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In a surprising move aimed at challenging Sony, Nintendo, and Microsoft (NASDAQ: MSFT ) , video game developer Valve recently introduced SteamOS, a free Linux-based operating system. SteamOS will bring its popular front-end store software to living room computers, allowing Valve to indirectly enter the home console gaming market.
Although Valve's plan is ambitious, there are some major challenges that the company will face in its quest to dominate both markets.
Is SteamOS anti-competitive?
In its present form, Steam is a front-end launcher that can be installed on PCs and Macs to access the Steam Store's extensive library of software and games. Much like Apple's iTunes, Steam is a "walled garden" content delivery system that encourages customers to shop within a single system.
Steam was so popular that it forced other companies to release their own digital distribution platforms, like Electronic Arts' Origin and Ubisoft's UPlay. Many gamers installed multiple digital distribution platforms, since different digital stores offered different products and discounts.
By growing from a software launcher into a full operating system, Valve is trying to eliminate that choice for gamers. No longer will gamers be allowed to choose to download from Origin, UPlay, or Amazon -- they will only be allowed to shop at Steam.
Who can build the biggest walled garden of all?
More than anything, SteamOS appears to be a defensive move against Microsoft. Microsoft has united PC, Xbox, and mobile gaming under its Windows Live/Xbox banner. All three platforms share the same user login, character profile, and achievement records. Its Xbox SmartGlass app can even tie Xbox games to smartphones and tablets by adding "second screen" displays.
However, the biggest threat to Steam is the Windows Store, which is directly integrated into the Windows 8 operating system. Just as Microsoft attempted to make Internet Explorer and Windows inseparable back in the late 1990s, it is now trying to eliminate the walled gaming gardens of Valve and EA by simply making its own OS the biggest walled garden of all.
Microsoft is also targeting Apple and Netflix with its Xbox Music and Xbox Video stores. With the Xbox One, Microsoft hopes to unite all of these services in the living room on a single platform.
Splitting with Microsoft could also help Valve detach itself from the unpopular Windows 8, which Valve co-founder Gabe Newell publicly blamed for the decline of PC game sales. Newell recently stated that although the PC gaming industry had experienced double-digit declines, Valve sales grew 76% year-over-year.
Like Microsoft, Valve is also expanding into other cloud-based services for the living room. The company announced four new features for SteamOS and the regular Steam platform: game streaming (mirroring a game running on another PC), family sharing (allowing a single digital game to be shared with others), parental restrictions, and streaming media services.
Can Valve merge the console and PC markets?
In previous statements, Newell touted the open-source nature of Linux, in contrast to the closed-off Windows ecosystem. While that statement is true, and could encourage more independent developers to release games for Steam, it's an ironic one considering that Valve plans to corral all its gamers into its own walled garden.
However, there could be major benefits in merging the gaming console and PC markets, if Valve is successful. Video game consoles are usually released in generations which are several years long. For example, the current seventh generation of consoles -- which includes Sony's PS3, Microsoft's Xbox 360, and Nintendo's Wii -- began in 2005 and will officially end when the PS4 arrives later this year.
During those eight years, console hardware remained stagnant while PC hardware improved significantly. As a result, the graphical and audio capabilities of many multiple platform games remained tethered to the console version.
By combining consoles and PCs onto a single platform in the living room on a higher-powered PC, Valve hopes to blur the distinction between these multiple platform releases to eliminate the gap between console and PC games. Valve also believes that SteamOS will offer a more seamless experience with cloud-based updates, rather than individually downloaded patches.
Some logical inconsistencies
Yet there are still some logical problems with SteamOS.
Why will gamers install a Linux-based Steam OS on a computer connected to a TV, when they can simply hook up a Windows PC and play the same games on the big screen? In addition, on the Windows PC, they can pick their own distribution service to shop around for the best deal.
In addition, the selection of games for Linux is limited, with only 198 titles compared to the thousands of PC titles available on Steam. However, Valve claims that the major publishers will bring all the high-budget "triple-A" games natively to the platform in 2014. If Valve is right, then its Linux OS could actually become the new standard platform for cross-compatible PC gaming, as Android revolutionized mobile gaming. Yet if Valve is wrong, developers won't see a future in the platform and quickly go back to developing games for Windows.
There's also a question about controllers. Games that are designed for third-party controllers will play just like their console counterparts in the living room, but what about mouse and keyboard-based games? Will gamers abandon their desktops and laptops to play point-and-click games on the big screen, or will only controller-centered games be available on SteamOS?
Last but not least, hardware pricing is an issue. The PS4 and Xbox One are respectively priced at $399 and $499 -- more expensive than current generation consoles but still much cheaper than higher-end gaming PCs. Will computers running SteamOS be a price-competitive solution against consoles, or will they only appeal to a niche audience?
Only the first piece of the puzzle
In closing, the initial announcement of SteamOS is the first of Valve's three big announcements this week. This could be a big lead-up to the release of Valve's Steam Box console, which fellow Fool Sam Mattera discussed in a previous article. Stay tuned for more updates!
Microsoft's multi-front war
It's not just Valve causing headaches for Microsoft. The tech world has been thrown into chaos as the biggest titans invade one another's turf. At stake is the future of a trillion-dollar revolution: mobile. To find out which of these giants is set to dominate the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate, and we'll give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!