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The Valve logo, as seen in an etched design at its offices.
Enlarge / The Valve logo, as seen in an etched design at its offices.

Indie developer (and Humble Indie Bundle originator Wolfire Games has filed a proposed class-action lawsuit against Steam creator Valve, saying that the company is wielding Steam’s monopoly power over the PC gaming market to extract “an extraordinarily high cut from nearly every sale that passes through its store—30%.”

An unbreakable monopoly

The lawsuit, filed in a Washington state federal court, centers on what it considers an illegal tying of the Steam gaming platform (which provides game library management, social networking, achievement tracking, Steam Workshop mods, etc.) and the Steam game store (which processes online payments and delivers a copy of the game). After years of growth, the vast majority of PC gamers are locked in to the Steam platform thanks to “immense network effects” and the high switching costs to move to a new PC platform, the suit argues.

That makes the platform “a must-have for game publishers,” who need access to the players on Steam to succeed. But games that use the Steam platform also have to be sold on the Steam Store, where Valve takes its 30 percent cut of all sales. By leveraging its monopoly platform power into a “gatekeeper role” for the store, Valve “wield[s] extreme power over publishers of PC Desktop Games” that leads to a “small but significant and non-transitory increase in price” for developers compared to a truly competitive market, the suit argues.

The suit includes a laundry list of competitors that have tried to create their own platforms to take on Steam’s monopoly, including CD Projekt Red, EA, Microsoft, Amazon, and Epic (not to mention “pure distributors” with platform-free stores like GameStop, Green Man Gaming, Impulse, and Direct2Drive). But the lawsuit argues that Steam’s lock-in effects mean none of these stores have been able to make much of a dent in Valve’s monopoly position, despite plenty of well-funded attempts. Even the Epic Games Store, which has spent hundreds of millions of dollars securing exclusives and free game giveaways, has a market share of only “a little above 2 percent,” according to one cited analysis (in an interview last June, Epic’s Tim Sweeney estimated a more robust 15 percent market share for EGS).

“The failure of these companies to meaningfully compete against the Steam Gaming Platform shows it is virtually impossible as an economic matter to compete against the Steam Gaming Platform,” the suit argues. “The Steam Gaming Platform has well-cemented dominance in the PC Desktop Gaming Platform Market, and given its unique and strong network effects, that is unlikely to change.”

Steam key restrictions

Valve does offer one method for publishers to sell Steam platform games on storefronts other than the Steam Store. A publisher can ask to generate free Steam Keys, which can then be sold on competing platforms that might take a smaller commission than Steam itself.

But Valve places significant limits on this feature, which “[rigs] the Steam Keys program so that it serves as a tool to maintain Valve’s dominance,” according to the lawsuit. That includes a “Price Parity Rule” that tells publishers, “Steam keys cannot be sold on other sites unless the product is also available for purchase on Steam at no higher a price than is offered on any other service or website.” Valve also reserves the right to deny key requests if the publisher asks for an “extreme number of keys and [isn’t] offering Steam customers a good value” (as the suit notes, the precise definitions of “extreme” and “good value” are unspecified and determined by Valve).

When requesting keys, publishers also have to click a box saying, “I agree that I am not giving Steam customers a worse deal.” And Valve also makes use of what the lawsuit calls a selectively enforced “Price Veto Provision” to alter the Steam Store pricing of games that are offered cheaper elsewhere, even in the case of games that don’t make use of the Steam platform.

One could argue that these restrictions are in place to prevent a game publisher from free-riding on the Steam platform. By selling the vast majority of its Steam keys on a different storefront, for instance, a publisher would be able to get all the benefits of the Steam platform while avoiding the bulk of the store’s 30 percent cut (and thereby generating much less revenue for Valve itself). If that argument sounds familiar, it’s probably because Apple has used similar arguments in its legal battle with Epic over Fortnite and the iOS App Store.

Wolfire’s lawsuit, though, argues that Steam’s pricing protection is an “anticompetitive restraint” that ensures that “Valve can stop competing game stores from offering consumers a lower price on Steam-enabled games in order to shift volume from the Steam Store to their storefronts.” Because of Valve’s pricing protections, “rival distributors have no meaningful way to attract publisher customers and take away share from Valve, because their efforts to compete on price (e.g., by charging lower commissions) are blocked by Valve’s price parity requirements.” Thus, Valve faces little to no competitive pressure on its 30 percent commission structure.

The only meaningful way to avoid these anticompetitive measures, the suit argues, is “to avoid using the Steam Gaming Platform at all.” But Valve’s monopoly position means that “there are no economically viable alternatives to the Steam Gaming Platform” for most PC games. While the suit acknowledges a few counterexamples (Riot’s League of Legends is cited by name), such titles “typically require a long history of recognition and success before they can attempt to thrive without the Steam Gaming Platform,” the suit says.

