The Battle for Digital Gaming Distribution

Borderlands, Gearbox Software’s (Gearbox) flagship franchise, has sold more than 26 million copies across three titles and has a loyal fanbase of long-time players. Starting with several tweets and culminating in the release of the game’s first full-length trailer shown at PAX East, Gearbox announced Borderlands 3, the fourth entry in the critically acclaimed looter-shooter series.  According to the title’s publisher, 2K Games, Borderlands 3 will launch on September 13, 2019; however, shockingly to many PC fans, the game will be initially released on as an Epic Game Store exclusive, only launching on other digital distribution platforms six months later in April 2020. Many fans of the series have been quick to lash out at Gearbox, calling for boycotts of the new title (as well as historical offerings), , and posting negative reviews on platforms such as Steam, a practice known as review bombing. The reaction to the exclusivity deal with the Epic Game Store is only the latest skirmish in what is quickly becoming the battle for the future of gaming digital distribution. The participants are the incumbent, Valve (Steam), and several new challengers, including Epic Games.

Valve has been a dominant player in the gaming digital distribution space since launching its platform, Steam, in 2003. The platform has become an industry standard, featuring convenience, modding support, deals, and an enormous offering of games from both AAA and indie game developers.  In addition to features expected by customers on the platform itself, Valve’s first-mover advantage has also allowed the company to establish the industry status-quo for revenue sharing between a platform and game developers, With Valve having historically taken 30% of the revenue generated by games on Steam. There has long been some animosity between developers and Valve on this point – after all, 30% is a significant percentage of revenue to effectively pay to a distribution channel, especially considering how much many titles cost to produce. As technology has advanced over the years, allowing for increased complexity, game development costs (which include development team salaries, hardware, software, and intellectual property) have ballooned to unprecedented levels.  For example, Grand Theft Auto V, which was released in 2013, had a total development cost of upwards of $265 million – more than many blockbuster motion pictures.  Steam’s large fee on game sales has begun to result in tensions boiling over with developers and publishers; in January 2019, the organizers behind the Game Developer’s Conference released their State of the Industry Survey.  Of the nearly 4,000 game developers questioned, nearly a third said that Steam did not deserve its 30% cut.  Based on the results of the survey, it’s clear that there are enough disgruntled developers who would welcome competition in the space with open arms.

Enter Player 2. Although many gamers only know Epic Games as the maker of Fortnite, the North Carolina-based developer is far from a gaming upstart, having developed massively popular franchises such as the Unreal Series and Gears of War. In addition, the Unreal Engine powers a myriad of other AAA and Indie titles. However, over the last year or so, Epic Games has enjoyed a level of accolades and popularity that many game developers can only dream of:  Fortnite, the Company’s wildly successful battle royale release, and had close to 250 million active users as of March 2019.  This explosive growth has not escaped investors; ), and several other investors in October 2018. The increased cash flow from Fortnite, as well as its place in the modern-day cultural zeitgeist, has allowed Epic Games to expand into new areas, one of which is the Epic Game Store.

Epic Games is seeking to challenge Valve by directly appealing to developers and publishers, taking only 12% of revenue from game sales compared to Valve’s historical 30% cut.  Furthermore, if the game developer is using Epic Games’ development engine (Unreal Engine), Epic will reimburse the developer 5% of revenue from game sales. These terms have already begun to resonate with developers and publishers; several high-profile games, such as Borderlands 3, The Division 2, and The Outer Worlds have been announced as Epic Game Store exclusives. One such game, Metro Exodus, even shifted its deployment strategy in the midst of its pre-release rollout, a peculiar move that has since become infamous.

Other actors, perhaps emboldened by Epic Games’ blatant challenge to Valve, have also begun to enter the fray. Discord, a proprietary freeware voice over internet protocol (VoIP) application recently launched its own game store in October 2018 and announced 10% revenue share terms starting in 2019. In light of the new challengers facing Valve, the company has responded by lowering its own revenue share requirements. In November 2018, Valve announced a new tiered system to determine revenue sharing splits: instead of an even 30% cut, the company will adjust its cut downwards to 25% once a game has achieved $10 million in sales on the platform, and down another 5% once the game earns $50 million on Steam. The action by Valve illustrates the positive effect of competition in a space that has essentially been a monopoly for the last decade.

Competition causes prices to fall. Competition is good. Yet the question that needs to be asked is how will this impact consumers? Developers receiving more money for their work is good for the developer, but not necessarily for the consumer, particularly if the developers do not pass the lower costs on to consumers in the form of lower prices. However, there are two sides to every market. If the user experience offered by Epic Games on their game store pales in comparison to Steam, as it currently appears to, developers may second-guess their choice of digital distribution platform before they experience a backlash in sales. As it currently stands, the Epic Game Store is a barebones platform, lacking many basic Steam features that users have taken for granted. The list is long and includes functionalities such as cloud saving capabilities, user profiles, reviews, forums, mod distribution, account sharing, streaming to other devices, and item trading. While Epic Games’ challenge should be applauded, the company must keep in mind that consumers will only tolerate a notable decrease in functionality for so long before requiring more for more for their money. If that time comes and Epic Games cannot deliver, Valve may once again reign supreme in PC gaming.

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