Meet Gabe Newell, Microsoft’s next CEO
by Rodolfo Rosini
Why Microsoft will end up buying Valve (and Valve will end up running Microsoft), why Gabe Newell will be the new Steve Jobs and why we’ll all be happy that ding-dong Steve Ballmer is gone.
Four months ago, I made a prediction on Founderware that Valve was going to be acquired by Microsoft. Since pretty much not a single person agreed with my opinion, and every time I mention it people pull weird faces, I decided to explain in detail why I am convinced it will definitely happen.
My belief is that Valve has been on course to be acquired by Microsoft for several years. Here are some facts.
A few things about Valve:
Valve was founded by former Microsoft employees and, unlike many tech titans, is not located in Silicon Valley but less than 10 miles from Microsoft HQ.
Gabe Newell (Valve’s CEO, founder and, if I’m not wrong, its only shareholder) keeps giving interviews where he states that “he doesn’t want to sell“. Many take him at face value. Well. Firstly, in M&A, when you don’t want to sell you just don’t. There’s no need to blab to the press about it. Secondly, if your statements appear in the press, it usually means that what you are saying is: “I am not for sale. Unless you offer more than X. Then we’d totally sell out.” I believe this is the message Mr. Newell is trying to convey.
According to the New York Times, EA has been in talks to acquire Valve several times and each time they were rejected on valuation grounds. The gist of it is that EA offered less than $1 billion, but Valve wanted more than $2.5 billion.
Valve owns Steam, which is the second largest app store after the iTunes Store. It controls 70% of the digital download market for PC video games (which in real terms means that it’s making $2-3 billion in revenues at 30% gross margin). Steam has 54 million users with 6.6 million concurrent users logged in.
Steam has VoIP, IM, social features, achievements and a mini-Kickstarter built in, called Greenlight, for its own games. It supports F2P titles with in-app purchases, flash sales, pre-sales, promotions and has a great collection of indie games. Oh, and it’s also expanding on OS X and Linux.
In other words, Steam recaptures all the value it creates without leaking energy.
In the case of some games, Steam by itself was responsible for 80% of revenues. And we are talking AAA mainstream games like The Witcher 2, not some Bumfuck Willy: The Fedora of Time 2D type of indie nonsense.
In Q3 2012, Steam added, for no apparent reason, non-gaming software to its library. This move is exclusively designed to render the underlying OS ‘just a bunch of drivers’ and make it irrelevant.
Valve is reportedly working on a Steam Linux box. This can only be intended to remove the Windows license and its concomitant restrictions from the market. Then, a few weeks ago, some of the designers on the hardware team were laid off. (A sign that Microsoft is already in talks to acquire Valve and they were getting their house in order?)
Valve owns one of the few independent app stores out there and the others are tiny in comparison. (I am nonetheless expecting GOG and Green Man Gaming to be acquired, leaving only branded app stores out there. Disclaimer, some of the investors in my company are also investors in GMG.).
A few things about Microsoft:
Looking at the micro level, it seems that Microsoft is just full of nasty backstabbing middle managers who violently defend the P&L of their unit, as opposed as working as a group (non-backstabbers get fired thanks to Microsoft’s bone-headed employee review method called ‘stack ranking’. it’s terrible and everyone points at it as the reason why Microsoft lost ground against its competitors.)
At the macro level, everything changes. Microsoft is extremely simple to understand as a company: it has to sell a $52 Windows license to every new PC (net price; not what the user pays). Plus it needs to collect about another $67 of Office revenues. Everything else in the company is non-core, and effectively an accessory to enable or defend these actions. Look at the chart below (courtesy of Asymco): Microsoft makes a lot of revenues in many areas, but profits? Well, just in two places. Everything else is irrelevant.
Microsoft is facing also a crisis because the forever expanding PC market has, well… stopped expanding. -1%, in fact, in the past few years, while the tablet (read: iPad) space grew like crazy:
This is one of the reasons Microsoft was forced to create the Surface. Asymco has a nice dissection about that. It boils down to the company making about $120 profit per device.
But they need to find a way to sell millions of these things, and so far they are failing spectacularly (Microsoft hoped for 3 million units and managed to move less than 1 million), mostly thanks to a confusing product line.
I am an early adopter with several tablets and I can’t for the life of me describe their Surface product line; it’s just schizo. Superbad.
Since their tablet strategy failed (pray let us not even mention mobile phones), Microsoft need to control the economics of software distribution on the PC platform in order to stay in business.
