MIGHT start to get it.