BELLEVUE, WA – Installed base.

It's what every gaming machine needs if it's to get even a tenuous foothold in this ultra-competitive market. Software developers won't bring their killer games to your platform if there isn't a critical mass of addressable customers – but those customers won't buy your hardware in the first place without exclusive software.

The difficulty of squaring this circle is the reason why the history of the gaming business is strewn with the bodies of failed platforms. If you release a new piece of gaming hardware without at least attempting to resolve that fundamental chicken-and-egg problem, you're dead before you even launch. Yes, there are ways to do it, but they're not foolproof, even if you're an industry giant – witness Nintendo, with sales of its new Wii U platform deep underwater and minimal developer support for its second Christmas season.

Nintendo's fall from grace might give Sony and Microsoft, the current kings of the living room, more confidence when it comes to the launches of their respective new platforms, PlayStation 4 and Xbox One, later this month. But soon enough, they'll have another competitor, one with a particular advantage: It might not have to tackle the chicken-egg problem at all.

Last week, Valve announced that 65 million people were now active users of Steam, its gaming umbrella service for personal computers. That's a number on par with the installed bases of Xbox 360 and PlayStation 3. It's a whole lot of gamers buying and playing the over 3,000 games on the service, from blockbusters like BioShock Infinite to one-man indie projects like Retro City Rampage and everything in between.

Our customers love all those Steam titles, but they also like their families.If these players had Steam in their living rooms, it would be a close substitute for a traditional game console – if not better. And that's exactly what Valve's attempting. At the Consumer Electronics Show in January, Valve and a variety of hardware partners will unveil a range of Steam Machines, television game consoles of various power levels and price points, built with commodity PC parts, that run Valve's new Linux-based SteamOS operating system. Valve itself is nearing completion of a controller that is designed to eliminate the need for a keyboard-and-mouse setup.

"There's a strong desire from our customers that we've heard for a long time," says Valve product designer Greg Coomer. "They love all those [Steam] titles, but they also like their families. And whenever they had to go into the living room, they've had to abandon everything they loved about the games in the other room of the house."

Valve doesn't need to convince anybody to give up their Xbox. All it needs to do to disrupt the game console biz is get its current customers to bring Steam out of the computer room and onto the couch.

Playing with the new Steam Controller prototype. Photo: Matthew Ryan Williams/WIRED

Taking me on a brief tour of Valve's headquarters – a few floors of a nondescript office building in Bellevue, a suburb of Seattle that is also home to Destiny developer Bungie and a short drive away from the offices of Microsoft and Nintendo – Coomer is trying to impress something upon me: Valve is a hardware company now. The halls are full of 3-D printers and electrical engineers sit at desks piled high with oscilloscopes, wires, and prototype hardware. It's all done here in the same office, he says, except for some stuff – injection molding, for example – that they legally can't do in their current office space, and have an offsite area for.

"We're used to thinking of PC as an area where lots of innovation happens in hardware all the time," Coomer says. "It seemed like we should get involved in making that move forward."

It wasn't so long ago that Valve Corporation, then doing business as Valve Software, was a simple game software maker, one of many. Founded by Microsoft alums Gabe Newell and Mike Harrington in 1996, it had a couple big hits with first-person shooters like Half-Life and Counter-Strike. The project that made Valve more than just another hotshot game developer was, at first, just a creative solution to problems that its existing customer base was having. In 2002, buying, authenticating, installing and patching PC games could be a pain in the ass. The Steam service that Valve was introducing would automate the process. Run the program on your PC and you could buy, download and maintain your Valve games automatically. Since many players would be logged in to Steam constantly, they could use it as a meeting place for game matchmaking.

To say that it was happily ever after would be a lie. Steam began, as one story put it, as the "butt of the gaming community's jokes." The servers were overloaded at launch and Steam represented not a solution but a barrier between players and their games. It still wasn't well-liked in 2004, when Valve made a momentous but controversial decision: Its highly anticipated Half-Life 2 would require players to install and use Steam even if they bought it on a disc at a retail store. Gamers freaked out, and at first their complaints were validated, since Steam again suffered under the load of new players and gamers had to wait hours or days before their copy of the game would activate.

