Live Blog: DICE 2009 Keynote - Gabe Newell, Valve Software


Posted February 18, 2009 - By Brian Leahy

This year at DICE, Gabe Newell, the founder and managing director of Valve Software, will be delivering the keynote address. The ballroom is rapidbly filling up, but I've got an amazing seat and can't wait to hear Gabe's remarks. I'm a huge fan of Valve.

Responsible for the Half-Life series, the revival of Team Fortress, Portal, and Left 4 Dead, Valve is one of the few studios that consistently releases incredible work. Their Steam digitial distribution service is already the leader in digital sales with more publishers flocking to the service every month.

Hopefully, he'll announce a release date (that they'll break anyway) for Half-Life 2: Episode 3. Better yet, how about Half-Life 2: Episode 33 1/3 with Leslie Nielson? Move over, Alyx!

We're getting started soon so keep checking back for glorious live blogitude.

6:01 PM - The keynote is officially one minute late. Jeez. Valve can't even ship a keynote on time!

6:04 PM - I just got word that Gabe's beta speech was stolen from the green room and it wasn't very polished. He's hard at work refining his speech and we expect to kick off "when it's done."

There are some Sony people behind me discussing the Killzone 2 release date. Even at industry events, I can't escape "February 27!!!!"

6:13 PM - Lights are officially dimmed and we're kicking off. Joseph Olin, President of the Academy of Interactive Arts and Sciences, is doing the general introduction to the Summit, which has officially now on course.

6:19 PM - Time for Gabe. Here he is! His topic: "Entertainment as a Service." I'm guessing a lot of this will be focused on Steam and Valve's direct relationship to its customers through the service.

Gabe beileves the old way of entertainment: Indirect customer relationships, product orientation. The new way of entertainment now: Direct customer relationships, service orientation. Valve aims to touch its customers in some way every three weeks, not every three years when a new game is shipped.

Through this perspective, Gabe and Valve have observed the following:

  • 30-year old songs with a little service (Rock Band, Guitar Hero) generate huge profits
  • Pirates are ahead not just on price, but on service
  • DRM appears to increase, not decrease piracy
  • Privacy and transparency
  • Shrinking distance to customer empowers content creators

Gabe doesn't believe that pirates are really seeking to get things for free. They are people that spend thousands on their PC's and Internet service. He believes that pirates are beating companies on service. He cites TV shows not available in certain parts of the world. Pirates have TV shows up on the Web minutes after they have aired.

6:26 PM - DRM decreases service value for customers. It also makes pirated copies of games look more appealing. Anecdotal evidence appears to suggest that DRM is increasing and not decreasing piracy.

As far as privacy goes, Gabe believes that people are willing to give up system and personal information if they feel it's being used to get a better service. Steam's hardware survey is an example of this. Rather than spying on users for nefarious reasons, Gabe believes things like its hardware survey helps with better sales of products and service. As long as companies are transparent, he feels that customers will accept this.

As far as the shrinking distance between Valve and its customers, Valve didn't find any service in existence so it made its own: Steam.

6:30 PM - Gabe thinks that the movie industry would benefit from incremental products. Toy Story 1.1! Just make the graphics better!

Steam stats time:

  • 20 million people connected
  • All major PC publishers on board
  • 350+ of the best PC games
  • Worldwide in 21 languages
  • 100% Year-over-year growth since 2004

There are competitors, but they are all trying to do the same thing. These include services like Games for Windows Live, Direct2Drive, iPhone App Store, Stardock Impulse. Gabe was very modest , not mentioning that Steam is wildly more successful than any of the other services. But that's why he's giving the keynote. No need to brag.

From a customer's perspective, they want things like portability of content and files, anti-cheating, auto-updating & version control, new games, old games, indie games, 24/7 availability, and community tools. Yep, Steam has all of those. I still think the groups need an upgrade, but they are definitely functional enough to get the job done.

6:35 PM - From a business perspective, developers and publishers want piracy protection, keeping customers current with the latest version, direct communication to customers for marketing and promotion, instant sales and promotional performance data, and being able to take advantage of new business models like DLC, subscriptions, and micro-transactions.

