Thursday, August 11, 2011

Steam Trading

Valve recently announced "Steam Trading", a marketplace that allows Steam users to trade new games and items to each other. Here are a few details (from the Steam Supportpage:
What items can be traded?
Team Fortress 2 items and Steam Gifts can currently be traded in the Steam Trading Beta.

Will there be other games that support trading?
We’re working now with other game developers to incorporate both Trading and Inventories. Portal 2 should be reasonably soon and we hope to have several third-party games in the next few months.

What do you mean by trading Steam Gifts?
Any game you’ve purchased from the store as a gift, or received as an Extra Copy, can be traded to other users. They can be used to trade for other Gifts, or for items in Team Fortress 2. We’ve added a new checkout option to the Store when purchasing a gift so you can save it for trading or sending later, to support users who want to save games for trade fodder.

What restrictions are there on trading Steam Gifts?
Trading a Steam Gift is very similar to sending a gift to someone; just that once it is traded that user can then either trade it again, or open it for themselves. There are no restrictions on territory.

That's quite interesting--extremely interesting, really--so let's discuss it today.

As I understand it, secondary markets exist for the trading or purchase of Team Fortress 2 items. This is not, by itself, uncommon--secondary markets often pop up for the trading of popular goods, game-related or otherwise. However, the market was large enough for Valve to notice, and they started selling certain TF2 items last year.

Again, that's not uncommon. Co-opting secondary markets seems to be a primary goal for gaming companies these days, but it's also a goal for professional sports teams (the reselling of tickets) and many other businesses.

What Valve is doing with Steam Trading, though, is fascinating.

Let's look at how this used to work. In the secondary markets, there were item-for-item trades, and it was also possible (in some cases) to sell items for cash. As an example, let's say Gamer X sold his Hat Of Undying Bladder Fortitude to Gamer Y for $5. Cash transaction.

Gamer X now has five dollars in his pocket. He can spend it anywhere, or he could put it into the bank (highly unlikely). Its value, though, is tied to a real-world currency.

Valve, obviously, doesn't get anything out of that transaction. Now I have no idea how big the secondary market was for TF2 items, but Valve does, and I'm guessing the numbers were far from trivial.

A boring way to capture that secondary market is just to create an in-game auction house or something like that, using real-world currency.

Valve, however, is rarely boring.

What they did instead is create a marketplace where the currency is games. Now, Gamer X can sell his Hat Of Undying Bladder Fortitude to Gamer Y for a copy of The Best Game Ever (also valued at $5).

In the old transaction scheme, Gamer Y wound up with a hat, and Gamer X wound up with $5. In the new transaction scheme, Gamer Y still gets hat, but Gamer X gets a game "worth" $5, and Valve gets $1.50 (if they take 30%, which I believe is correct--or close). And the game's developer (which might also be Valve) gets $3.50.

Why wouldn't Valve just have a cash trading system and take a cut of each transaction? Well, if they said they were taking 30%, people would be outraged. Torches, angry villagers, Frankenstein's castle--you get the idea. Because taking 30% of a transaction is outrageous, right?


The way they've set it up, though, they can say it's nothing out of the ordinary, because they always take 30% of the revenue from a regular game purchase. They don't even have to say anything. To most consumers, Valve's take will be totally opaque to them--because it's not coming from them.

Instead, it's coming from the developers. That's no different than what happens with any other game sale on Steam, though.

See how clever this is? And Valve will add a TON of games, both from themeselves and from third party developers, that support this system. It prints money.

Wait, though--it gets better. Another reason Valve went with a "games as currency" system is that it decouples item value from a real-world currency. Value becomes more fuzzy (not for the people who are paying attention, really, but most people aren't paying attention).

When value is fuzzy, the chances for inflation increase. And if item prices rise, which requires higher value games to be purchased for trade, then Valve makes even more money.

Wait, it gets even better. People are going to look at this system and think they can trade it for profit. Let's say Valve has a blowout weekend special and a game temporarily sells for $3.99. On Monday, though, that game is back up to $6.99. The "trader" who bought it for $3.99 now believes he's sitting on $3 of profit, because he could theoretically trade it for a $6.99 item.

It's not quite arbitrage, but it's in the ballpark.

Here's the thing, though. What Steam Trading is going to encourage is the piling up of "game assets." It will get people to buy multiple copies of games they already have, because they plan to use the extra copies as virtual currency. It's an investment, right?

What happens when everyone has extra copies of almost everything? Well, people will have to spend a little more "game currency" to get the item they want. Maybe, quite a bit more.

Inflation. Maybe, at some point, hyper-inflation. But that inflation translates into lots and lots of extra game sales, and Valve takes their sizable cut.

So decoupling value from a currency transaction where Valve takes 0% into a gaming currency transaction where Valve takes 30% AND introduces the real possibiliy of asset inflation is, in a business sense, totally brilliant. Unspeakably brilliant, really.

Scary? Absolutely. But besides indies, what isn't scary in gaming these days?

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