When "Half-Life 2" burst onto the PC gaming scene in November, the developer world watched as a brave experiment took place. Gamers were offered the choice of buying the long-anticipated, first-person shooter in stores -- or go on the Web and download it from Steam, the content delivery system of the game's developer, Valve Software.

While that choice may have been a coin-toss to many gamers, Valve's preference was most decidedly that they buy "Half-Life 2" online. That's because when a customer pays the $50 retail price to, say, Wal-Mart, Valve's royalties -- which are determined by the considerably lower wholesale price -- must be shared with Vivendi, the game's publisher.

"But when you pay $50 to download it from Steam, that's the wholesale price and the retail price -- and it's all ours," says Doug Lombardi, director of marketing at Bellevue, Wash.-based Valve. Not a penny goes astray -- not to a retailer, not to a publisher.

Valve has since split with Vivendi in a highly publicized trademark infringement lawsuit. But, prior to the settlement, Vivendi announced in January -- two months after the game's release -- that it had sold 1.7 million units of "Half-Life 2" in stores. Valve won't talk about how many units it's sold through Steam, but Lombardi describes the venture as being "extremely successful. Even though the lion's share of our sales is still at retail, the digital units are wildly more profitable for us."

While much of the industry is still in wait-and-see mode regarding online digital distribution, Scott Miller is ready to roll, having been impressed with what Valve is accomplishing. Miller is CEO of Garland, Texas-based 3D Realms, home of the popular "Duke Nukem" series and the developer of the forthcoming first-person shooter "Prey."

Miller intends to release "Prey" in brick-and-mortar stores and online at the same time, utilizing a relatively new digital distribution system known as Game xStream (www.gamexstream.com). At the site, gamers will be able to pre-order "Prey" and load it onto their hard drives, ready for instant activation and play on the official release date, whenever that might be. (Miller had hoped to release the PC game for Christmas, but that may slip to next year now that a simultaneous Xbox 360 version is in the works.)

Meanwhile, Valve intends to announce that its Steam delivery system (www.steampowered.com) will soon be available to any game developer whose preference is to sell its "mainstream games" direct, circumventing retailers and publishers.

"Toward the end of this month, we'll be talking about the first couple of games that are coming to Steam later this year, games other than Valve's," says Erik Johnson, product manager at Valve. "They're smaller games, but they aren't Web or 'casual' games, and they're coming from independent developers who own their own IP (intellectual property) and who want to make more money than they would if they could get their games into retail only."

Developers won't be required to pay for the digital distribution upfront; the agreement with Steam calls for a split on the game's revenue. No money changes hands until the first copy is sold. For an additional cost, Steam can also handle such services as tech support and managing online purchases. ("That makes a lot of sense for a bunch of programmers whose specialty is creating games, not taking six months off to go learn from Visa how to do credit card transactions," says Johnson.)

3D Realms' Miller has high hopes for online digital distribution, and he intends to be at its forefront.

"The bottom line is that you make a lot more money off of direct sales," he explains. "If a game sells for $50, you'll probably be making $8 to $10 more per box than if you sold it through a retailer. That's something that's hard to resist."

And yet, Miller recognizes the hurdles.

"The retail stores are bound to complain -- at least at the beginning," says Miller. "They complained when we sold over 80,000 copies of 'Duke Nukem 3D' on our own. The retailers hated that. But they still carried the game and, in fact, sold over a million and a half copies. I think retailers just naturally complain about anything that cuts a little bit into their sales."

"Prey" will be published by 2K Games, a division of Take-Two Interactive, which will market the game in stores.

Despite the obvious advantages of a developer -- or publisher -- selling direct via the Internet, the game industry has been slow to embrace the concept. There are two reasons for that, according to Royal O'Brien, the CEO of Jacksonville, Fla.-based DiStream, who created the Game xStream product that will disseminate "Prey."

"First there's the pushback from retailers," he explains. "Then there's understanding the business model. Whenever we talk to the people who make the AAA games, the biggest hurdle is explaining clearly the business model. Last year, their reaction was, 'Oh yeah, that's kind of neat. Maybe we'll look into it.' But, this year, they're saying, 'It looks like there's money we can make. Yeah, we need to seriously look at how we can do this.' "

Based on his discussions, O'Brien predicts that, within the next 12 months, "at least two major and four second-tier PC game publishers or developers will jump onboard digital distribution," hopefully, he adds, using his service.

