The Bank of Gaben

Valve Corporation is a bank, issuing its own proprietary currency. This currency is managed through the Steam Wallet system, and backed by the full faith and credit of Valve: its ability to continue to afford to keep Steam services online, and its continued possession of the legal right to issue keys for the games and virtual goods on its service. (That is, if Steam shut down tomorrow, or its product listing emptied out, your Steam Wallet balance would be worthless.)

When you fund your Steam Wallet, the money you spend funding it might as well cease to exist; it becomes a few dollars in a corporate bank account, which Valve can spend freely or invest to earn returns. The money in your Steam Wallet is actually just a promise Valve is making you that, in good time, your money will be repaid in goods purchasable on Steam. This promise has no expiration date, and bears no interest, just like “real” currency.

However, it differs from the currencies of the “real world” in two main ways:

  1. You cannot convert your Steam Wallet currency back to real currency, at all. If you try to use external services (selling gifts, selling accounts) to get your money back out, Valve can and will punish you for violating the Steam Terms of Service.
  2. Valve is a privately-held company that doesn’t publicly issue financial statements or publicly sell stock, so you can’t easily monitor or influence its operation.

Valve can, and does, exploit these properties of its ecosystem to extract profit, through a process of designing a platform that wants to have money fed into it, to assess fees to support business processes we have no insight into, and for which we have no justification save Valve’s word.

a simplified diagram of cash flows in the Steam system; green lines are local (i.e., real) currency, blue lines are Steam Wallet credit, Valve write-offs are omitted

Say you’ve somehow ended up with $60 worth of currency in your Steam Wallet. Here are the different ways you can spend that $60:

  • You decide to buy a $60 video game. Valve is tight-lipped about how much of a revenue share they take from Steam publishers, but Notch and THQ bankruptcy paperwork suggest it’s about 30%. (This also lines up with the revenue share on the two big mobile video game stores: the Apple App Store and Google Play.) Valve issues a Steam key (for no cost), marks down their Wallet debt by $18, and reimburses the publisher for $42.

So far, this is nothing too bad; Xbox Live, PSN, and the Nintendo eShop all work basically the same way. However, Valve also has thriving markets in virtual goods off of which they make money:

  • You decide to buy $60 worth of Dota 2 hats. Valve forces you to use Steam Wallet to purchase items for Dota 2 on the Steam Workshop, and takes — as the developer of the game, which is theoretically being funded by the plethora of available items; and the $40 million virtual program sold for the world finals every year; and ticket income; and the income from the merch booths which are stripped clean for keys to be resold on secondary markets; and the major tournaments worldwide which all charge fees through Valve to attend virtually, but I digress — a 75% revenue share. Valve adds items to your inventory (for no cost), marks down their Wallet debt by $45, and reimburses the item designer for $15.
  • You decide to buy $52.17 worth of Steam Trading Cards. Valve forces you to use Steam Wallet to purchase items on the Community Market. Valve adds a 5% “Steam Transaction Fee” (STF) on top, notionally to cover the cost of maintaining the service and preventing fraud; they also add another 10%, which goes to the developer of the item. Valve moves items to your inventory from another user’s inventory (for no cost), marks down their Wallet debt by $2.61, reimburses the developer $5.22, and moves the other $52.17 of Wallet debt to another user.

All of these markdowns are entirely disconnected from the cost of the labor Valve has to invest in the process; additionally, Valve reduces its exposure to the risk of producing many of these items by using others’ labor wherever possible. Valve sets up official contests and regularly introduces Workshop items created by third parties to their games’ official item sets; these items’ designers are not paid a wage by Valve, only a revenue share. Designers bear the risk of designs which don’t recoup the time invested, as well as the cost of self-employment tax, business expenses like software and hardware purchases, and benefits an employer would usually provide like health insurance and a retirement program. Steam Trading Cards (and badges, wallpapers, emoticons, etc.) are made by the developers who make their associated games; Valve pays them only 10% of the total trade volume of these items, and tries to lean on developers to go to the effort by claiming that the presence of Trading Cards sells additional titles.