This is not the way most hardware manufacturers would behave.And yet, somewhere along the line Steam went from boondoggle to boon. Being able to download and update games without hassle (once the kinks were ironed out) was great, especially once other publishers added their games to the service, but what really made Steam great were the prices. Steam sales sometimes let you buy full-priced games for pennies, taking full advantage of the fact that the cost of selling a copy of a digital game was effectively nothing and even a $1 sale was pure profit. 10 years and 65 million customers later, Steam has revived the PC gaming market, which had been in a death spiral when discs and CD activation keys were the only thing standing between publishers and rampant piracy.

Saving money is one of the most enticing things about the idea of Steam in the living room. While Microsoft and Sony have greatly boosted the availability and competitive pricing of downloadable games for the Xbox 360 and PlayStation 3 (neither console launched with the option to download full retail games, just bite-sized Arcade-type titles), they're still constrained by their relationships with brick-and-mortar retailers. They can't undercut disc game prices by too much, but Valve couldn't care less about that.

About a year ago, Valve took the first steps out of the computer room by introducing Big Picture Mode to the Steam platform. It was a console-style interface, a way to interact with Steam from a 10-foot distance while sitting on a couch, looking at a big screen TV, holding a controller. This was a clear indication of where Valve wanted to go, but it wasn't really useful unless you were hardcore enough to actually cram a PC tower into your entertainment center. And you'd have to haul a mouse and a keyboard out there too, since you were still running everything under Windows and since not all games used a gamepad – and even the ones that offered controller support still sometimes required you to set them up with a mouse.

"This is not the way that most hardware manufacturers would behave," says Coomer. A company like Microsoft would have a "monolithic unveiling of something that has been exhaustively tested under wraps." Valve, he says, would rather introduce a piece at a time, gather customer feedback, tweak, iterate, polish, release the next piece.

Now, Valve is ready to start sending out the pieces that should completely solve the living room problem.

The Steam controller replaces the traditional joysticks and buttons with two multi-use trackpads. Photo: Matthew Ryan Williams/WIRED

The Controller ————–

After our brief stroll around the office (during which we were not allowed to take photos, lest we inadvertently snap some secret project), Coomer leads me to a demo room in which more than a dozen different crazy-looking prototypes are arrayed. When Valve first began looking at input hardware, he says, it did experiments with future-tech type stuff: virtual reality, wearable computing, etc. "The very first thing we did was a pair of gloves. There's actually a tremendous amount of fidelity you can get out of gloves. But that wasn't really product thinking."

The focus quickly turned, Coomer said, to developing a controller that would let you play Steam's entire library of games without a mouse and keyboard. This presented two distinct challenges: It needed a high-precision pointing device that would be a close substitute for a mouse pointer, which analog joysticks are not, and it needed lots and lots and lots of buttons.

For a while, Valve produced prototype controllers that had a trackball replacing the right analog stick, eventually landing on an iteration with a giant ball that could be spun from the top (with a thumb) or the bottom (with your fingers). The ball, Coomer said, had "built-in haptics" – you didn't need to simulate haptic feedback because you were spinning a large, heavy ball with its own momentum. It worked well. Simultaneously, Valve was playing around with touch interfaces, from simple circular trackpads for your thumbs to more complicated ideas. One abandoned idea looked like a smartphone that sat in a controller-shaped dock, and every game could have its own customized control display on the screen. Another concept was a modular controller; you could swap out the left and right inputs for a joystick, a touch pad or a trackball depending on the game.

"The physicality of buttons combined with touch and trackpad-style input was really where the sweet spot was," Coomer said, "actually serving the needs of Steam customers and the Steam catalog." Valve decided to go with two touch pads, and give game developers the ability to control, with their software, how those touch pads reacted to player input. It also designed the form factor of the controller around them. Just replacing a joystick on an Xbox 360 controller with a flat touch pad would not be a very good input method: Your thumb would lay flat against the whole pad and the game would have a very hard time figuring out what direction you were trying to push.

