Valve's Holtman: Digital Direct Gives Developers More Pricing Freedom

"Service is becoming everything," claimed Valve's Jason Holtman during a Montreal International Game Summit keynote. "It's going to impact every line of business and every line as you think about your game." As the director of business development at the company responsible for Steam, the PC digital distribution service that now boasts more than 20 million users and 950 games, Holtman has an intimate familiarity with the avenues being made available to game developers by emerging service-driven models, particularly on the PC. "In the old world you'd have an indirect customer relationship with a product orientation. The most I'd be able to do in the old world is get some feedback with some forms, and make some patches, and then boy I hope people get the patches," he said. "The direct customer relationship means now that you shouldn't think of your product as 'finished' -- a single piece that goes out monolithically. You should think of your product or the game you're making as an ongoing service to your customer." Valve has released around 97 updates for Team Fortress 2 since the game was released, and since the game is constantly connected through Steam, users don't need to worry about patches or versions, and Valve can be assured its entire online userbase is playing the same version of the game. When a game is kept live to that extent, traditional attitudes towards pricing and marketing break down. "Currently, pricing is a function of friction in the system," Holtman said of the retail model. "You've got to sell a certain amount of crates and get a certain amount of shelf space. Mostly, if you're trying to manage a big product, you're doing a bunch of step functions." "You launch at $50 or $60, then you sit around for a few months until someone says, 'It's time to go to $30,' and you can never go back. Then someone says, 'It's time to go to the Platinum Series at $20,' and then you're praying it stays there, and then eventually it drops off and it's gone." Traditional retail wisdom says that lower price points are associated with lower perception of value, and price adjustments are only downward over the long term. "But in a connected market, you can shift prices up and down, and people don't care. You can change prices instantaneously," Holtman pointed out. "Customers are incredibly sensitive to pricing. You can adjust the price by five dollars, or a dollar, and you can see the demand curve shift." Over Halloween, Valve held three two-hour sales, during which Team Fortress 2 was sold for $2.50 rather than its usual $20. The company hadn't announced the sale ahead of time using its traditional marketing methods. "We just did a funny blog post," Holtman said. "It just drove people insane." Sales of the game skyrocketed for that period, unsurprisingly, but they also remained at higher levels in the following weeks than they were in the weeks leading up to the sales. That phenomenon demonstrates a new, somewhat-paradoxical, property of product value in a fully-connected service economy: devoid of the scarcity of goods, a lower-priced product actually increases the overall product's value, because it increases the size of the community that surrounds that product. The more players there are playing Team Fortress 2, the more attractive that game is to a potential buyer, even after the price has risen back to its normal level. That phenomenon also applies to single-player games, since a user who is hooked into the Steam (or another community-driven service) will see more and more of his friends buying the game, playing the game, and possibly earning achievements in the game. "Pricing as a service allows you to do radical things you would never do in the boxed world," Holtman said. And, contrary to some assumptions, a sales boost in one channel does not seem to adversely affect performance in another channel. In February, Valve held a half-price Left 4 Dead sale on Steam. It was extremely successful, but it also illustrated the nature of the sales model. "We didn't have any store promotion, because that's hard to set up. How would you get enough boxes into the retailer to do that?" Holtman explained. "But retail [sales] were unaffected. What this fundamentally says is you can actually have lots of extra sales on top of things, and it doesn't mean you're sacrificing one for the other." "This is not a zero-sum game," he concluded. "You don't have to hurt somebody to win. It actually makes everybody win."