Just before Halloween, a commentator covering Valve's most popular game, Defense of the Ancients 2 (Dota 2), tweeted it would not have the seasonal event "Diretide." The time-limited game mode with Halloween elements such as 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, “(つ◕_◕ )つ," demanding that Valve "Give DIRETIDE." They even launched a Change.org petition, and they added a version of the character for download in Dota 2 itself. User ratings for Dota 2 on the review site Metacritic tumbled.
Last week, Valve co-founder Gabe Newell called the decision this year to skip Diretide "totally a mistake." Newell, who started Valve with fellow former Microsoft employee Mike Harrington in 1996, has achieved a cult-like status in gaming circles. In person, he's a near perfect representation of Valve's "gentle giant": a bear of a man with a graying mop of unruly hair, full beard and the wire-framed glasses that have become his trademark. 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, headquartered in Bellevue, Wash., 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 that Newell pioneered: a radically democratic structure that uses the wisdom of crowds both for its own internal structure and in managing its relationships with customers.
Those values were reflected in Valve's response to Diretide.
"Essentially, anytime you do an event like that everybody expects it's just going to keep happening," Newell said. A blog post explained that the company decided not to prepare a Diretide for 2013 because it was working on another substantial release it hoped to have ready by Halloween. In hindsight, Newell said, it's easy to see why that was a mistake.
"Nobody says that you’re not going to have Halloween this year because Christmas is just going to be huge," he said. So the company reversed course and rushed to include a Diretide event in the most recent update.
Just as important as rectifying the problem, Newell said, was admitting the mistake. "We had to be really clear that we screwed up," Newell said, mirroring language from the blog post that told players they "were rightly upset" by the Diretide decision. But he also said that the episode was particularly embarrassing because 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 game maker 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 a privately-held company and would not comment on its financials. In a New York Times article last year, Pachter estimated the company was worth about $2.5 billion.
In October, the company announced Steam had reached 65 million active players. That's a 30 percent increase over last year, beats Microsoft's 48 million XboxLive accounts and is 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, a console alternative that will run open source software based on Steam that could dramatically expand the market for Valve's platform. The console games market is a $13 billion industry locked up by Nintendo, Microsoft and Sony, Pachter says, while the full-size PC game market that Valve dominates is about $3 billion.
The Steam platform is also a major way for Valve to solicit feedback. After Steam was introduced, Valve "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 said. "They're rabid, they're passionate, and there are a lot of them."
"All of the sudden you're no longer dancing in the dark with oven mitts on," he said. Instead, "you can actually see how your audience and your customer base is reacting to what you've done, riffing on it and extending it."
Getting customers to create value
Customer involvement isn't limited to giving feedback, Valve believes. It's also a way for the community to create value. And that 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 created a place for user-submitted content that turned into the Steam Workshop, a massive marketplace where users share or sell game tweaks.
"The interesting thing is that it didn't start from us having some grand vision of the future around user-generated content," Walker said. "It started with customers doing something interesting and other customers clearly saying, 'I like that, and I want it.' 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 users create, share and even sell them sets Steam apart. "They are essentially the only ones who let their customers bring real value," Pachter said of Valve.
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. "It’s a lot easier to realize that the experiences we create for people are really a collaboration between all of the members of the community," he explains, adding that "this sounds a little bit touchy-feely granola, but it’s pretty concrete."
"A real lifesaver"
Ben Henry, a teenager in Kansas, is one of Newell's favorite examples of the commercial relationship between Workshop contributors and Steam.
Ben's mother, Amy Henry, said that getting involved with Valve "was a real lifesaver for Ben, and by association for us.”
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 period for him, and he and his brother played a lot of video games together. One day, his mother recalled, Ben asked for a copy of The Orange Box -- a compilation of Valve titles that included Team Fortress 2.
Ben had experimented with some basic 3-D effects for video projects he and his brother worked on. Before long, he started making new features for his favorite Valve games -- first he created "skins," or graphics to load over existing 3-D objects, and later he made the 3-D objects themselves. When Team Fortress 2 started accepting community contributions, Ben jumped in.
