How A Microsoft Millionaire Leveraged A Video Game Into $9.5 Billion Fortune

Last October, around 20 employees and alumni of videogaming giant Valve gathered at The Lakehouse, a trendy restaurant nestled on the second floor of a corporate office tower in Bellevue, Washington, just outside of Seattle. The artists and coders trickled into the private event to celebrate a big milestone: the 25th anniversary of Half-Life, Valve’s first bestselling videogame, which was released two years after Gabe Newell and his business partner Michael Harrington started the company in 1996.

An overnight hit, Half-Life sold 2.5 million copies within 12 months, putting Valve firmly on the map. “When you go back to how Valve started and its roots, it was that,” says Harrington of the Half-Life launch. Even today, with multiple hit games like Portal and Dota 2, a fast-growing hardware division and its digital sales platform Steam making Valve one of the most consequential gaming companies in the world, Half-Life is still core to the company’s identity.

Harrington, now 60, left Valve in 2000, a couple years after Half-Life was released. But he returned on this autumn evening, along with most of the original Half-Life team, to sip cocktails, taste farm-to-table starters, and swap war stories. The big no-show that night? Valve’s 61-year-old co-founder and president, Gabe Newell.

While Newell is still the company's leader (considered the president even though Valve is the sort of left-coast outfit where no one actually has a title), he’s rarely at Valve’s offices these days and hasn’t attended an in-person company event in years. Since the pandemic, Newell has apparently been living at sea on one of his five ships (the collection is worth an estimated $500 million; Newell is worth an estimated $9.5 billion and owns an estimated 50.1% of Valve. Employees own the rest.) The increasingly reclusive mogul hasn’t given an interview since 2022 and declined to speak to Forbes for this story. He isn’t on social media. He doesn’t go to Davos or give TED Talks. His appearance at the 25th anniversary event was limited to a few brief cameos in an hour-long documentary on the company’s history. “I always have absolutely nothing interesting to say when people say, ‘Would you reflect on your legacy?’,” Newell says to the camera. “I can look back at the things we did, but to me, they’re just the stepping stones of what we’re going to be able to do in the future. That’s just how I’m wired.”

To gain insight into one of the most central players in the nearly $238 billion (worldwide 2023 revenue) videogame industry, Forbes pored through dozens of legal documents and spoke to former employees, videogame industry experts, financial analysts and legal experts. The result: a rare look into the finances of one of gaming’s most secretive companies and new information on how its secluded leader is spending not just his money but his time. Valve did not provide or confirm financial figures.

Recent legal filings (some mistakenly unredacted) reveal two key facts about Valve: it has sustained a more than 40% operating profit margin for a decade, and it has often been more profitable per employee than some of the most valuable companies in the world, including Amazon, Alphabet and Microsoft. Last year Valve had its best year ever, booking an estimated $5 billion in revenues. That works out to about $14 million in sales per employee for its roughly 350 employees.

Videogame consoles from Sony (PlayStation), Microsoft (Xbox) and Nintendo (Switch) have become so ubiquitous it’s easy to forget that gaming on a desktop computer or laptop is a massive – and fast-growing – business. Globally, around 1.9 billion people play games on their PCs, making up a nearly $50 billion (hardware and software sales) industry. By 2030, the PC gaming market is expected to swell, reaching $68 billion.

Most gamers no longer buy their games physically from a retail shop like GameStop. Indeed, many publishers only make their game available digitally. Players purchase them and download them online. And if they live in the U.S. and play on a PC, they usually do that through Valve’s game distribution platform, Steam, which has commanded an estimated 75% global market share for the last 19 years. Steam pockets a 30% cut of every sale – shrinking to 25% or 20% for games selling more than $10 million or $50 million respectively.

It’s an insanely good business. The platform requires little upkeep and few employees. Publishers upload their games independently; gamers download them. At any given moment, more than 30 million gamers are using the platform to message friends, buy games, store data and play on one of the more than 100,000 titles available. Everything else is a minnow by comparison. The second most popular online game distributor, Epic Games Store, from the developer of Fortnite, peaked at 36 million daily active users in 2023 and has 2,900 titles. GoG.com, a PC gaming storefront owned by Polish developer CD Projekt RED, has about 10,000 games.

