Valve's SteamOS Threatens GameStop, Electronic Arts

Last week, PC gaming company Valve announced SteamOS, a free, Linux-based operating system built around Valve's digital distribution platform Steam. With the PC in decline, and Microsoft (NASDAQ: MSFT  ) taking more control over Windows, SteamOS could become the premiere platform for PC gaming.

If that occurs, it could pose a threat to GameStop (NYSE: GME  ) and Electronic Arts (NASDAQ: EA  ) . Both companies have invested in competing businesses that would be disadvantaged in a world where SteamOS is dominant.

PC gaming goes digital
Although the market for console games is still largely a physical one, PC games went digital long ago. Despite the fact that there are thousands of PC games, the typical GameStop may devote only a tiny shelf to PC gaming.

Instead, PC gamers look to digital services to get their fix. Numerous websites, including Amazon, GOG and Green Man Gaming, offer digital copies of PC games, purchased and downloaded directly over the Internet. But Valve's Steam is the largest, with some estimates giving it 50% to 70% market share.

GameStop competes against Steam with Impulse, a service it purchased in 2011. It still represents a small percentage of GameStop's total business -- the retailer lumps it in its "other" category, a division that generated about 17% of GameStop's revenues in fiscal year 2012 -- but it has been a source of growth. Back in March, GameStop cited digital growth as helping to offset what was otherwise a stagnant year in gaming.

Moreover, console gaming appears to be going digital, with Microsoft's next Xbox and Sony's newest PlayStation trumpeting new digital gaming features like cloud computing and streaming games. Impluse could help GameSpot offset some of the decline that would come from more games going digital.

Electronic Arts is more of a video game publisher than a retailer, but it too competes with Steam. Origin is its rival digital platform, through which EA sells digital copies of its own games, including popular titles like Battlefield and Sim City. The success of these titles is far more important to EA than Origin itself, but by controlling the digital distribution of its games, EA can cut out middle-man retailers.

In a presentation to investors in 2011, EA focused on the growth of the Origin platform as integral to its digital future. EA has continued to tout the growth of Origin in its earnings releases, as it may prove to be a source of future margin growth.

SteamOS would put Valve in control
Right now, PC gamers are free to purchase their games from any of these services, but on SteamOS, that would be unlikely. The final details surrounding the company's forthcoming operating system have not yet been unveiled, but given that Valve has touted it as being built around the Steam client, it would be odd if gamers could use it to access competing digital storefronts.

Gamers can, for example, buy a digital copy of an Xbox 360 game directly through their console, but to do so, they must go through Microsoft's digital storefront, Xbox Live. If Valve did not do something similar, it would be highly unusual.

Will Microsoft lose the PC gamer?
Valve's move to create its own operating system is a reaction to Microsoft taking more control over the Windows platform. With Windows 8 came Microsoft's app store, and with the app store came Microsoft taking a 30% cut of software revenue -- an obvious problem for companies that depend on selling software.

Although the Windows app store has yet to catch on, the threat of a more controlled PC platform looms large. By acquiring Nokia's handset and services business, creating the Surface tablet, and promising to focus the company around "devices and services," Microsoft is clearly aiming at a more controlled Windows platform.

Still, there are signs that Microsoft is fighting to retain the PC gaming market. In August, the Windows-maker poached Jason Holtman, one of Valve's key employees. Holtman has been given the task of strengthening the Windows gaming experience.

Although PC shipments have been in decline, PC gaming has largely been immune. PC gamers continue to be dependent on the Windows platform, making them a key constituency Microsoft cannot afford to lose. Still, it's hard to argue with free, and Valve's upstart operating system could put pressure on Windows.

PC gamers become Steam gamers
If Valve can execute properly with SteamOS, it could effectively turn PC gamers into Steam gamers. As it would control the operating system, Valve could limit access to alternative digital storefronts, like those offered by GameStop and Electronic Arts.

By hiring a key Valve employee, Microsoft appears to be fighting back, but the rise of SteamOS is one trend that investors in all three companies should keep their eyes on.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 02, 2013, at 9:13 PM, Prettyfox wrote:

    Why do I even read these articles anymore? This website is awful.

  • Report this Comment On October 02, 2013, at 10:35 PM, boxtropica wrote:

    Actually, quite a few of these facts are incorrect...

    SteamOS will be able to run any compatible Linux application-- Meaning any other game platform that supports Linux.

    I don't think I'll switch to SteamOS.

    But I really don't care-- Steam is giving Linux more attention then ever now, and for every game that supports SteamOS, that's another game in the bank for Linux Mint & Fedora~~

  • Report this Comment On October 20, 2013, at 11:45 AM, bottineaubob wrote:

    Valve is an arrogant joke from people with to much money and think everyone else is below them. Valve is what is wrong with this country. They think we are stupid drones that will do what they say because they have money and we want to be fat and useless like them, Value is just another way for the NSA to watch you. Check on the internet and you will find out there is very little information about this company. zigheil america.

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