“At bottom, Valve’s scheme imposes a massive tax on the PC Desktop Gaming industry,” the suit argues in seeking the usual mix of damages and injunctive relief to fix the situation. “If Valve did not block price competition for Steam-enabled games, gamers and publishers would be able to have a seamless and non-fragmented platform while also enjoying the benefits of price competition in the distribution market. That would improve quality for gamers and publishers alike, all while lowering prices for everyone.”

The new lawsuit comes as Microsoft has announced plans to lower its revenue cut for games on the Microsoft Store from 30 percent to 12 percent starting in August. It also comes months after a group of five Steam users brought a similar lawsuit alleging that Valve’s monopoly position was keeping game prices artificially high.

Developers of games like these will soon earn more money when they're sold through the Microsoft Store.
Enlarge / Developers of games like these will soon earn more money when they’re sold through the Microsoft Store.

Microsoft is lowering the revenue cut it takes on games sold through its Microsoft Store on PCs from 30 percent to 12 percent, marking a new front in its uphill battle to take on competing game distribution platforms like Steam and the Epic Games Store.

“Having a clear, no-strings-attached revenue share means developers can bring more games to more players and find greater commercial success from doing so,” Microsoft Head of Game Creator Experience and Ecosystem Sarah Bond wrote in an announcement post. “All this to help reduce friction, increase the financial opportunity, and let game developers do what they love: make games.”

The new rate, which goes into effect on August 1, seemingly applies to games specifically and not to the general entertainment and utility apps that are also sold on the Microsoft Store platform, based on the language in the announcement. The change also doesn’t apply to game development across the Xbox console ecosystem, where Microsoft will still take a 30 percent cut (as do other major console makers).

Stiff competition

On consoles, of course, Microsoft relies on that 30 percent cut to make up for losses incurred on the sale of hardware. And on the Xbox, Microsoft is in the enviable position of being in full control of the only legitimate method of distributing downloadable games to customers (a similar situation to the one causing legal headaches for Apple and its iOS App Store).

On the PC, by contrast, Microsoft’s downloadable game store faces stiff competition from multiple competing platforms—as well as the ancient practice of gamers just downloading EXE files. And while there are some big-name titles currently available through the Microsoft Store, the platform’s selection of games is currently dominated by a lot of lowest-common-denominator shovelware.

A glance at the most popular games on the Microsoft Store today is not exactly an inspiring sight for most game developers...
Enlarge / A glance at the most popular games on the Microsoft Store today is not exactly an inspiring sight for most game developers…

Microsoft’s revenue-sharing move comes over two years after the Epic Game Store launched on PC with its own 12 percent revenue cut and could put additional pressure on Steam to lower its standard 30 percent cut (though that number comes down a bit for best-sellers and doesn’t apply to Steam codes sold via third-party stores). Then again, Epic has only clawed its way to a roughly 15 percent share of the PC gaming marketplace (as estimated by Epic CEO Tim Sweeney last June) by throwing huge sums of money at developers for timed exclusives and free game giveaways.

Thus far, Microsoft hasn’t shown interest in making similarly aggressive plays for exclusives on the Microsoft Store. Even many of Microsoft’s own Windows games, which would seem like ideal candidates for ways to get gamers interested in the Microsoft Store platform, are also offered on Steam these days, seemingly as a practical necessity.

Yes, a more generous revenue-sharing arrangement may convince some developers (and players, by extension) to try out distribution on the Microsoft Store. But if the large majority of potential players stick to Steam—where their friends, achievements, existing game libraries, etc. are already well established—then having a larger cut of a smaller market might still end up being a losing proposition for those developers.

The Microsoft Store stumbled a bit with game developers at first because of the initial requirement that all apps on the platform needed to be developed using the more restrictive Universal Windows Platform standard, which still has its fair share of issues. By the time Microsoft started allowing standard Win32 desktop apps in the Store in late 2016, the damage had largely been done for some skeptical members of the gaming community.

“The risk here is that, if Microsoft convinces everybody to use UWP, then they phase out Win32 apps,” Epic’s Tim Sweeney said in 2016. “If they can succeed in doing that, then it’s a small leap to forcing all apps and games to be distributed through the Windows Store.”

Microsoft’s move to improve its revenue-sharing agreements for PC games shows the company knows that it needs to do something to fix the Microsoft Store’s reputation with gamers and developers. But that move alone may not end up being sufficient to dislodge the more entrenched players in the PC gaming space.