Game developer Valve's unique corporate structure rewards autonomy, feedback

Staff Writer
Columbus CEO

(c) 2013, The Washington Post.

Just before Halloween, a commentator covering Valve's most popular game, "Defense of the Ancients 2" (DOTA 2), tweeted that it would not have the seasonal event "Diretide." The time-limited game mode with Halloween elements like virtual candy collection was a big hit on its first run in 2012. This time, Valve's imaginative fans felt tricked.

They spammed the Internet with this text art character, { ? -__- ? } demanding that Valve "Give DIRETIDE," even launching a Change.org petition. User ratings for DOTA 2 on the review site Metacritic tumbled.

Valve co-founder Gabe Newell called the move "totally a mistake" at the company's downtown Bellevue, Wash., headquarters earlier this month. Newell, who started Valve with fellow former Microsoft employee Mike Harrington in 1996, has achieved cultlike status in gaming circles. In person, Newell's a near-perfect representation of Valve's "gentle giant:" a bear of a man with a graying mop of unruly hair, a full beard and wire-framed glasses. His conversational style is friendly but measured — you can practically hear the gears turning as he constructs the precise words to describe how his gaming empire works.

Valve has grown from an independent game developer to an entertainment powerhouse that estimates it is more profitable per employee than Google or Apple. Its flagship Steam platform has 65 million active users. Employees say the company's stunning success is based on an idea Newell pioneered: a radically democratic structure that uses the wisdom of crowds both for its own internal structure and in managing its relationship with customers.

Those values were reflected in Valve's response to Diretide.

Valve decided not to develop a Diretide event this year because it was working on a substantial update to the game that it hoped to deliver by Halloween. In hindsight, Newell says, it's easy to see the mistake: "Nobody says that you're not going to have Halloween this year because Christmas is just going to be huge."

So the company rushed to update the game with a Diretide event. And it admitted its mistake: "We had to be really clear that we screwed up," Newell said. Valve doesn't "usually make a whole lot of mistakes like that."

One reason for that, Newell says, is its customers, who offer feedback and build value on Steam with their creative contributions.

Steam is Valve's massive online distribution and multiplayer platform. Initially a system for delivering automated game updates, it has evolved into a major commercial entity featuring distribution partnerships with developers big and small.

"Valve's success as a AAA PC gamemaker and friend of the gamer allowed Steam to grow to the point where it probably represents 50 percent of PC game sales and 70 percent of all full-game downloads," says Michael Pachter, an industry analyst at Wedbush Securities.

Valve is privately held and would not comment on its financials. In a New York Times article last year, Pachter estimated the company worth at $2.5 billion.

In October, the company announced that Steam had reached 65 million active players. That's a 30 percent increase over last year, beating Microsoft's 48 million XboxLive accounts and closing in on the 110 million active users touted by Sony's PlayStation Network.

Valve believes that massive user base will be a key asset as it prepares to challenge Microsoft and Sony on their home turf: the living room. Next year, third parties will begin releasing Steam Machines, gaming consoles that could dramatically expand the market for Valve's games. Pachter says the console games market is a $13 billion industry locked up by Nintendo, Microsoft and Sony, while the full-size PC game market that Valve dominates is about $3 billion.

The Steam platform also represents a major way that Valve solicits feedback. Once it was introduced, the company "began working in a much different way with a different relationship with our customers," said Greg Coomer, another Microsoft refugee and one of the first Valve employees. "We used to put all of the bits that we had for a game onto a piece of optical media, put them in a box, ship them and that was sort of the fire and forget."

Now each release starts a tight feedback loop between gamers and developers, who make many tiny tweaks, all working toward delivering the best experience possible. "We've essentially crowd-sourced supervision of a lot of these decisions to our customers, and it works way better than almost any other system we could design," Newell says. "They're rabid, they're passionate, and there are a lot of them."

Customer-added value all started with some hats. As Valve employee Robin Walker describes it, years ago in a forum thread, two users started creating graphics for hats in the game "Team Fortress 2." Valve took note, and it created a place for user-submitted content that turned into the Steam Workshop, a massive marketplace where users share or sell game tweaks.

"It started with customers doing something interesting and other customers clearly saying, 'I like that and I want it,' " Walker said. "And us going, 'How do we scale that? How do we get to the point where everyone can do that?' "

These customer modifications to games are called "mods." And Valve's willingness to let customers create, share and even sell them sets Steam apart. "They are essentially the only ones who let their customers bring real value," Pachter says.