But today Microsoft does not control software distribution, and this means that not only are they are missing out on additional revenues but core profitability is in question in the long term in a world of $1.99 apps (remember, selling the OS is not enough; you need to be sold an expensive copy of Office as well or the whole house comes crashing down). And $MSFT has been a stock that despite its ups and downs has delivered profits by the truckload, thanks to Office, over the years.
It is important to point out that Microsoft, with Windows 8, did indeed try to control software distribution by bringing in its own app store, insipidly called ‘Windows Store’ – not to be confused with ‘Microsoft Store’, which describes their equally insipid retail outlets. (Seriously: who the fuck is in charge of design at this company?)
Surprise, surprise, who went to the press to complain? Step forward Gabe Newell. He called it “a catastrophe” that will make users “rage quit computing” and then few months later called it “this giant sadness“. Others echoed the sentiment on social media, but he was the one that went to the press first.
Mr. Newell’s comments were taken at face value. His ownership of Steam, Windows Store’s biggest competitor, was often glossed over or went entirely unmentioned.
Overall sales of Windows 8 are so bad that in fact it will be thrown under the bus this October by Microsoft in favor of ‘Windows Blue’, making it the shortest upgrade cycle in Microsoft’s history. The alternative would have been to throw Ballmer under the bus, but he still has the backing of Bill Gates.
But the new OS will still be a failure. Microsoft is crippled by its Windows/Office mentality. So a new strategy and new management will be needed.
iTunes has shown that a software distribution platform can be an enormous success and not just a feature: over time, it can overtake OS sales (and in the case of OS X, it has):
(Awesome chart from Asymco)
So, based on all this, here’s my theory:
Gabe is not against selling Valve but being already in the ‘top 1,000 richest people on the planet’ club it’s not that he gives too much of a fuck about money anyway. He needs to fill the wallet and the ego at the same time to make it worthwhile.
Microsoft, by integrating Steam into Windows, would go from having an anaemic and hated app store to having the 2nd largest store by revenue after iTunes, and more importantly the biggest one with social features. It could rip apart the communications component of Steam and replace it with Skype. The purchase would keep core gamers firmly entrenched on the Windows platform at a time when innovation is mostly happening on iOS. The new Playstation 4 is a PC without Windows. But the new Xbox could be a Steam Box.
The more one considers this integration, the more it makes sense. It would even give Microsoft control over software distribution revenues on non-Windows platforms like Linux and OS X.
Steam has DRM. And Microsoft loves DRM. No, Microsoft *fucking adores* DRM.
Any acquisition would see Valve being subsumed and Gabe running a sizable chunk of Microsoft – at least ‘Entertainment and Devices’, if not all of it.
Remember when when Gil Amelio bought NeXT and brought Steve Jobs back to Apple. He thought it was to appease the fanbois and in few months he ended up being fired by a board coup orchestrated by Jobs himself (who
used his own money to anonymously short then sold anonymously all his Apple shares to depress the price further and gather support as an extra classy touch). This could be very similar and fits the narrative of a world starved by the premature loss of Jobs.
The news world demands a new tech messiah.
I am going out on a limb and say that Gabe is aiming at being the next CEO of Microsoft.
Why? Well, he was one of the ‘Microsoft millionaires’ i.e. the early employees that got rich with share options before leaving and founding Valve. Like Gates, he is a Harvard drop-out. He built both companies and he is close to them in geographical terms. And, as I said a moment ago, the current toxic company culture is what is keeping Microsoft behind. (Strange, isn’t it, that Valve keeps pushing articles in the Wall Street Journal about HOW AWESOME THEIR COMPANY CULTURE IS AND THAT THERE IS NO MIDDLE MANAGEMENT WOOHOO FREE BAGELS AND COFFEE FOR EVERYONE). Did anyone ever question why, suddenly, all these articles about company culture are appearing? My guess is that they were designed to influence the rank and file at Microsoft and its shareholders where the company culture is perceived as the business’s greatest problem.
Check this ‘Welcome to the Bossless Company’ as an example.
What better ego trip than going from being CEO of one of the best video games companies to CEO of one of the best software companies in the world? With the added, lip-smacking pleasure that comes with running your former employer.
Yes, Gabe likes making games and selling silly virtual hats and guns that make big dimensional holes. And, speaking from personal experience, the game industry really is a lot of fun. But running Microsoft? It’s a once in a lifetime opportunity.
All the moves and noises that Valve is making at a strategic level are designed to force the hand of Microsoft by disrupting their business model so it cannot be ignored forever. This cannot happen without Gabe’s approval.
