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'Fortnite' Is So Popular It Could End Steam's Decade-Long Dominance

Epic's new store and a growing number of big publishers that are pulling out of Steam are finally putting Valve in a position where it has to make some changes.

by Matthew Gault
Dec 12 2018, 4:56pm

With few exceptions, products released on digital distribution platforms such as Steam, the Apple App Store, or Google Play, split revenues from sales with the platforms 70/30. The developer of the app or game takes 70 percent and the platform owner takes 30. It has, until recently, been an unshakeable rule of doing business online. That’s changing.

On November 30, Steam—the largest digital distributor of PC games operated by Valve—announced changes to its pricing structure that give favorable rates to large publishers. The more money a game makes on Steam, the less of a percentage Steam will take.

“When a game makes over $10 million on Steam, the revenue share for that application will adjust to 75 percent /25 percent on earnings beyond $10M,” Steam said. “At $50 million, the revenue share will adjust to 80 percent /20 percent on earnings beyond $50M.”

Days later, Epic—the developer and publisher behind Fortnite—announced it would open its own store, also with new revenue share rates, competitive with Steam at 88 percent to the developer and just 12 percent to Epic.

The era of the 70/30 split, under which Steam became the leading digital distributor of computer games, seems to be coming to an end. Valve isn't changing Steam's revenue split out of the kindness of its heart. The company is trying to draw back in big name publishers who, in the past few years, have struck out on their own, created their own stores, and bypassed Steam and the standard 70/30 split.

“It's not the first time a well capitalized publisher has decided to create a distribution platform for PC,” Daniel Joseph, a postdoctoral fellow at the University of Toronto who studies the economics of video game platforms, told me in an email. EA has Origins, Ubisoft has Uplay (though it still releases games concurrently on Steam), Activision Blizzard has Battle.net, and—most recently—Bethesda launched Bethesda.net. Fallout 76 is Bethesda’s first Bethesda.net exclusive and the publisher took a huge chance bypassing Steam. Steam users bought more than five million copies of Fallout 4—Bethesda’s previous entry in the franchise—with Steam selling more than 500,000 copies of Fallout 4 the day Bethesda released it.

When big games like Fallout 76, Battlefield V, and Call of Duty: Black Ops 4 launch without Steam, the distributor misses out on huge amounts of cash it could have counted on just a few years ago. But Epic and Fortnite seem to have pushed things over the edge. The battle royale shooter is one of the most popular games in the world. With more than 78 million players and revenues in the billions, Epic’s game was so popular it could afford circumvent Steam and the Google Play store to bypass the 70/30 split altogether. It even got Sony to relent and allow PlayStation 4 players to play with users on other platforms—something Sony fought against for years.

“This is Epic's chance to take advantage of what Valve just did—basically give a AAA-only discount—and say ‘Hey indies! WE'RE here for you!’"

Now Epic is using its clout and capital to launch its own Steam alternative, complete with favorable revenue sharing and several changes to Steam’s stale digital distribution formula. Developers releasing games through the Epic store take 88 percent of their sales, giving over only 12 percent to Epic. If they’ve developed the game in the Unreal 4 engine—a game engine Epic owns—it will also waive the five percent licensing fee it typically takes from sales of games using the engine.

“The biggest value-add of the whole thing seems to be the 88/12 split, which is a direct attack on business as usual to try and collect as many big publishers and devs possible early on,” Joseph said. “Valve will watch and will adjust their rates accordingly if Epic's platform actually does warp the market as much as they want to.”

But the market is already warped and it’s hard to imagine a world where Valve wins back big name publishers such as Activision Blizzard.

“Itch.io (a website where indie developers sell their games directly to fans using a pay-what-you want model) has already proven that 70/30 is not a requirement to successfully run a store,” Rami Ismail, co-founder of indie developer of Vlambeer, told me in an email. “Epic's Store has shown that even on Steam's scale, 30 percent isn't necessary, it's basically taking a profit at the expense of the developer.”

Epic heavily advertised its new store during the 2018 Video Game Awards. It announced exclusive’s such as Supergiant’s Hades and promised to give out two games every week throughout the rest of 2019. “It's quite an impressive reveal,” Ismail said of the launch.

fortnite
Image: Epic Games

The new revenue splits are obviously better for game developers big and small, but they won't solve all the problems developers face on digital storefronts. Steam is great for smaller publishers and indie devs because it’ll publish almost anything. But it’s also terrible because it’s easy to get lost in a sea of releases. In 2017 alone, 7,672 games launched on Steam. “So you either win big during launch, do a big update, or move units on sale. If you haven't recouped costs by then, it's a failure,” Joseph said.

“More curation and a better cut are two of the main complaints about Steam, and most Steam competitors don't have the funds to compete on scale or funds,” Ismail said.

