Game distribution has been controlled by a select few tech companies for as long as most gamers can remember. Steam (Valve), Google Play (Alphabet), iOS App Store (Apple), Xbox Store (Microsoft), and PS Store (Sony) have owned this market for essentially two decades. Outside of Steam, these companies built the hardware (phone, console) and/or operating systems that served as the entry point to each respective distribution platform.
iPhones run on iOS, Android phones run on Android, PlayStation runs on Orbis OS, and Xbox’s OS is a little more complicated but has a modified Hyper-V hypervisor (known as NanoVisor) as its host OS. All of these operating systems were built by the company that also owns and controls the medium of distribution. Steam is the beneficiary of being an early mover in the PC space (official release in 2003) and has become the de facto launcher and distribution platform for developers of PC games. Due to the strong marketplace network effects of these distribution platform, we have seen complacency when it comes to consumer-focused innovation.
Within the game distribution market, Steam is most vulnerable as they are the only ones who do not own the operating system. Although the Epic Games Store does not have as many listed games as Steam (~650 vs 50k), it actually has a close peak DAU to Steam (31.1m vs 69m), relative to the amount of games they support, due to a few highly popular games in Epic’s portfolio (Fortnite, Rocket League, Among Us, etc). Though Steam still boasts 134m average MAUs versus Epic Games Store’s 62m, it is clear that a minimal catalog of high quality games is enough to compete with Steam’s large volume of games; enough quality trumps quantity (Protocol). To further showcase Steam’s lack of a moat, both Microsoft (Xbox Play Anywhere) and Sony (PS Now) are expanding to PC and bringing their plethora of titles with them.
Late last year, we wrote a piece on the top PC gaming distribution platforms in the market, how they got here, and how their scaling strategies compare to each other (Konvoy). At a high level, we focused on both the developer and consumer (gamer) side. This week, we want to focus the discussion on one of game distribution’s key problems over the last 20 years: distribution is not built for the consumer.
While Steam’s early focus was on building an all-in-one solution that was best for both developers and gamers, every subsequent competitor has tried to upend their PC monopoly by focusing purely on the content offered instead of the consumer’s core experience. Distribution platforms have focused here as content is still king and gamers will follow the best games (see PlayStation and Xbox competing for the best exclusive titles). The only way to “win” in the distribution category is to either undercut the platform take rate (Steam charges 30%) or pay for exclusives (i.e. Halo on Xbox).
For context on exclusive title spending: Epic spent $444m in 2020 (source), Microsoft spent $1b for exclusive titles for the Xbox One (source) and acquired Zenimax for $7.5b and Activision Blizzard for $68.7b, and Sony spent $329m for exclusive titles for the PS5 in 2021 (source).
On the one hand, a fragmentation of gaming distribution platforms may increasingly degrade the consumer experience and increase costs (similar to what we have seen in the television streaming industry with Netflix, Hulu, Disney+, and others). However, increased competition will inevitably encourage innovation. Outside of exclusive content, we see four alternative ways in which we think PC game distribution platforms can differentiate:
1) Social features: these platforms should build out more extensive social features that leverage a consumer's social graph across platforms (i.e. integration of TikTok or Instagram friends). Additionally, distribution needs enhanced tools around teammate discovery and private tournaments. This is especially true now that playing cross-platform is prominent and gamer friend groups are not constrained to singular ecosystems. Gamers gravitate to where their friends are; if a platform can facilitate more social connections and interactions they will provide additional value-add and network effects between their consumers, building a more defensible offering.
2) Creating and sharing game moments (clipping): One of the best ways to market games is through word-of-mouth. Bundling a way to create and share moments between friends and the public would make games easier to discover and far more viral. Consumers should be able to watch popular clips through user profiles or buy games with the click of a button when watching a clip. Friends and communities should be able to access, manage, and create clips on the same platform they are buying games from. You can read more about clipping in a previous Konvoy newsletter, The Future of Clipping. There are a number of standalone clipping solutions in the market today, distribution platforms should consider acquisitions here.
3) Discovering and watching content creators: With the rise of gaming streamers, they have become one of the best marketing channels for games. From gameplay to walkthroughs to reviews, consumers rely on gaming streamers to find and learn about new games. Within a game distribution platform, there should be live-streams or videos from gaming streamers that are actively playing or have done walk-throughs of the game. This would highlight the game to consumers while also allowing consumers to discover new streamers. Furthermore, YouTube Gaming’s market capture of the live-streaming market shows that live streaming platforms (like Twitch) are prone to new entrants. You can read more about our perspective on Twitch’s market vulnerability in a previous Konvoy newsletter, Twitch’s Obituary. As a note, Steam has half-attempted an offering here with Steam.tv, but the product is essentially abandoned and relegated to CS:GO.
4) Deep recommendation engine: Game discovery is currently done through either advertising/marketing budgets or word of mouth. In our opinion, discovery should be far more aligned with big data. Platforms should have the ability to recommend based on games in your library, playtime in genres and games, friends and social connections, as well as following curators. Many great games are either never discovered or found later than expected (see: Among Us). This lag in discoverability is a major issue that we believe is solvable.
Takeaway: Game distribution will be a difficult sector to disrupt given the extensive IP libraries of existing platforms. However, the most cost-effective way to differentiate will be through focusing on the consumer experience. Companies like Twitch (streaming), Discord (communications), and Medal.tv (clipping) are impressive standalone businesses; however, if they were bundled into game distribution platforms they would create significant consumer value and a stronger defensible competitive moat than the costly exclusive content pursued today.