When Coomer handed me the Steam controller to hold, I immediately understood what was different. The handles are curved upwards, so they keep your thumbs spaced apart from the pads. And the pads themselves are recessed and tilted inward, so only the dead center of the tip of your thumb actually makes contact.

This is the kind of thing that is the nightmare for most PC controllers.But I didn't really get it until I tried it. As I sat down in front of the TV screen on the other side of the room, another Valve employee loaded up the strategy game Civilization V and handed me the controller. I passed my right thumb over the trackpad, expecting to see the mouse cursor move. And I did. But what I didn't expect is that I'd feel and hear it, too. As I swiped the pad, the system of electromagnets under the pad whirred into action, firing under my thumb and making a noise like a ball rolling to a stop: cliklikliklik-click—click—–click———click. If I didn't know better I'd have thought I was actually rolling a trackball.

The second piece of the puzzle: buttons. They're everywhere. There are shoulder buttons for you to hit with your index fingers, of course, but there are also "back paddles" that you can easily press with the fingers that go unused on traditional controllers. Each trackpad can be clicked, too, and there are an array of buttons on the face that you can access if you remove your fingers from the pads (although Valve says these are for secondary functions). Finally – although it wasn't on the prototype I was using – a small screen in the center of the controller will allow users to create their own virtual buttons to take care of any keyboard commands they can't assign to the physical controller inputs.

"There's been, I don't know how many custom peripheral controller type things for gamers on PCs over the years," Coomer says. "An issue they have all faced, which is giant, and impeditive to their success, is the lack of a mediator like Steam between the controller and the games, so that mediator could universally make sure the controller worked well with all the games."

At this, Coomer brings up a menu screen that will look familiar to any gamer: a controller-configuration screen where you can assign actions to each input. "This is the kind of thing that is the nightmare for most PC controllers," he says, "because you start a game and then you're in this screen for half an hour before you ever get going. We believe we've designed a way around that." When the controller launches, he says, players will be able to create, then share, their custom controller layouts.

"Steam users [will be] the ones driving the proliferation of configurations for all the games," he says. "We think that as we start our beta, immediately the entire Steam catalog is going to fill up with very high-quality binding sets for all the games that were never meant for use with a controller." Steam will have a system that lets players rate those bindings, and bubble the best ones to the top of the list, with the intent that most players will never have to configure their own setup.

The inside of Valve's prototype Steam Machine, which it will send to 300 beta testers from the Steam community this year. Photo: Matthew Ryan Williams/WIRED

The Machines ————

Sitting underneath the television across from me is the Steam Machine – not one of the models that Valve's heretofore unnamed hardware partners will announce at CES, but a prototype built by Valve that it will be sending out to 300 lucky beta participants, hand-selected from the Steam community's most engaged users. It looks like a console, not a PC, about the shape and size of an Xbox One with a big glowing power button on the face. "These are the components that someone would put into a traditional tower PC," Coomer says, including an Nvidia 780 graphics card that, as an open model of the machine on a table next to me shows, takes up fully half the space inside.

"We did a bunch of work to put it into this package," he says. "You have to be really careful of heat." Valve has separated this prototype into three different zones, he says, each thermally isolated from the others. Each zone has its own intake and outtake to handle the heat. I put my face next to the one running on the entertainment center; it is cool and quiet.

This prototype, were it for sale, would cost about as much as a high-end gaming PC, Coomer says. "The video card in there is hundreds of dollars. But in 2014, there's going to be a whole array of prices," he says. "Most people don't want a box that matches this description."

"We think it'll be valuable to customers to have an open ecosystem on the hardware side," says Anna Sweet, who does business development for Valve, "being able to pick the box that's the right size and the right performance ... but still have that consistency of experience and content and community with Steam."

And because these machines will run SteamOS, a specialized operating system just for game playing, Valve says it can dole out more bang for the buck. "We're able to get more performance out of graphics hardware ... by running on Linux and having worked so hard on the graphics drivers, not just for compatibility and bug fixing but for optimizing performance," Coomer says. "For our own games, we're seeing significant speed-up in terms of framerate at the same graphics settings." Valve has also made progress in the areas of input and audio latency, he said. "Going to the driver level and having access to the full operating system lets us tune things specifically for gaming."