Microsoft’s share price has lost -49.46% (vs. the entire NASDAQ being down -18.48%) since Ballmer became CEO in January 2000:
(If you want to compare it to Apple’s share price you need a log scale)
Steve Ballmer has been able to keep his job because he eliminated the competition (remember Sinofsky anyone?) and because Microsoft delivered on profits (and on some incredible investments: it put $150m in Apple in 1997 and $240m in Facebook at a $15bn valuation). But this is about to change with the next iteration of Windows. Consumers won’t upgrade to Windows Blue, and in a world of $1.99 apps, nobody will buy a 15-year old word processor + Excel for $220.
Who else has the money to pull it off or to compete against Microsoft for Valve? I am inclined to strike out Google since their focus is to keep Google+ relevant (uh, good one) and they seem determined to capture the advertising spend for that ‘80% of the household budget’ that mothers control (detergents, food, and so on: all that ad money is still spent offline). So a product for dedicated core users, mostly young males, does not fit. Apple is also out, since they do not care about games.
The other company to keep your eye on is Tencent, whose stock has actually outperformed Apple over the past five years. They dominate the social and gaming spaces in China and Valve would give them access to the US market. I’m sure the anti-competition commission would throw a fit over this one, but even if a bid from them does not end well, it would surely jack up the price.
EA does not have the money and might be taken private at $20 a share when the new CEO gets in anyway. Amazon is also a possible candidate, and local as well, but there is space for only Bezos or Newell in that company, not both.
(Tencent’s  growth is surely impressive, it is now the 3rd largest Internet company in the world after Amazon and Google)
So I am expecting Valve to be bought by Microsoft very soon, possibly this year during the new Xbox announcement or the first reporting quarter of the next OS, for a price of about $4.5 billion cash upfront and up to $3 billion in long term incentives. (Microsoft had $66bn in cash and short term investments as of September 2012.) I further expect Gabe to be promoted to CEO once Ballmer is pushed. Because, let’s face it, that’s one man who is never, ever going to quit.
PS. Thanks to Dylan Collins and Mylo Yiannopoulos for the suggestions while writing this post. All non-NASDAQ charts are © of Asymco, which is pretty much the best blog on mobile technology and that you should read religiously.
That’s quite a hunch.
Why would Valve sell out? There’s just no reason to do this for them.
There is no question that Valve is for sale.
They were ready to sell out already to EA but they could not agree on the price (they were asking about $2.5bn). The advantage of being public is that they can incentivate their employees with share options.
But again it’s not much ‘why would they sell’ and more that the Windows Store performance is bad and could threaten future OS sales. This could send Microsoft into panic mode and made them put an offer on the table that not even Gabe could refuse (I put this at $7.5bn total – $4.5bn cash and $3bn shares).
As a Linux enthusiast who has been thrilled with the recent push by Valve to extend PC gaming to Linux, I’m absolutely terrified that this might occur. On the one hand, if Gabe really did take over at MS, it might mean nothing for Steam, and it will continue as it currently is trying to encourage cross-platform gaming. On the other hand though, if MS takes control of Steam and manages it like they historically have managed things, the nascent OS X/Linux support of the gaming community could end up being killed before it even really begins.
It all depends how fast sales of Windows OS are deteriorating. The two scenarios are 1) if early on, yes, Microsoft will completely kill OSX and Linux gaming because it threatens Windows/xbox and 2) if OS sales are falling and there is not much appetite to put billions to compete with the PS4 then focus would be put into actually turning Linux as a revenue generating platform. But unless management changes and Gabe is on top do not expect option 2 to happen.
This would be a horrible future. Let’s hope none of us ever have to live it.
A lot of your argument makes great sense. Microsoft desperately needs a “product guy” in the driver seat to remain relevant going forward, and there are few people as good at that sort of thing as Newell.
This might be me, but I just see him as a gaming person more so that an all around technology person, like Jobs or Bezos. It’s hard for me to picture Newell running the company in charge of all the enterprise stuff that MS has today.
Gabe spent 13 years at Microsoft, he was the producer for the first three versions of Windows and was behind most of the stuff that Microsoft does for enterprise.
How would you see these companies cultures integrating? One is completely flat, not just without middle management, but without management. The other is the stereotype of excessive hierarchy and management.
It’s like oil and water, they aren’t going to mix, you have to pick one or the other. And I don’t see Microsoft becoming flat.
I see him being in charge of the Entertainment & Devices business unit at Microsoft first, which has a different culture than the rest of the company and the ‘Valve model’ could work as an experiment. If that works once Ballmer is pushed his name could be a serious contender for the CEO role.