He received an e-mail from from a Valve employee who said the firm wanted to feature some of Ben's creations for sale in the game. That's when Valve learned that Ben was just 14. Soon Ben was making more money from the downloads of his creations than some adults do in their day jobs. But his mother said Ben doesn't like to discuss the money he's made through Valve "because he wants to be liked for who he is, not for having a good job, or his connection with Valve."
Ben used his first check to fly out to visit Valve and says one of the highlights of that trip was meeting Newell. By the time he left, his goal was to get a job at Valve.
Since then, he's been making progress toward that goal. Last summer he interned at Valve’s headquarters, contributing to its Pipeline project. The Web site 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 for the company.
His parents say they are thrilled about the opportunities Ben's relationship with Valve has opened up for him, and not just the financial ones. "I’m happy he was able to be a creator, not just a consumer of something he was passionate about," Amy Henry said. Ben said the experience has made him more confident and has given him a group of friends in the gaming community that span the world.
But another aspect of the relationship that Ben and his mother gush about is the level of respect they say Ben has received from the company, despite his age. "They have taken him seriously," Amy Henry said.
Newell beams when describing how he thinks Steam helped Ben reach his potential. "In the old world, he never would have even found a company to be a game developer at. Plus, nobody would have been able to recognize how talented he was," Newell said. "He would have gotten some boring entry-level job and struggled for many years, and 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 encourages in its community, as well as inside the company. In fact, many of Valve's recruits started out in the industry creating successful gaming mods. That includes Walker, who co-created the hugely popular Quake mod Team Fortress.
Walker recalled just how aggressively Valve pursued him after the initial success of Team Fortress. While he and his business partner were engaged in a months-long back-and-forth about doing some design work for a major game developer, they got an inquiry from Valve about making a version of their mod for Half-Life. The day after they said yes, they received plane tickets. Valve eventually bought out their company, and Walker, who had three semesters of college under his belt at the time, has been with Valve ever since.
"Traditional credentialing really doesn't have a lot of predictive value to if people will be successful," Newell said. "Most people who end up being successful have good grades, but it's orthogonal -- there's no extra information than if they put together a Web site and have a bunch of fans who love coming and seeing what they're doing." He sees the creation and management of successful products to be a good indicator of potential success, especially if a project was self-driven.
Many current Valve employees who didn't come from the mod community have unique recruitment stories. Anna Sweet, who works on partnerships, was a former Microsoft and MySpace employee who was considering going back to school for an MBA when she had an informational interview with Valve. At the meeting, the Valve folks suggested that Sweet come work with them instead. Doug Lombardi, who does communications work, was handling brand management for Valve's first game, Half-Life, at its publisher. Then he accepted a job offer from Microsoft, a position he described as a "really big deal."
But when Lombardi told Newell about his impending departure, Newell asked him to lunch. After the meal, Lombardi ended up in a three-hour meeting with Newell, who convinced him to join up with Valve instead -- back when it was a 20- or 30-person shop, not the 300-plus crowd it is now.
"It was a tough call, " Lombardi said.
Whom to hire is one of the most important decisions Valve makes, Newell said, and the company has been structured around hiring 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 work at Valve, Newell explained. "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 views hiring as a long-term relationship, saying upfront that it wants people to be here for the next 10 years and then asking what it will take to do that. Some of the incentive comes down to perks, such as in-office trainers or the annual company-wide vacation. Yes, once a year, the entire Valve staff is loaded onto chartered planes and dropped off on a beach -- along with their entire families.
"It turns out that you actually get a huge amount of work done," on that trip Newell noted. "It's supposedly a vacation, but all anybody talks about is work in a different environment where they're interacting with a bunch of other people, right?" One of the most valuable benefits of the trip, he said, is that people bring their parents. "It's amazing the number of times parents have come up to me and said, 'I'm telling my daughter, I'm telling my son how lucky they are to work here and how proud of them I am.'"
Valve said it also offers its employees a lot of general, individualized flexibility. If someone needs to take time to care for ailing parents or to go compete in the U.S. Ultimate Frisbee nationals -- both of which have happened -- they can do it. "We don’t track vacation time or sick time," explained Newell. "We just tell people: We trust you to make all of these other decisions; of course we are going to trust you to manage your own time."