For Newell, the Internet has meant "the lines are a lot blurrier between who is a customer and who is a creator," and that's not a bad thing. "This sounds a little bit touchy-feely granola," he says, "but it's pretty concrete."

Ben Henry, a teenager in Kansas, is one of Newell's favorite examples of the commercial relationship between workshop contributors and Steam.

Getting involved with Valve "was a real lifesaver for Ben, and by association for us," says his mother, Amy Henry.

The Henrys are a home-schooling family with six kids. Five years ago was a difficult time for them; Ben's father lost his job, and the family moved from Colorado to Kansas. Both Ben and his mother describe it as a very lonely time for him. But he and his brother played a lot of video games together. And one day, his mother recalls, Ben asked for a copy of the Orange Box — a compilation of Valve titles including "Team Fortress 2."

Ben had experimented with basic 3-D effects for video projects he and his had brother worked on. Before long, he started making things for his favorite Valve games — first "skins," or graphics to load over existing 3-D objects, and later the 3-D objects themselves. When "Team Fortress 2" started accepting community contributions, Ben jumped in.

Eventually, he got an email from Valve saying it wanted to sell some of his mods. That's when Valve discovered that Ben was 14. Soon Ben was making more money from downloads of his work than some adults do in their day jobs. Ben used his first check to fly out to visit Valve. One of the highlights, he says, was meeting Newell.

Last summer he interned at Valve's headquarters, contributing to its Pipeline project. The website for Pipeline describes it as "an experiment to see if we can take a group of high school students with minimal work experience and train them in the skills and methods necessary to be successful at a company like Valve." Next summer, Ben hopes to work on video game development.

His parents are thrilled about the opportunities that Valve has opened up for him. "I'm happy he was able to be a creator, not just a consumer of something he was passionate about," his mother says.

Newell beams when talking about Ben. "In the old world, nobody would have been able to recognize how talented he was," Newell says. "He would have gotten some boring, entry-level job and struggled for many years. Instead he's really good at it, and he's doing it."

Ben's drive to create, entertain and sell is the sort of thing Valve tries to encourage. In fact, many of the people Valve recruits started out building successful gaming mods. That includes Walker, who co-created the hugely successful Quake mod Team Fortress.

Newell sees the creation and management of products to be a good indicator. "Most people who end up being successful have good grades," Newell says, "but it's orthogonal — there's no extra information than if they put together a website and have a bunch of fans who love seeing what they're doing."

Many Valve employees have unique recruitment stories. Doug Lombardi, who does communications work, started by handling brand management for Half-Life at its first publisher, and then he accepted a job offer from Microsoft — something he describes as a "really big deal."

But when Lombardi told Newell about his impending departure, Newell asked him to lunch. In a three-hour meeting, Newell persuaded him to work with Valve instead — back when it was a 20- or 30-person shop, not the more than 300-person crowd it is now.

"It was a tough call," Lombardi says.

Newell says hiring decisions are some of the most important they make — and they've structured much of the company around attracting and retaining talented people. "It was pretty clear that there were very large differences in productivity between people who were good and people who were great" when they started, he says, "so we had to have a clear model for how Doug was going to be better because he was here rather than going off and starting his own gig."

The company says upfront it wants people to stay for 10 years and then asks what it will take for that to happen. Some of it comes down to perks, like in-office trainers or the annual company-wide vacation. Yes, once a year, the entire Valve staff is loaded onto chartered planes — along with their families — and dropped on a beach.

There's also a lot of flexibility. If employees need to take time to care for ailing parents or to compete in the U.S. Ultimate Frisbee nationals — both have happened — they do it. "We don't track vacation time or sick time," Newell says. "We just tell people: Of course we are going to trust you to manage your own time."

Which brings us to the most interesting aspect of Valve: The company is flat.

Newell describes "a bit of a culture shock when people are coming in from other industries." In fact, a leaked new-employee handbook mainly advises new hires on "how not to freak out now."

The guide is half-training manual, half-manifesto for Valve's management style: action-oriented democracy. "We want innovators, and that means maintaining an environment where they'll flourish," it says. The key is giving their talent the freedom to do what they think is best. So Valve has no management structure. Even Newell, the guide insists, "isn't your manager."

