By John Gaudiosi
FORTUNE -- Independent game developer Valve Software, which has created bestselling franchises like Half-Life, Portal, and Left 4 Dead, used the Consumer Electronics Show (CES) in Las Vegas to debut the first 13 Steam Machines to the world. The new PCs have been designed for the living room, rather than the office or den. And the plan is for these Steam Boxes to entice some gamers to invest in these upgradable devices instead of stagnant consoles like Sony's (SNE) PlayStation 4 or Microsoft's (MSFT) Xbox One.
Valve has added 10 million Steam accounts in the last three months for a total of 75 million PC gamers who use the free service to buy and download digital versions of games. Gabe Newell, co-founder and managing director of Valve, said the company regularly has 6 million people simultaneously on Steam. Valve recently introduced Big Picture mode to Steam, allowing PC gamers to do everything from play games to watch entertainment on an HD TV. By this fall Steam Machines will take things a step further, offering one box to rule them all.
"We heard from customers for a long time that they really wanted to be able to port their experience of using Steam to the living room," said Greg Coomer, producer designer at Valve. "What that really means is they just love the games that are available on Steam, but they don't love the fact they have to usually give up all those games and their friend list when they go to a different room in the house."
The PC gaming business has been on a roll the past few years, thanks in part to the success of free-to-play games like Riot Games' League of Legends, Wargaming's World of Tanks, and Valve's own Dota 2. According to Peter Warman, founder of research firm Newzoo, PC gaming represents the largest share of the games market on a global scale with 39% of all game revenues, or $27.6 billion generated on PCs vs. 36%, or $25.4 billion via the TV screen (through consoles). But Newell was worried that the future of the open platform with the rise of closed platforms on mobile devices and current and next-gen consoles. So he decided to do something about it.
"We picked three things to look at, starting with the user interface, the operating system, and the platform side of things," said Newell. "We have a lot of experience with Steam, and we could work with something called Big Picture and move all that on top of Linux. We also looked at hardware design for the living room. And we needed a controller design that was consistent with the interaction modes that people were going to be using in the living room."
Valve designed the new controller for Steam Machines and will sell those to the public. Other companies will also be releasing controllers designed for these boxes. Although the game company did make 300 early devices to help partners, Valve currently has no plans to sell Steam Machines directly to consumers.
Each Steam Machine looks different on the outside, but has the same base platform on the inside. Manufacturers offer all types of extra bells and whistles to enhance the experience. And most of these devices are also upgradable, something Sony and Microsoft can't compete with. While not all boxes have been priced yet, there are models from CYBERPOWERPC and iBUYPOWER for $499 and one from Zotac for $599. Falcon Northwest will have models that range from $1,799 to $6,000, so pricing will be spread across a broad spectrum.
"There's a lot of variation low-end to high-end in the devices," said Newell. "One of the strengths that the PC has is that customers can get the experience that they want, while developers can be guaranteed a stable platform to create with."
Bryan Dezayas, director of product marketing at Alienware, believes Steam Machines, like the devices his company will release, will give gamers another option.
"From a PC perspective it's going to allow gamers to play their entire back catalog of videogames, which is a huge part of PC gaming," said Dezayas. "There's a misnomer that there are console gamers and there are PC gamers. Everybody's playing games on multiple devices anyway. We're just giving them another option."
"We definitely see Steam Machines as a play against consoles, and we feel these PCs are much more powerful than next-gen consoles," said Kevin Wasielewski, CEO of Origin PC. "You have more custom options, more powerful graphics cards."
And while games will be the focal point, Valve is offering a full package of entertainment. Dezayas said Steam OS will have the full capability to connect gamers to their Netflix (NFLX), Hulu, and other entertainment services, bringing everything together on the big-screen TV.
"We think that it absolutely makes sense for Steam to be involved in bringing media to customers in the living room, and we'll have a lot to say about which partners and how that's going to work around E3," said Coomer.
Valve is no ordinary development studio. Back in 2010, analysts concluded that Valve had approximately $700 million in revenues equally split between its games and its Steam shop. This number did not include the 70% going back to developers selling games through Steam. Steam gross revenues were estimated to have surpassed the $1 billion mark at that time.
"Back then, Valve had less than half of the current number of 75 million Steam subscribers," said Peter Warman, founder of Newzoo. "Valve has since unofficially reported that they experienced a 100% growth in 2011 and 50% growth in 2012. If you add that all up, take a 30% growth in 2013, and keep Valve's game revenues at the same level, Valve's total 'net' revenues without the payout to developers and publishers could be around the $1.75 billion mark."
And that's just Steam, which Warman believes has seen over $10 billion in gross game sales life-to-date, including an estimated $4 billion in 2013 alone. Valve is also a game developer and has seen Dota 2 attract larger audiences than Monday Night Football, according to Newell.
