Valve is Off for this Profit-Thirsty Gaming Company
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In last few paragraphs of a laudatory New York Times article on gamemaker Valve Corporation, the mention of a once-pursued purchase generated a new storm of headlines: Electronic Arts (NASDAQ: EA) had attempted for years to buy Valve for around $1 billion.
This may not seem like such a big deal -- game-publishing giants like EA often look to buy promising studios, hoping to cash in on fresh ideas.
But, to add some laudatory language of my own, Valve is no mere developer. A private company, Valve is valued at around $2.5 billion, and many of the company's titles have become holy grails for gamers: Half-Life, Counter-Strike, Left 4 Dead, and Portal.
Valve also runs Steam, a game-selling platform that The New York Times story said may account for 70 percent of all PC games purchased and downloaded through the Web. Games from a vast array of publishers are marketed and sold on Steam, including from EA.
Thus it makes sense that a company like EA would want Valve. They are in corporate envy. A small company with a relatively small staff has managed to release beloved titles -- and turn a profit while marketing and selling its competitors' products. But what makes Steam work EA would probably stifle in an effort to tout it's own products. This is because there is always a chance that a competitor could wrestle your title's to the basement. This is a risk, and if EA took control of Valve and Steam, they would probably try to marginalize that risk. What makes Steam work -- and profitable -- would be snubbed.
Thus, as The New York Times reported, Valve's honcho Gabe Newell said that there was a better chance that Valve would "disintegrate" than that it would ever be sold.
"It’s way more likely we would head in that direction than say, 'Let’s find some giant company that wants to cash us out and wait two or three years to have our employment agreements terminate,'" the New York Times quoted Newell.
So some private companies aren't fond of being domineered by corporate giants. But the story continues.
Recently, Karl Magnus Troedsson, manager of the EA-acquired studio DICE, told Gamasutra "sometimes, I think we get too much crap for not being innovative." DICE makes the popular Battlefield series.
Later in the story, Troedsson hints at getting approval for an innovation from his corporate automatons. Likely, EA saw a successful company, bought it, and tampered with its innovators at the behest of the bottom line.
EA tampers; innovators tinker. The tinkerers at Valve released "Portal" in a software bundle in 2007. In this case, a commitment to the art spawned a huge success with hardly a corporate nudge.
Between DICE and Valve, we can see a pattern. The behemoths of game publishing, EA being the punching bag here, love to spot an idea, buy it, then plasticize it. Activision Blizzard (NASDAQ: ATVI) has the advantage of being a step ahead in several "plastic" gaming genres. Look for Activision Blizzard to stay on top as new releases for its popular franchises are imminent, including expansions for World of Warcraft and Starcraft II. New Call of Duty games and an expansion for Diablo III are surely on the horizon, as well. If you're not familiar with any of these titles, know that they have all been extremely successful and profitable for ATVI. Upon its release, Diablo III became the fastest selling PC title in history.
But despite the successes and dominance exhibited by ATVI, even it could find itself in similiar same pitfalls some day. Call of Duty is a pernnial cash bag for ATVI, and Blizzard's faithful stand frothing at the mouth for a title's midnight release. But eventually Activision Blizzard will have to freshen up. Buying up artists -- the making of video games is an art -- or continually rebooting the same games and hoping for share-lifting profits simply by an effort maintenance will not work. This will sound a bit heavy, but innovation comes from within. It is not acquired nor defibrillated.
Therefore Newell's comments should give investors some insight: A giant name in gamemaking likes his job and, perhaps, won't entertain the idea of working for a company that doesn't do its job well.
When Valve whole-heartedly snubbed EA, it was a symptom that wringing every last penny out of gaming franchises isn't going to work anymore. The gaming community is becoming more intelligent, and innovative titles made by artists, not marginalized studios, will see greater success and profits.
Taylorian has no positions in the stocks mentioned above. The Motley Fool owns shares of Activision Blizzard. Motley Fool newsletter services recommend Activision Blizzard and Take-Two Interactive . Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.