Unsurprisingly, given its market dominance, Steam is a cash cow, contributing an estimated $3 billion to Valve’s top-line, or about 60% of 2023 revenue. And it’s growing fast. Steam’s total game sales grew 18% in 2023 and have doubled since 2019, according to research firm Video Game Insights.

That money hose has freed Valve to do something almost no one has successfully done in decades: Break into the hardware side of the business. After a series of failed attempts spanning nearly a decade, Valve launched a console called the Steam Deck in 2022, to take on handheld devices like the Nintendo Switch. The Steam Deck’s big advantage is that it can play PC games, meaning players have access to their existing library of Steam games. The company sells three models, priced at $399, $549 and $649. It sold nearly half a billion dollars’ worth of the consoles in its first year, based on data from London-based research firm Omdia.

“Valve is this mythical unicorn, and it takes up this massive position in one of the most innovative spaces in the industry, a.k.a. PC gaming,” says Joost Van Dreunen, author of “One Up” who teaches at NYU. “And Gabe Newell is one of these legendary figures in the industry, and we know nothing about any of it. It’s a miraculous thing that it's done so well, and, at the same time, it's been so opaque.”

Before co-founding Valve, Newell was a Harvard dropout who became a programmer and technical executive at Microsoft, where he worked for 13 years. There he met Mike Harrington — a fellow “Microsoft millionaire”— at a birthday party in 1987. It was Harrington who mentioned to Newell he was considering a new venture. Newell was amped and wanted in.

“[Newell’s] strategy has always been to, at least, double down on the thing that he truly believes in — he goes all in,” Harrington said.

The well-connected duo scored an advance of roughly $1 million from Sierra Online, which agreed to exclusively publish their first few games in exchange for 30% of the revenue and 100% the intellectual property (eventually Valve clawed back its IP through a re-negotiation and distribution rights though a legal battle). But Newell and Harrington needed $4 million more to launch the company. Harrington sold shares in Microsoft to pay his side upfront, while Newell, loath to part with his Microsoft shares, borrowed against them to put up his half.

The bet paid off almost immediately when Half-Life became a runaway success in 1998. Two years later, Harrington sold his stake in Valve to Newell, cashing in on the company’s near-term success but missing a once-in-a-lifetime chance to become a billionaire (He is still well off after a decade on the ground floor of the Microsoft and a $75 million sale of a photo editing app to Google in 2010). Then in 2003, Newell launched an early version of Steam. “[It] was light years ahead of everybody else's thinking, the idea of digital distribution,” says NYU’s Van Dreunen.

To quickly grow Steam, Newell leveraged his biggest asset: A best-selling videogame. When Valve released Half-Life 2, in 2004, players were required to download Steam, boosting the platform as the game sold more than 4 million copies in its first two years. Thanks to the games and Steam, by 2005 Forbes estimated Valve was well on its way to making $55 million in operating profit.

Several hit games later, the company pivoted in the 2010s from developing single-player titles in favor of developing multi-player games like Counter-Strike 2 and Dota 2. Valve eventually made its shoot-em-up games like Team Fortress 2 and Counter-Strike: Global Offensive free to play, exclusively on Steam of course. Around the same time, the company started selling cosmetic items for gamers’ avatars, like ten-gallon hats and mirrored sunglasses. It became such a significant business that in 2012 Valve hired noted Greek economist Yanis Varoufakis (he left to become Greece’s Finance Minister in 2015) to stabilize and experiment on the burgeoning virtual market for these items.

Valve also dabbled in hardware. It released the now-defunct Steam Machines in 2013, a console-like computer which used a proprietary operating system called SteamOS. In 2016, Valve started selling a virtual reality goggles built in collaboration with Taiwanese electronics firm HTC and, in 2019, its own independently made headset, the Index. And after years of development, Valve released its long-awaited prequel Half-Life: Alyx in 2020. Alyx was built exclusively for VR headsets to push the technology. It has sold more than 2 million copies.