Portraits of the characters from Valve's hit shooter Team Fortress 2 line the hallway that leads to the bathroom in the lobby of Valve's Bellevue office. Photo: Matthew Ryan Williams/WIRED

The OS ——

There's still one last problem, and it's largely out of Valve's control. It can make a new controller, it can send out Steam Machines, but it can't force gamemakers to port their games over to the new OS. The Steam Machines will be set up to stream games off your existing desktop PC, but ultimately their success will hinge on getting publishers to create custom Linux versions of their games that can be played on SteamOS.

And that's been slow going, thus far. There might be over 3,000 games on Steam, but only about a tenth of those run on Linux. And besides Valve's own games, few of them are the big triple-A blockbusters. Mostly, they're indie games; some of them are well-known to game enthusiasts (Fez, Don't Starve) but none are household words.

Will big publishers – not to mention small developers for whom ports can be much more expensive, relatively – add SteamOS to the already large list of potential platforms for their titles? Anna Sweet says that the recent proliferation of incompatible game machines might actually work in Valve's favor.

Apple remains a very real threat that could upset the next round of games consoles the same way Wii did."I actually think we're at an advantage right now because there are so many other platforms out there," she said. "A lot of publishers and developers have already done the work that makes it easy to build their games for multiple platforms. Doing that work to add another platform that they see as valuable is not as much work as it may have been in the past." If you've ported your PC game to the Mac, Sweet said, "you've done a lot of the work that's required to move to ... Linux."

"We don't have anything to announce today, but we have lots of partners who are on board and excited," Sweet said. "Most of them are happy to see that sort of open platform experience extend into the living room." As an example, Valve showed me a SteamOS version of this year's popular first-person shooter Metro: Last Light. Apart from being an example of a major hit game coming to Linux, it also gave me an opportunity to try the Steam Controller on a first-person shooter. (There's a bit more of a learning curve when the game itself is difficult and fast-paced; I got mauled by radioactive dogs a bit more than I'd like to admit.)

Linux, Valve's cofounder and big boss Gabe Newell said at the DICE summit at the beginning of this year, is a "get out of jail free pass for our industry, if we need it." Newell has been a vocal critic of Windows 8 ("a catastrophe"), PlayStation 3 ("total disaster") – anything that doesn't represent his ideal of a free and open platform for developers. (Although he is not shy about voicing his unvarnished opinions, Newell also often rebuffs requests for publicity – he initially agreed to speak with WIRED for this story, but when we arrived at Valve's headquarters we were informed that he had pulled out of the interview.)

Apple, Newell said at that conference, is "more threatening to the PC in the living room than anything that would be happening on the console side." While Apple has still yet to announce the long-rumored Apple TV update that will bring its App Store gaming environment to the living room, it remains a very real threat that could upset the next round of game consoles the same way Wii did during the last generation.

"If you pressed us to say, who are the players in the living room who could curtail what we're trying to accomplish," says Greg Coomer, "we spend probably more time thinking about Apple and the success that they've had upending the PC space with tablets. They could bring a lot of energy to bear on the living room, more than they have. And if they did that in a certain way that sucked all the oxygen out of the space for us for a while, we may have more of an uphill road to get as many customers well served. So we think about that."

"We don't do much in the way of competitive analysis when we're that confident about delivering value," he says. "We're mostly just taking a fairly well-educated leap of faith that enough of our customers have been asking for this kind of thing that it's absolutely worth the experiment to go bring this stuff to market."

Ah, yes: Those 65 million users, the ones who make Valve more than just another competitor looking to wrest control of the TV away from Sony and Microsoft. In fact, Valve wouldn't even describe themselves as wanting that. It's just about adding a new way to play Steam games, one they say they're reasonably sure that a big enough portion of their sizable base of loyal fans wants to use. But if they're right – and if that virtuous cycle gets going, bringing in more players, more games, more players, more games, etc. – in a few years, Steam Machines might be eating a meaningful portion of Sony's and Microsoft's lunch. But for now, Valve's focused on its existing customers.

"At first, it's all about that," says Coomer. "And then we'll see where that leads."