It’s a sentiment echoed by many developers in the industry, especially independent developers. “The biggest problem I've seen for devs wasn't really the split on sales, it was discoverability,” Joseph said. “Last time I was at a [Steam] event the most strained I ever saw the Valve folks get was when they were trying to answer devs asking about how they can get more time on the front page.”

"Nowadays you pretty much need an indie publisher, or you need to have an amazing game," Joe Brammer, a producer for Bulkhead Interactive—the developer of The Turing Testtold Gameindustry.biz in 2017. "It has to be something really special to be picked up organically— something like PUBG.”

Independent developer Lars Doucet has conducted surveys designed to gather information from indie devs using Steam three years running. The informal survey collects data from developers in an effort to “tell Valve all the things.” Doucet’s published the results of the most recent survey on December 10. “The biggest thing that sticks out in the survey is that revenue share is not developer's #1 concern. I mean it's way way up there (nearly tied for first in fact), but the top issue is ‘Not getting screwed by the algorithm,’” Doucet wrote.

In October, Valve tweaked Steam’s discoverability algorithm which, according to indie devs, led to plunging sales. “Valve sells Steam as a meritocracy, but sharp discontinuities in traffic from overnight changes like The October Bug shatter any remaining faith in that promise,” Doucet wrote. “How can Steam be a meritocracy if a developer was doing everything ’right’ according to Valve's stated best practices for success yesterday...and then the next day their traffic and sales immediately drop off a cliff, never to recover? If you want to nurture an ecosystem where the next Undertale or Terraria can spring forth, this sort of unstable environment could strangle it in the crib.”

“The only thing I can say with confidence is that the eyes of every indie dev is on this exchange,” independent developer Aura Triolo, who worked on titles such as Fantastic Contraption, told me in direct message over Twitter. “This is Epic's chance to take advantage of what Valve just did—basically give a AAA-only discount—and say ‘Hey indies! WE'RE here for you!’ If they successfully take advantage of that it could be huge, but that's a big if that relies on a ridiculous number of factors."

At first blush, the Epic store looks to be pushing its indie cred. Hades, Subnautica, and Ashen are all indie titles sitting prominently at the top of its store page.

“Right now it feels like Epic is avoiding a lot of thorny questions by heavily curating their launch titles,” Joseph said. “But this kind of special launch time where the platform gets the attention it deserves doesn't last long...problems will come to light then.”

Digital distribution is full of problems and thorny questions. Are adult games allowed? What even constitutes an adult game? Will there be a way for fans and developers to communicate? Is there an internal review systems.

"We’re starting small, with a hand-picked set of games at launch,” Epic CEO Tim Sweeney told me in an email. “We’ll have an approval process for new developers to go through to release a title. It will mostly focus on the technical side of things and general quality. Except for adult-only content, we don’t plan to curate based on developers’ creative or artistic expression."

Favorable revenue splits are great, but better answers to these problems are where Epic could really steal market share from Steam. Valve is famously hands off when it comes to community and content management, which has made its forums and customer reviews a toxic stew of Neo-Nazis, school shooters, and assorted hate groups. When Valve does curate or moderate, it’s almost always a reactionary response to a scandal.

“It's a winner-take-all marketplace that leaves little room for genuine creativity that isn't of the blockbuster kind.“

Epic hasn’t said much about how it plans to curate its storefront, but it has said it doesn’t find value in giving gamers and developers a place to communicate publicly. “We don't plan to have forums,” Sweeney told Gameindustry.biz. He said Epic would integrate a way for players to contact developes privately, hoping to mitigate toxicity.

Valve has existed largely unchallenged in this market for 15 years. Large publishers have launched their own services, but Epic is the first competitor to come along that feels like it could actually compete. Indie devs are waiting to see how its curation will play out, but the 88/12 split is attractive after years with 70/30 as the standard.

“Steam has been an incredible part of the indie ecosystem for the past decade, and I am thankful for them being so far ahead of the curve with digital distribution,” Ismail said. “But...the tiered pricing model was a rough reminder for a lot of developers that it's purely business for them, too. I think a lot of developers will take that hint, and make the purely business decision that the Epic Store is a better pricing model. I hope a lot of developers will make that jump to force a better cut on Steam, because I think that will ultimately be healthier for Steam.”

Competition can be good in a marketplace, but it’s also possible that all these new services will have unintended consequences. As the number of video streaming services have exploded to compete with Netflix, the fracturing of the marketplace means consumers can’t get everything in one place anymore, and that’s leading to a rise in piracy.

Steam used to be a one-stop shop, but that’s over. New Call of Duty’s will run through Battle.net. Battlefield is always sold on EA’s Origin store. People use the service that most easily delivers them the game they want, and those games are overwhelmingly the big budget draws such as Fortnite and Fallout. That may mean that indie devs who pick one store or another will only get the built in audience for the big titles on that service.

“Surviving isn't enough to compete in the games industry,” Joseph said. “It's a winner-take-all marketplace that leaves little room for genuine creativity that isn't of the blockbuster kind.“