I admit it’s a very long shot.
A very lovely backstory about microsoft, but heres where I feel your argument takes an extreme turn:
“He needs to fill the wallet and the ego at the same time to make it worthwhile.”
Can’t people live for things other than fame and money? He just doesn’t strike me as the sort of person to be extremely attracted to the limelight. As you said, he doesn’t need more money. He wears ill fitting polo shirts all the time. Does he want more power? I don’t know, to be honest, but its a far stretch to say he’s holding out for a selfish power grab.
Being able to motivate your employees with share options is something that Valve does not have at the moment. I believe this is the main reason why in the past they considered merging with a public company.
I think you are right, another billion is not as interesting to Gabe but the ability to attract and retain top talent is.
But my point is that just more money and more fame is not really that interesting, and maybe running Microsoft is big enough of a challenge that might be attractive to him.
If Valve is perceived by its employees as having an acquisition or IPO in its future, it can provide stock options or restricted stock units to its employees and use that to retain them. You don’t need to be a public company to use your equity to retain talent, you need only the expectation and/or perception the equity will someday be worth something. Even a company that will remain private forever can pay dividends or engage in profit sharing.
Does Valve presently give its employees stock options or restricted stock grants? That I do not know that. You made an assumption Gabe owns 100% of the stock (fully diluted) that you did not substantiate and I find unlikely.
Microsoft has been sorely missing an app store for a very very long time. There are huge non-revenue advantages of having an app store, not just for the consumer market, but especially for the corporate market (read: security). And the Win8/WinRT app store is an absolute flop.
It’s a very interesting theory you have. I think you are wrong. You are very right on three items, 1) Microsoft needs a successful app store, 2) Microsoft needs a massive change in culture, management structure and a personnel shake-up, 3) the next leader of Microsoft needs to come from the Entertainment division. Unfortunately they got rid of J. Allard in favor in Sinofsky. You’re absolutely right, I just don’t think it will happen.
I would love to see this happen. Microsoft could drop the Microsoft store and put everything I’m steam. Developers would come running for that. Steam could have a mobile section and that could blow Apple store and Google store away. Using steam to deploy applications would be perfect fit. Plus i really want to see Ballmer kicked out. He isn’t a good fit. And changing the hiarchy of Microsoft is so very needed at this point.
I see Apple buying up Valve to turn the SteamBox into their AppleTV replacement. That way Apple can enter the video game market and replace Linux on the SteamBox with iOS or MacOS X instead. It also will get them something to merge Steam with iTunes to be the biggest Internet store ever. Plus Apple can sell their Windows software via Steam and have other sources of income and make Gaben their VP in charge of software.
What do you think of Skype’s Tony Blair as a potential rival for Ballmer’s seat? Would you short-list him?
I’d say he wants the reward without the public scrutiny, plus as a politician he knows chickenshit about running a company (without even touching the baggage he is carrying) and even less a tech one.
I think he is more comfortable sitting on board of directors of global defense and finance companies or just advisory boards where the money is good and the deliverables are less onerous. So he can advise on how to deal with foreign countries and can use some of the rolodex he built while at work.
As per the CEO role would not even consider long-listing him.
Ahem sorry I missed the ‘skype’ bit and thought you were talking about the politician.
How would Valve intergrate with Microsoft?
Valve’s management style is a total 180 to MS and pretty radical from what I’ve read.
There are no managers at Valve. Just teams with projects. And you can change teams depending on what projects you find the most compelling. Remuneration is based on what the team deems you contributed to the project.
None of this happens at Microsoft.
Honestly, this is extremely laughable at beast. Gabe has mentioned MANY times that he dislikes microsoft. In fact he has been bashing Windows 8 for awhile now saying what a total failure it is.
No amount of money in the world would get this guy to work for them.
[…] Por qué Valve está esperando que Microsoft la compre y Gave Newell sería el próximo post de Microsoft. Especulación pura y dura, pero así es el cerebro: dale una historia bien contada y parecerá tremendamente verosímil. Whilst in Arrakis. […]
Well A lot of Microsoft games are appearing on Steam as of recent. Age Of Empires 2 HD is the top selling game as of right now. And their are rumours suggesting a “Halo Trilogy” is coming to Steam soon.
Theres also evidence shown in the AMD beta drivers
The interesting thing about the evidence in the AMD drivers is how AMD is going to be the featured technology in the next Xbox.
Does these evidence support the supposed fusion of Microsoft and Valve? .