"Considering their profitability, growth potential in games and the Steam store, as well as their serious attack on TV screen gaming with Steam Machines; Valve value for an investor should be significantly above $5 billion," said Warman.
Not that Valve is going public. The company has been very content as an indie studio, developing the games it wants to make and keeping a close direct relationship with its huge gaming audience. That audience is likely to grow larger once Steam Machines start infiltrating the living room, once the gaming domain of only Sony, Microsoft, and Nintendo.
As the world prepares for Microsoft to announce a new chief executive, we ask the company's top executives -- including the man himself -- to take a look at the legacy Steve Ballmer leaves on the technology company.
By Mary Jo Foley, special to Fortune
FORTUNE -- On the eve of his exit as chief executive officer of Microsoft, after more than a decade on the job, Steve Ballmer is more than MOREDec 11, 2013 5:00 AM ET
Microsoft's latest accepts voice commands, scans musculature, and -- oh, yeah -- plays games. Our full review.
FORTUNE -- If the Xbox One isn't already near the top of your holiday wish list, it should be.
With Microsoft's (MSFT) Xbox One, due out this Friday, it's clear the company is gunning for the living room, marrying TV viewing, game play, and Internet-connected services to an unprecedented degree. At $499, it may cost $100 more MOREJP Mangalindan, Writer - Nov 20, 2013 12:00 AM ET
Don Mattrick may be the troubled game maker's best shot at coming out on top again
FORTUNE -- Desperate times call for desperate measures. In the case of flailing casual gaming company Zynga (ZNGA), that meant installing a new CEO. Earlier this week, the company announced founder and long-time CEO Mark Pincus would step down, making way for Don Mattrick, the former president of Microsoft's (MSFT) Interactive Entertainment unit, which includes MOREJP Mangalindan, Writer - Jul 2, 2013 12:33 PM ET
Hardcore PC gaming appears to be alive and kicking.
By Peter Suciu
FORTUNE -- While Microsoft and Sony elaborated on their new video game consoles earlier this month at the Electronic Entertainment Expo there was another system that showed signs of renewed life: the PC. Despite the moribund market for mainstream computers, hardcore PC gaming seems to be alive and well.
In past years the PC had been a dominant part of MOREJun 26, 2013 11:42 AM ET
The famed creator of The Sims and SimCity is working on a new startup.
By John Gaudiosi
FORTUNE -- Will Wright has created some of the most successful video games of all time, including Electronic Arts' SimCity and The Sims, which has sold over 150 million copies worldwide. The game developer left EA and the Maxis studio he founded back in 2009, shortly after his long-in-development Sport launched in 2008 and failed MOREJun 25, 2013 10:35 AM ET
Tim Cook said at D:11 that Apple has sold more 13 million units. That was news.
FORTUNE -- For a number of reasons -- including all those questions about future products not even Steve Jobs would have touched -- Apple (AAPL) CEO Tim Cook didn't break much news Tuesday night at AllThingsD.
But he did provide a new data point about Apple TV: He said the company has sold more than 13 MOREPhilip Elmer-DeWitt - May 29, 2013 10:54 AM ET
We looked to Microsoft senior vice president Yusuf Mehdi to learn more about what the company's new videogame console can and can't do.
FORTUNE -- By now, gamers around the world know just as much about Microsoft's new video game console, the Xbox One, as they do Sony's (SNE) recently announced PlayStation 4. Like its next-generation counterpart, the Xbox One will rely on an 8-core processor, supported by 8 gigabytes of MOREJP Mangalindan, Writer - May 23, 2013 12:52 PM ET
Chipmaker AMD hasn't had it easy. Now three of tech's most powerful companies have embraced it for the long-term.
FORTUNE -- With its processors in 83% of PCs, Intel (INTC) overwhelmingly dominates traditional personal computing. But there's one area where the chip giant won't be winning any time soon: game consoles. If reports prove correct, Advanced Micro Devices (AMD) could manage what its competitor hasn't: getting its chips into all three of MOREJP Mangalindan, Writer - Apr 11, 2013 7:14 AM ET
TV is clearly outshining the movies. But when will we know if original content from companies like Netflix is a workable business?
By Kevin Kelleher, contributor
FORTUNE -- Television is enjoying something of a golden age. With shows like The Walking Dead, Breaking Bad, and Game of Thrones drawing praise as well as rabidly loyal viewers, it's often remarked that TV is better than the movies. And, because golden ages can create MOREMar 14, 2013 9:31 AM ET
|AT&T cuts prices again|
|Ukraine crisis: Aid, sanctions and fallout|
|Malaysia Airlines stock sharply lower after plane vanishes|
|Winners and losers of the bull market|
|The medical marijuana ad that never aired, despite contrary media headlines|