Meanwhile, several game manufacturers seem to be testing the waters, using third-party "online retailers" who digitally distribute their mainstream games for them. While it is more common for publishers to release their "back catalogs" of older games digitally, Ubisoft is one company that intends to make practically all its new titles available both in stores and online simultaneously.

"It's simply another way for us to find our customers and give them our products in a way they want to buy them," says James Regan, director of new business development at Ubisoft, which has signed digital distribution deals with Exent, GameSpy, IGN Entertainment's Direct2Drive service, TryMedia, Bell Canada, and with Turner Broadcasting's new GameTap service, among others. "For us, these are just additional means of distribution beyond the more traditional brick-and-mortar retailer. We want to do all of our games this way going forward because we've seen positive benefits from it."

Regan says he can't release data that compares Ubisoft's online versus store sales, "other than to say that everyone is happy. Retail is still happy that they're selling the products they want, our downloadable efforts -- the dozen or so sites that sell Ubisoft games -- make us happy because we're selling even more products and they're expanding the market for us."

He doesn't believe either of Ubisoft's efforts is cannibalizing sales from the other: "We're expanding the opportunities to get product," he explains. "Sure, there may be some customers who decide not to go to the store because downloading is easier. But some of those are people who wouldn't have bought the game anyway, especially if there isn't a store that's conveniently close to them."

IGN's Direct2Drive service (www.direct2drive.com) makes available not only Ubisoft games, but those of such publishers as Electronic Arts, Sony Online Entertainment, Eidos, Vivendi Universal, and Activision. It currently has a roster of over 80 titles on its site, says a spokesperson, and many were made available online the same day they arrived in stores, "which is a recent development in terms of publishers' sales strategies."

Still, game makers using third-party distributors aren't reaping the same benefits they would see if they eliminated the middlemen entirely, since they are divvying up revenues with them just as they would with brick-and-mortar retailers.

But it's a model that works, says Michael Pachter, senior VP, research, entertainment software publishing and retail at Los Angeles-based Wedbush Morgan Securities. The Steam and Game xStream models, on the other hand, says Pachter, are doomed to fail -- for two reasons.

The first reason, says Pachter, is that the retailers won't stand for it.

"Sure, 'Half-Life 2' was successful online because it was a very high-profile game from a very high-profile developer," he says. "And I'm sure 'Prey' will sell a million units in the stores and gamers will download 50,000 of them, which is not a big deal. But these are the exceptions to the rule. Valve and 3D Realms are guys who make one game every few years. But, on the whole, retail stores are not going to stand for it, especially if downloadable game sales become significant enough. Why should they?"

The second reason, Pachter adds, is that gamers won't have a clue as to where to find games available only on the developers' sites.

"If every PC game becomes available for digital download from its developer or publisher, the consumer won't know where to get them. And if a consolidator comes along -- like an Amazon.com or a Yahoo -- and says it's signing up all these games for download on its site, guess what? It becomes a retailer, a middleman. And that's just what these guys are trying to avoid. But I'm saying that using a middleman is the only way this works. The developer would get only 80% of the money, but he's bound to get more sales. And 80% of a much bigger sales figure is better than 100% of a smaller sales figure."

But, the way Valve and 3D Realms figure it, if they hang onto their store sales and supplement them with their own online sales, they've increased their revenue substantially.

"For us to remain in a leadership position in the games industry and to stick with the PC as our main platform, we've got to do more than retail," says Valve's Lombardi. "We've got to be in the cyber cafes, we've got to be doing stuff direct online, and we've got to be anywhere else where we can leverage our products. Retail will never go away. Digital is an additional avenue for us, not a replacement."

3D Realms' Miller agrees: "Retail is always going to have its place; that's where you get a lot of impulse buys," he says. "But I can tell you -- without naming names -- that a lot of big publishers are looking into online digital distribution. And my prediction is that, within a year, you're going to see this stuff just explode. You're going to see at least 50% of the major publishers going that route, selling retail and digital simultaneously.

"And I'll tell you this … if I were running a small studio that is self-funding its games, I would be very much looking into a digital distribution solution like Stream or xStream. I tell you, that's the way to go."

Paul "The Game Master" Hyman was the editor-in-chief of CMP Media's GamePower. He's covered the games industry for over a dozen years. His columns for The Reporter run exclusively on the Web site.