Steam’s near monopoly position has attracted its fair share of detractors – and lawsuits. In 2018, a Valve employee wrote, “it feels like a bunch of threats and risks have been swirling around us recently and some feel more real than they have in a long time,” adding that “growing pressure from [Epic’s] Tim Sweeney and a drumbeat from developers that 30% is too big of a cut for what we provide.” The email was included in discovery for a lawsuit against Valve.

Epic Games CEO Tim Sweeney — who became a billionaire on the back of the popularity of Fortnite— has been outspoken in criticism. Fees of 30% are “the number one problem for PC developers, publishers, and everyone who relies on those businesses for their livelihood. We’re determined to fix it,” Sweeney tweeted in 2019. Legal documents show he once emailed Valve executives, calling the idea of a flat 30% cut “untenable” and asking Valve to reconsider (he also wrote “you a**holes are telling the world that the strong and powerful get special terms.”)

“My past criticisms have been specific and directed towards just the thing I've criticized,” Sweeney wrote to Forbes in an email. “I don't have any criticism of Gabe Newell, who has always been thoughtful in my interactions with him, nor of Valve in general.”

Epic Games, which Sweeney founded in 1991, has emerged as Steam’s most viable competitor. The company exploded in scale in 2017 after releasing Fortnite, a candy-colored, cartoonish gun game that quickly became a worldwide sensation. Much like Newell had used the success of Half-Life to jumpstart Steam, Epic launched its own game distribution platform in 2018 in the wake of Fortnite’s success. The Epic Games Store, which did about $950 million in sales last year, positions itself as more developer friendly, taking only a 12% cut.

Epic wasn’t alone in its frustration with Valve’s fees. Prior to the pandemic, companies like Ubisoft and Activision-Blizzard started to remove popular games like “Call of Duty” and “Assassin’s Creed” franchise from Steam to host exclusively on their own proprietary platforms or on the Epic Games Store. But the lure of Steam’s huge audience proved too great to resist. By 2024, Ubisoft and Activision-Blizzard had both returned some of their biggest games to Steam.

Wolfire Games, a small San Francisco-based independent videogame company, sued Valve in 2021 after a disagreement about a game price on the Steam store. Two additional lawsuits have been filed against Valve this year. The latest lawsuit, filed in Seattle in August by a group of gamers, alleges Valve practices anticompetitive behaviors, like insisting publishers match Steam’s prices even selling through other channels and retaliating against companies that don’t conform by removing their games from Steam. Neither case has a date to go to trial, and Wolfire’s attorneys filed a motion to consolidate the two cases in October. Valve is also facing a lawsuit in the UK filed in June alleging the company uses its dominant position to overcharge its users.

“If it's important to regulators what Microsoft does with the acquisition of Activision Blizzard, if it's important to regulators what Apple does with its third-party App Store rules and regulations … it should equally be important to regulators what happens with Valve and Steam. But for some reason that's totally off the map,” says Van Dreunen.

Newell owns six yachts plus several submarines. Rocinante, pictured in a Cape Cod Marina in 2023, is his third biggest at 257 feet.

Newell has offered no public comment on Valve’s future in several years. Indeed, the entrepreneur, who is richer than ever, appears to be spending less time on Valve and more on personal passion projects. His involvement at Valve seems to have taken the form of a rarely visiting celebrity rather than a hands-on CEO. Since Covid, Newell, whose past hobbies have included race cars, knife collecting and Tuvan throat singing (a bellowing, throaty singing traditional to Central Asia) has been largely living on his yachts in an intense effort to avoid the virus.

Newell is spending time on two new enterprises: Starfish Neuroscience and Inkfish. Starfish, which has offices near Valve in Bellevue and was spun off from Valve in 2022, is working on the “next generation of neural interfaces,” and LinkedIn lists Philip Sabes, who helped start Elon Musk’s Neuralink, as a co-founder. Inkfish runs a mini-fleet of six ships and several submarines; it is a self-described “philanthropic fundraising service” that conducts maritime research. Neither company responded to requests for interviews.

“From the outside looking in, it doesn't feel that Valve’s the same anymore,” Van Dreunen says. “There's a sort of absentee landlordism going on that wasn't there 20 years ago. … It's natural for leadership to cycle out. That distance naturally occurs. It's not a personal attack of any sort. It's just, what would it look like if 2004’s Gabe Newell was running the ship now?”