Which brings us to perhaps the most interesting aspect of how Valve runs its business: The company is flat.
Welcome to Flatland
Newell describes Valve as “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." And even that document is a team effort.
"Once you’ve read it, help us make it better for other new people," the text urges, soliciting feedback and edits to the version that's hosted on the company Intranet."Suggest new sections, or change the existing ones. Add to the Glossary. Or if you’re not all that comfortable editing it, annotate it: make comments and suggestions. We’ll collectively review the changes and fold them into future revisions."
The guide book is half training material, half manifesto for Valve's management style: action-oriented democracy. "We want innovators, and that means maintaining an environment where they’ll flourish," it explains.
The best way to do that, Valve believes, is by giving its employees the chance to do whatever they think is best. So, Valve has no institutionalized management structure. Even, Newell, the guide insists, "isn’t your manager."
In fact, here’s how a glossary at the end of 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.
Valve has also rejected job titles: "Job titles create expectations of specialization and focus which don't map really well to creating the best possible experience for your customers," Newell said. 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 specific skill like "being really good at Half-Life level design is not as nearly as valued as thinking of how to design social multi-player experiences," he said. And since everyone is on the same level, each individual decides what he or she wants to work on. "I think people sort of recognize how useful it is for people to vote with their time," Newell said. The handbook mirrors this sentiment, saying that "employees vote on projects with their feet (or desk wheels)."
Yes, the desks are on wheels. The handbook urges new hires to, "think of those wheels as a symbolic reminder that you should always be considering where you could move yourself to be more valuable." Employees are encouraged to travel across projects and work areas, so "there is no organizational structure keeping you from being in close proximity to the people who you’d help or be helped by most."
Creating decisions from chaos
Structure does happen at Valve, the handbook says, explaining that “it crops up in many forms all the time, temporarily.” But even then, the person thought of as the project “lead” is more a "clearinghouse of information" than a manager.
Tenured employees who are more experienced in the crowd decision-making process sometimes help acclimate new hires with a white board exercise: A big group meets and predicts how certain projects will go and offers reasons why. Then they revisit the projects down the line, which Walker called "really healthy because you tend to be wrong almost all of the time."
By looking at their predictions and discussing the models that informed those predictions, employees learn that it's okay to be wrong -- and that the collective wisdom of the room can help them reach better conclusions than they might reach on their own. When it comes to day-to-day decisions, each employee has 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 so they can discover the "right" decisions.
Some might think this radically decentralized management model would start to break down as Valve grows. But Newell argued that the opposite is true. "What that means is that a lot of bandwidth internally in the company frees up because you're not just constantly tracking a whole bunch of stuff," he said. "Decision-making is really distributed."
Newell acknowledged some inherent risk in the open decision-making process at Valve. For example, 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, including Dota 2.
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 said. 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 said, "but that wasn't me making some top-level decision, it was me going, 'I think that I can add value.'"
"I'm not a hugging person, but that's what they want."
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 popular social site reddit are devoted to fan content about "Gaben," as he is called. On his birthday, fans filled those 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," Newell said, adding, "I'm not a hugging person, but that's what they want."
"I was with my kids the first time that happened in public, and my kids were pretty cool with it," he explained, "but I wasn't."
But he doesn't think his personal fan-base is necessarily due to his own efforts, saying "I think that the intensity really is a reflection that we look like a post-Internet company to them." The company, he explained, gets the same sort of jokes about Internet culture like reddit and 4chan as its players do. And Newell's e-mail 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."
Still, he seems flattered by the attention because he views it as proof that what they are doing is working: "I like our customers. They like me. They like us. And that's where the validation of our business principles and the choices that we make happens."
An interactive future
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 Theory 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 said, 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 making a product marginal, he said.
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 said 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 mused, 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 that the management structure at Valve will stay flat. And it's the reason that if the masses want Diretide, they get Diretide.
Correction: An earlier version of this post stated that the original tweet about the lack of Diretide in 2013 came from a Valve employee. However, it came from a Dota 2 commentator. We regret the error.