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Invincible Company of the Month: Valve Software

The difference between R&D innovation and business model innovation

Valve Software - one of the top video game makers in the world - is a fascinating example of culture and business modeling that highlights the difference between R&D innovation and business model innovation. 

Historically, Valve Software, founded in 1996, makes popular story-driven game series for PCs - Dota, Portal, and Half-Life to name a few. They are known for employing a very flat managerial structure, where employees are encouraged to design their own agendas, set their own priorities and move between teams at will.

What makes Valve a good example of business model innovation is that, while it continues to put out games - having released Half-Life Alyx just a few days ago - one of its main activities is now running the biggest video game platform/marketplace in the world - recently ranked as the #2 largest marketplace in the world by a16z. This platform, Steam, is used to sell and host the vast majority of premier games that come out nowadays.

Source: a16z.com/marketplace-100

Rather than going to the shops to buy a copy of their new favorite game, or even ordering it online, gamers can simply buy the game from Steam and play it on their platform. Video-game developers now expressly create games to be compatible with the Steam platform as a result of the platform's overwhelming market share, and gamers host their entire gaming catalog on the platform for convenience and storage. Steam created an automatic update system alongside various other storage tools that perfectly fit its consumers’ needs and ensure their continued support.

This is a clear example of a double-sided platform model - like Facebook and Airbnb - with its two customer segments - the gamers, and the video-game developers. The reason this shift towards a platform model is fascinating is that there is nothing in Valve Software’s infrastructure or key activities that enabled it to make this pivot more so than any other large gaming company. Whether it be Bethesda or EA Sports, other game makers were just as well-positioned to pursue this opportunity, and equally well equipped to do so. That being said, none of its competitors did so, even seeing Valve’s open war on console gaming as a futile one. Two decades later, more than 20% of all video game sales are made on Steam and somewhere in the range of 75% of all games are hosted on the platform.

Rather than creating new growth engine through Research & Development, Valve Software found a novel way to use its pre-existing key activities and resources. Using its knowledge of the game-making process and of its consumers, they created a very user-friendly and successful platform at very little additional cost on their end. 

Much like in the case of Google and Facebook, double-sided platform models are incredibly powerful, as they create moats that prevent their competition from copying their approach. In the case of Steam, their large catalog of games makes it an easy destination for gamers, locking in a giant base of users - with all their games are stored on Steam, leaving for another platform is difficult for consumers - which in turn forces video game makers to adapt their games to the Steam platform - creating what we call a Platform Castle.

Business Model Pattern: Platform Castle 

02-Platform-Castle

Create a business model with network effects in which a large number of users represents value to one or more other distinct sets of users and vice versa. That makes it hard for anybody else with fewer users to compete or to catch up. 

Platform Castles are a flavor of the Resource Castles business model pattern. Where companies look to build a competitive advantage with key resources that are difficult or impossible for competitors to copy. You can find this business model pattern and many others in our book, The Invincible Company

This Platform Castle is a powerful and stable business model, which does not rest on fancy R&D innovation or even an entirely new process. It uses the exact same approach that Google uses: consumers on one side and sellers/advertisers on the other. By joining a broad (and locked-in) user group with a broad seller group, the Steam business model is incredibly hard to disrupt or compete against. 

The question that this example brings up is: what business model could you use to revolutionize your industry?

How might you disrupt your industry, not with a new product, but with a new approach that better utilizes your key activities and resources?

The Invincible Company

How to constantly reinvent your organization.

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The Invincible Company
The Invincible Company

The Invincible Company

How to constantly reinvent your organization.

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Written by Nicholas Himowicz

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