6: 40 PM - With Team Fortress 2, Valve shipped the game as a service and not a product. Valve uses "updates" to create more value for its customers. Updates can be bug fixes, new achievements, maps, and unlocks. There have been 63 updates to Team Fortress 2 since its release. This is also why the PC version is so much better than the Xbox 360 version.

Gabe now speaks about how important Web content creators and blog writers are for the future of games. It brings a tear to my eye! They'll be able to help market products with authority and knowledge.

Gabe brings up an excellent point that successful entertainment companies will realize that fans of properties like the property, not the specific product. They are Harry Potter fans, not just fans of the books. The team that's making the TF2 character videos (which are awesome!) are going to be working on comics.

He's now going showing the Sniper short film. Yay, I get to laugh all over again!

"It works because the people that built that [video] are the same people that built the game."

6:46 PM - Valve has been using its existing customers to gain new customers. "There's no way to go into Circuit City to pick on the dead" and get a free weekend. Ouch, Gabe. Ouch.

Valve has seen a great turnaround rate on guest passes. Friends invite their friends to play a game they already own. Game invites that also walk a gamer through a purchase process are also effective.

Time to look at the sales of Team Fortress 2 to see the impact of the updates on revenue. Holy s#!%. The sales spike by huge amounts everytime there's a sale or major update. Steam sales went up 106% after a free update. Player minutes went up by 105%. Gifting has thrown a 71% sales increase. Surprisingly, sales from retail stores also went up by 28%. Finally, it saw 75% increase in new users. Knock knock. Who's there? Steam. Steam who? Steam is so successful it hurts.

6:51 PM - Price changes in the retail world don't allow for much freedom. Steam and other services offer flexability. In fact, users apparently respond to pricing discounts within five minutes.

Valve was afraid that too many price changes would "confuse and anger" customers. It isn't the case.

Last weekend, Valve decided to do an experiment with Left 4 Dead. Last weekend's sale resulted in a 3000% increase over relatively flat numbers. It sold more last weekend than when it launched the game. WOW. That is unheard of in this industry. Valve beat its launch sales. Also, it snagged a 1600% increase in new customers to Steam over the baseline.

Worried retailers, fear not. The weekend sale didn't canabalize sales from retail. In fact, they remained constant. Well, constant isn't a 3000% increase, but it's still pretty good, right?

6:56 PM - Looking at a third-party game, it saw increases of 36,000% with a weekend sale. Oh. Em. Gee. Okay, Gabe is starting to convince me that PC at retail is going to die very soon.

Oh, more data. I'm such a data nerd. Here's some data!

During the Holiday sales:

  • 10% sale = 35% increase in sales (real dollars, not units shipped)
  • 25% sale = 245% increase in sales
  • 50% sale = 320% increase in sales
  • 75% sale = 1470% increase in sales

At 75% off, they are making 15% more money than they were at full price.

Conclusion time, digital distribution is a game changer the same way that:

  • VHS to DVD to Netflix
  • Vinyl to CD to iTunes
  • Paperback to Tape to Kindle

Entertainment as a service and not just a product certainly has its merits. Unfortunately, this model isn't going to work for console games as the bandwidth required to send a 7.8GB game across the pipes just isn't feasable yet.

Talk is over! GG, Gabe.

Q&A Time:

How does this model apply to consoles?

Consoles will succeed for fail based on their customer relationships. Given the choice between better graphics or seeing instant sales data and customer feedback, Gabe would choose the customer data. Gabe also believes that services like Steam that begin on the PC will eventually end up on consoles.

The weekend sale for Left 4 Dead, was that just a price cut?

It was a price cut and a tease for the new Left 4 Dead content. That's what leads to the non-linear increase in sales. There are other ways to excite customers with things like commentaries and comics that take less effort than new maps.

Does Valve see value in Facebook and MySpace for its content?

Right now, those two social networks are sources of interesting features, but not quite right for a partnership currently.

Are you worried about constant sales and having customers wait for the next sale to purchase?

When prices are dropped, Valve sees a lingering increase in sales. Valve has hired an experimental psychologist to come up with new ways to excite users with pricing models and sales. He suggested one in 25 users that buy Left 4 Dead get another Valve game for free. That'd be awesome!

Live Blog: DICE 2009 Keynote - Gabe Newell, Valve Software


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