The question is do they need all those tools and third-party addons to meaningfully compete with Unreal? Or is it enough to not have to pay the Unreal license fee? I don't know. Many (most?) AAA studios have their own game engine and they are not bothered by not having access to third party tools and addons. There are large AA studios that are still using CryEngine for new games, and I doubt there is a large ecosystem for that (although I don't actually know). At the same time, those studios have more money and employees to build those tools on their own. I imagine Valve also has a lot of internal tools that they could potentially release as well. Perhaps it's my own desire to see the industry converge on a high quality open source engine (which they can then heavily modify to their needs) that is blind-slighting me here.

Yeah doesn't seem like their strategy - probably much more profitable to run Steam and take a cut from huge volumes of game sales than to try and license an engine to as many companies as possible.

The economics of a game engine engine business are grossly inferior to an app store. Steam charges 30% of gross (25% at high volume), Unity charges by seats and not fees after (huge backlash when they tried to go the other way and indies bailed to GODOT.) Unreal Engine 3.5-5% and maybe some seat fees now.

If you were a developer you are looking the other way, getting those app store fees down.

The App Stores - Steam, iOS, Google Play, are making higher margins per game than most game devs, and that's based on hard numbers not a guess. There is no meaningful way for game developers - artists, programmers, and everyone else involved - to make more money other than getting rid of the app store fees.

There is a whole explanation about network effects here, and endless debate about what the fees should be. There is a cost to sell a game and it is not small. Several percent just go to credit card processing, refunds, and fraud. More has to go for the infrastructure to deliver games and updates. Then there has to be some margin. Then there maybe should be a premium that goes to the "app store" so that developers don't have to worry about distributing their app to thousands of locations. There is another premium that really is delivering demand for the game in the first place. Many sales would never happen on Steam if the users were not shown the game as featured or recommended. Most developers have no problem paying 30% for a sale that would otherwise never have happened.

However, if I went back in a time machine to 1999 when you drove to a retail store to pick a game box off of a shelf, and you told me some arbitrary application would get to take 30% of all game sales decades in the future, I would have said that's fucking crazy. More developers should be able to seamlessly sell their games direct to their players, and I'm not entirely sure why they don't. Selling a digital item online is definitely simpler than developing a successful game.

Edit: And if you look at Unity's financials they are in real trouble and probably will only survive if another larger, profitable, company acquires them. Not a great feeling for game developers who might suddenly be paying Facebook/Meta or someone worse their license fees.

But giving an engine to developers to make games for free (to them to release on steam) would bring more merch and volume to the store

I think that was the case with Source 1 - I can't remember the details but if you licensed the engine and released it exclusively on Steam I think there were favourable terms.

But maybe this wasn't execute well enough? Maybe Steam was too in its infancy to attract highly profitable licensees? Most of the non-Valve games made on Source 1 weren't big-budget AAA games so it was likely only a modest return on investment.