In fact, here's how the handbook defines managers:

"The kind of people we don't have any of. So if you see one, tell somebody, because it's probably the ghost of whoever was in this building before us. Whatever you do, don't let him give you a presentation on paradigms in spectral proactivity."

Another thing: No one has a title. "Job titles create expectations of specialization and focus which don't map really well to creating the best possible experience for your customers," Newell says. Especially in game design, where skill sets that are needed one generation may be flipped on their side by the next, versatility is key.

Thus a skill like "being really good at Half-Life level design is not as nearly as valued as thinking of how to design social multiplayer experiences."

And since everyone is on the same level, each person decides what to work on. Employees are encouraged to travel across projects and work areas. "I think people recognize how useful it is for people to vote with their time," Newell says. The handbook mirrors this sentiment, saying "employees vote on projects with their feet (or desk wheels)."

But structure does happen at Valve, the handbook says, explaining, "it crops up in many forms all the time, temporarily." Even then, the person thought of as the project "lead" is more a "clearinghouse of information" than a manager.

Tenured employees who are more acclimated to the crowd decision-making process sometimes help acclimate new hires by engaging in a white-board exercise: A big group meets and predicts how certain projects will go and offers reasons why. Then the group revisits the projects down the line, which Walker calls "really healthy because you tend to be wrong almost all of the time."

By doing this, employees learn it's okay to be wrong — and that the collective wisdom of the room is powerful. When it comes to day-to-day decisions, employees each have a great deal of independent power: They can start projects, make development decisions and even ship products — although throughout the process they are expected to be heavily dependent on co-worker and customer feedback to discover the "right" decisions.

Newell admits to some inherent risk in the open decision-making process at Valve — for instance, when mistakes, like Diretide, happen, he usually doesn't find out about it until after the fact. But he also credits this open structure with many successes — DOTA 2, for instance.

The original DOTA was a mod for "Warcraft III" — Valve acquired its developer and most of the intellectual-property rights before creating DOTA 2. Released in 2013 after significant player testing, the game has hundreds of thousands of concurrent players every day. But there was never a mandate to create the game, Newell says. Instead, one employee started work on it, then roped in a few co-workers after he showed progress.

"It got to the point where I was spending time working on DOTA," Newell says, "but that wasn't me making some top-level decision, it was me going 'I think that I can add value.' "

Newell's hands-off approach is all the more interesting because of the digital cult of personality that has sprung up around him. Swaths of the social site reddit are devoted to fan content about "Gaben," as he is lovingly called. On his birthday, fans filled forums with digital cards in the form of artwork and YouTube videos.

The obsession moves offline, as well. Fans "hug me when they run into me," he says, adding, "I'm not a hugging person, but that's what they want."

"I think that the intensity really is a reflection that we look like a post-Internet company to them." The company, he explains, gets the same sort of jokes about Internet culture like reddit and 4chan as its players do. And Newell's email is public. "I think what [fans are] really trying to say is that 'oh, you're on this other side of this divide with us, the customers?' as opposed to the CEO of General Motors, who has an army of people around him."

When Newell started Valve with Harrington, he was betting that "the future of entertainment was going to be interactive — that we'd move from away passive forms of entertainment toward ones that would be participatory."

And he thinks that Valve's business structure over time will be more productive than older hierarchical forms. To explain, he draws on the "Nature of the Firm," a legendary 1937 essay by economist Ronald Coase. It asked why we need corporations at all. Coase's answer at the time, Newell says, was "there are a set of issues related to discovery costs, transactional costs and obscured reputation that meant that it was simply too expensive to keep doing these things over and over again, and corporations were solutions that solved that problem."

But information processing and a shift toward digital goods have dramatically changed that equation by making the relative costs to creating a product marginal, he says.

He has a lot of other opinions about the business world, like a belief that mass manufacturing will lose out to highly customized creations. But he says the most "outlandish" idea he has is that the Internet will replace many of the things corporations do. "It'll be better at those old Coasian concepts of organizing labor and allocating capital," he muses, adding that the "egalitarian and democratic view of how we produce stuff as an economy is the one that I see increasingly winning out."

Newell's radically egalitarian vision is the reason the management structure at Valve will stay flat. There's also this: If the masses want Diretide, they get Diretide.

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