Here’s why game maker Valve is giving away $18 million by John Gaudiosi @FortuneMagazine August 6, 2015, 8:54 AM EDT E-mail Tweet Facebook Linkedin Share icons Game studio Valve is giving away over $18 million to winners of this year’s Dota 2 The International tournament on Aug. 8 at KeyArena in Seattle. It’s the biggest award ever given at an eSports tournament, an event where teams of professional video gamers compete over several days to see who will come out on top. That kind of payout may seem ludicrous, but it’s just a drop in the bucket for the eSports industry, which is worth hundreds of millions of dollars and growing. According to Doug Lombardi, vice president of marketing at Valve, the viewing audience last year for The International was more than 20 million for the entire six-day event. The event has grown from a small booth at the 2011 Gamescom in Cologne, Germany, to its current home in KeyArena at Seattle Center. “ESports have been around as long as gaming itself,” Lombardi says. “Over the years, the complexity of games have matured. The audience size has increased. The revenue produced by the industry has exploded. And, along with all those trends of the industry, eSports has also evolved.” “The production around the event has also become something that is on par with any major sporting event—with many of the same personnel working and trucks parked at KeyArena as you will find behind the scenes of a Seahawks, Mariners, or Sounders game,” Lombardi says. “Our broadcast reach continues to grow from the distribution as Pubstomps (watching the event in bars with friends) became a thing a few years ago. Last year we added ESPN to the mix, and this year we are offering the finals in over 400 movie theaters in the U.S.” While this year’s record-setting prize pool is attracting mainstream attention outside of the industry, it only cost the Valve $1.6 million of its own money. Over the last few years, Valve has used the sale of special in-game items to increase the prize winnings for The International tournament. It’s a model that’s already been adopted by other game companies such as Hi-Rez Studios, which gave away $2.6 million at the inaugural Smite World Championship. According to Joost van Dreunen, CEO of SuperData Research, in absolute dollars this event is probably a loss leader, like eSports tournaments are for other publishers like Riot Games. “Organizing tournaments is expensive, but it allows fans to connect to the game in a wholly different way,” van Dreunen says. “So in terms of its value with regards to retention, it’s invaluable. It drives excitement, spending, and increases the overall lifetime value of an individual player. There’s a direct correlation when you look at the increase in popularity of Dota 2 in tandem with the growth of The International tournament.” Valve’s also making money off the in-game micro-transactions around The International. Only 25% of in-game sales go towards the prize pool, which means the remaining 75% goes to Valve. And Van Dreunen notes that Valve raked in over $400 million from its three core games last year (Dota 2, Counter Strike: Global Offensive, and Team Fortress 2) and an additional $400 million from sales of its Source game engine technology and its Steam digital distribution platform, which has over 125 million active users around the globe. “Valve isn’t just a studio: It’s a unique ecosystem,” van Dreunen says. “It has a unique user base that is affluent and highly dedicated.” It’s also a company that has remained staunchly independent and has succeeded on its own terms. Van Dreunen believes Valve is worth between $4 and $7 billion, although he doubts founder Gabe Newell will ever sell. Given the success Valve has had across all of its business, there’s simply no need to.