The trading mechanics that have been added to Steam don’t actually create a “community”; they’re just progressively more elaborate schemes to drive trade volume — to get users to pump money into the Steam Wallet system (where it’s gone forever) and then leisurely write off as much as possible of the Wallet balance created.

For example: if you own a game on Steam, only half of the Trading Cards associated with it will ever drop while you play the game. Say a full set of trading cards is worth $2 before fees. Every person who tries to finish a set of cards through the Market will put $1.15 into Steam Wallet (to buy half of the set): $0.10 of this will go to the developer of the game; $0.05 will be written off by Valve in STF; and of the remaining $1, somewhere between $0.30 (Valve’s 30% share on a third-party game sale) and $1 (Valve’s 100% share of a first-party game or item sale) will be recouped by Valve in fees later.

During recent Steam seasonal sales, Valve created new lines of Trading Cards — for which they are the developer, so they recover 15% fees, rather than 5%, off of every trade — and used them to incentivize spending money during the sale (at the rate of 1 free card drop for every $10 spent). Despite the fact that selling this card looks like a discount at Valve’s expense (get $11 worth of games for only $10!), this discount is actually paid for by another user through the Community Market trading mechanism (get $11 worth of games for only $10, plus $1 another user paid for you, plus $0.15 that disappeared into Valve’s pocket!) To add insult to injury, unused Trading Cards from these sales disappear at the end of the sale — and, until then, serve as a persistent reminder to the user that they should be spending money to finish the set before they [dramatic music plays] lose the chance forever.

Finally, as of this writing, Valve is running a promotion in advance of the Holiday Sale 2014: an auction of Steam games. These Steam games were “donated” in lots of 100 by developers — i.e., “Valve got their permission to not reimburse them for generating 100 Steam keys” — and are being auctioned for Gems, a brand new commodity. The top bidder on an item at the end of each 45-minute auction round gets the item for “free” and is then removed from bidding: after 84 of the 100 rounds of bidding, a $4.99 item (the Sanctum 2 Complete Pack) is selling for 6,500 Gems; prices were substantially higher a few days ago.

Users can obtain Gems by destroying their existing Community Market items, or by buying sacks of 1,000 Gems on the Community Market. Gems currently sell directly for $1.17 a sack ($1.35 including Valve’s 15% fee), but the most efficient item in my possession is a Kerbal Space Program wallpaper that would cost only $0.87 a sack.

So, a $4.99 item could cost me at least $5.65 in Gems, $6.50 after the 15% fees to buy all those wallpapers. After the dust settles from the auction, Valve still gets their 30%: buying Sanctum 2 with Gems from those wallpapers gives Valve $0.28, and the developer of KSP $0.57, immediately in fees; later, Valve recoups somewhere between 30% and 100% of the $5.65 debt I transfer to another user. Valve’s cut is fatter if you buy Gems directly: not only are they more expensive than many Market items, but Valve will claim the full 15% in fees, pushing them up to nearly 40% of revenue.

The auction allows Valve to turn a $4.99 game sale — which would normally earn them $1.50 in net revenue — into somewhere between $1.98 and $8.74 (if I buy the game with Gems I bought directly, then the user I buy them from turns around and spends their Wallet balance on Portal 2), through a system that decouples the game from those who earn royalties on its sale, and creates a price increase through complicated, opaque pricing and artificial scarcity. If the auction is successful, the mass destruction of Community Market items by users to generate Gems will also help to decrease the supply of Community Market items, creating a price hike and increasing market trade volume even after the promotion ends.

Even if this auction is an aberration, it’s becoming clear that Steam is sprouting more and more abstruse systems by which to separate users from their money, running on labor and royalties donated by external developers and designers. At the same time, through systems like Greenlight and user list curation, Valve seems to be attempting to offload the work of maintaining Steam as a video game storefront to the unpaid labor of gamers and journalists. What does the future hold for Valve’s business model? Will there be anything left beyond a volunteer-run virtual consignment shop where money just disappears, never to return?

Thanks to Austin Walker for letting me bounce an earlier version of this post off of him.

This was originally posted (without diagrams) on my tumblr, on December 18, 2014. Recently, Valve announced support for third-party games selling Steam Workshop items; I’m currently writing about that system, to be released here as a separate article soon.

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