Will Google buy Valve?

Posted on 17th September 2008 at 3:44 pm by Ian Macfarlane

Rumours are going round that Google might buy Valve, and through it acquire the leading games distribution platform, Steam. What would this mean for the industry?

Everyone’s favourite source of tech-industry speculation, The Inquirer, claims to have inside information that Google is about to buy Valve. Although not always on the money, The Inquirer have broken some of the most sensational news in the tech industry (such as AMD buying ATI), so it firmly falls under a definite maybe.

The suggestion has taken many by surprise, but in hindsight, we’re kicking ourselves for not having thought about it before now. A tie up makes more sense than you might realise.

Google’s mission is to organize the world's information and make it universally accessible and useful (and fill it with targeted advertising of course!) This definitely includes games – only last year Google appeared at the Casual Connect game convention in Seattle and spoke of their plans for “AdSense for Games”. Microsoft are already working in this area, having bought in-game advertising company Massive Inc. in 2006. Microsoft also, of course, created and own the Xbox platform.

Valve became famous for developing gaming blockbuster Half-Life, but it’s their games distribution platform called Steam - by far the most successful in the industry and with over 15 million accounts - that would be key to interest from Google. Valve has said only last month that they would be happy to be bought.

Here are some potential areas where the two could work together;

Firstly, and most obviously, is AdSense for Games. Google would instantly have a commanding position in PC games distribution, putting them in an ideal situation to get talking to games developers about using Google for their in-game advertising.

This in-game advertising could be anything from ads on in-game billboards to product placement (e.g. Coca Cola cans in in-game vending machines or Nike branding on in-game characters), and many, many other forms people haven’t even thought of yet (for inspiration, see what Ikea did with the Sims). This is still a nascent industry, one with massive potential for growth (Google’s Bernie Stolar said last year Google is involved in in-game advertising … This is an area that Google believes will have tremendous growth over the next number of years.

In-game advertising is also something that wouldn’t have been possible only a short time ago, when always-on connections were less widespread (if your in-game ads never change, then the ads your game ships with are only a one-off source of revenue).

In-game advertising has greater potential than simply making games publishers a bit more money for their games – like advertising on websites, and in print and other forms of media before it, it will also open up entirely new business models, where the advertising pays for the content.

Many games could in the future be distributed for free and be supported financially by some form of advertising. This is unlikely to work for all types of games – the longer the users plays the game for, the more ads can be shown and the more money can be made. Therefore this is likely to work best for multi-player games, although there are some forms of single-player games which can keep attention for a longer period of time (such as the Sims). Expect an explosion in low-budget advertising-supported games too.

So, aside from in-game advertising on PC games, what else is there? Well, there’s the possibility of advertising within the Steam client itself, although we wouldn’t expect too much revenue from this compared to other channels. There’s also potential for tying in searches for games on in Google web or product search with direct download links.

The other big potential tie-up is with mobile gaming – some of the biggest complaints about games for mobile phones have been the small screen size and lack of compatibility across many phone models. Google Android could solve both of those, with minimum requirements (including a minimum screen size) which could be used as a basis for game developers to target. Google could act both as a distributor of mobile games, and could also apply the same in-game advertising principles that it will apply to PC gaming.

Gaming is an exploding market. Recent studies found that 97% of young Americans (including females) play video games, but studies are reporting growth in pretty much all demographics. It’s not just 16-29 year-old males who play games any more! This is a massive market… and also a rich source of data for producing targeted adverts. You paused to look at that flashy ad on a billboard while blasting your way through City 17? Look out for it on the next website you visit which uses AdSense. Picked out a nice coffee machine for your house in the Sims? Guess what’ll greet you in the ads next time you search for coffee-related queries on Google.

Piracy is one of the many challenges the games industry faces, particularly for the PC games industry, and digital distribution is proving to be one of the more successful ways in getting around this (another being subscription-based online games like World of Warcraft). Supporting games development with advertising makes a lot of these problems go away, or at least reduces their impact.

One thing in question is what Google might do with the games development side of Valve – that might sit too far outside of their business model. If Google do buy Valve, I certainly wouldn’t be surprised to see Steam itself kept and the Valve games development department sold off (and I don’t doubt that there would be many interested buyers).

Make no mistake, this rumour – and it is still just a rumour – would be a huge gamble for Google to take. It would be an audacious (and completely unexpected) move, but it makes a lot of sense on numerous levels.

Some food for thought – last year Google also said We are not going to be a publisher or a developer or a portal for games. Well, don’t forget, there is no gPhone and Eric Schmidt's statement We are not building a browser.

File under: google online advertising acquisitions

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