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Microsoft Corporation (MSFT), Zynga Inc (ZNGA), Activision Blizzard, Inc. (ATVI): PC Gaming Leads In Innovation

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Known for hit gaming titles like Left 4 Dead and Dota 2, Valve appears to be preparing an all-out assault on the traditional console companies.

Valve has long been a cornerstone of PC gaming. Its digital distribution platform, Steam, functions as sort of an iTunes for PC games. By some estimates, Steam accounts for 50% to 70% of the market for digital downloads.

Soon that dominance could extend to the living room. Gabe Newell, Valve’s managing director, hinted at the long-rumored Steam Box console during a speech at LinuxCon on Monday, while at the same time, arguing for the inevitable decline of the existing console players.

PC gaming leads in innovation

Gaming has changed dramatically in recent years. Radical new genres, new business models, and new features have sprung up — all thanks to PC gaming, at least according to Newell.

He has a point. Social games, the genre of games popularized by (relatively new) companies like Zynga Inc (NASDAQ:ZNGA), started on the PC. Although they eventually migrated to mobile platforms, games like FarmVille and Mafia Wars owe their early success to the traditional PC’s browser.

Activision Blizzard, Inc. (NASDAQ:ATVI)

Massively multiplayer games (MMOs) also originated on the PC, and outside of a handful of titles, they’ve never really made the jump. Activision Blizzard, Inc. (NASDAQ:ATVI)‘s World of Warcraft has been, since 2004, one of the most profitable and most popular games ever created. It remains a PC exclusive to this day.

At the same time, gaming companies are increasingly embracing alternative ways of doing business. Many PC MMOs (including World of Warcraft — to some extent) have embraced the free-to-play model (f2p), as an alternative to traditional, up-front costs. Although no gamer is obligated to pay, f2p can often be more profitable for the game creator, as a larger player base may be more likely to purchase optional in-game items or upgrades.

To date, this business model remains almost wholly in the realm of the PC and mobile devices, but there is some evidence that it’s beginning to cross over. Microsoft Corporation (NASDAQ:MSFT)‘s upcoming console, the Xbox One, will launch with Killer Instinct, a f2p fighting game.

Open systems dominate closed systems

Fundamentally, Valve believes that the PC’s advantage over the traditional consoles lies in its ability to offer an open experience.

By nature, traditional consoles are closed systems. Generally speaking, you can only play the games console creators approve — Nintendo Co., Ltd (ADR) (OTCBB:NTDOY)‘s Wii, for example, is only capable of playing Nintendo-approved games. For the most part, the hardware is not (legally) modifiable, and only controllers that fit the console manufacturers’ design can be used.

In contrast, as an open platform, just about anyone can create a game for a PC, and hardware modifications are prevalent. Even software alternations in the form of “mods” are common. Some of the most popular games in the world, including Counter-Strike and Dota 2, originated as player-created mods of pre-existing games (Half-Life and Warcraft III, respectively).

In fact, it is this player creation that underscores Valve’s confidence in the future of PC gaming.

Team Fortress 2, one of Valve’s more popular PC games, has used player-created content to great success. Through Valve’s Steam Workshop, players can create and submit new items for the game. Over time, this has resulted in a multitude of new content — according to Newell, the Team Fortress 2 community has created more than 10 times more content for the game than Valve itself.

Over time, Newell believes this system of user-generated content will result in more, and better games. Newell characterized the future of gaming as economy of connected nodes, where the vast majority of game content will be created by the players themselves.

But traditional, closed consoles are designed to stifle this sort of innovation. Valve believes they are “antithetical” to the very idea of a user-generated future, and “at odds with the evolution of gaming.”

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