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The first mod released on the system was Day of Defeat. Valve partnered with several companies, including AT&T, Acer, and GameSpy. To demonstrate the ease of integrating Steam with a game, Relic Entertainment created a special version of its game Impossible Creatures. It was publicly announced at the Game Developers Conference event on March 22, 2002, and released for beta testing the same day. Steam's development began in 2002, with working names for the platform being 'Grid' and 'Gazelle'. Valve approached several companies, including Microsoft, Yahoo!, and RealNetworks to build a client with these features, but were declined. Through user polls at the time of its announcement in 2002, Valve also recognized that at least 75% of their users had access to high-speed Internet connections, which would continue to grow with planned broadband expansion in the following years, and recognized that they could deliver game content faster to players than through retail channels.

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Valve decided to create a platform that would update games automatically and implement stronger anti-piracy and anti-cheat measures. Valve was looking for a way to better update its published games as providing downloadable patches for multiplayer games resulted in most of the online user base disconnecting for several days until players had installed the patch. The new contract eliminated Sierra's IP rights and gave Valve rights to digital distribution of its games.

Around 1999, as Valve started work on Half-Life 2 and the new Source engine, they became concerned about their contract with Sierra related to the IP rights, and the two companies negotiated a new contract by 2001. Valve published additional games through Sierra, including expansions for Half-Life and Counter-Strike. The contract had given some intellectual property (IP) rights to Sierra in addition to publishing control. Valve had entered into a publishing contract with Sierra Studios in 1997 ahead of the 1998 release of Half-Life. The success of Steam has led to the development of the Steam Machine line of gaming PCs in 2015, which includes the SteamOS operating system and Steam Controller, Steam Link devices for local game streaming, and the handheld Steam Deck tailored for running Steam games in 2022. By 2021, the service had over 34,000 games with over 132 million monthly active users. By 2017, users purchasing games through Steam totaled approximately US$4.3 billion, representing at least 18% of global PC game sales according to Steam Spy.

The service is the largest digital distribution platform for PC gaming, estimated around 75% of the market share in 2013 according to IHS Screen Digest. The platform also offers other digital content and Valve gaming hardware, including productivity software, game soundtracks, videos and VR headset Valve Index.

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Mobile apps to access online Steam features were first released for iOS and Android in 2012. Initially developed for Microsoft Windows operating systems, Steam was released for macOS in 2010 and Linux in 2012.

Valve released a freely available application programming interface (API) called Steamworks in 2008, which developers can use to integrate Steam's functions into their products, including in-game achievements, microtransactions, and user-created content support. Users receive automatic game updates, cloud storage for game progress, and community features such as direct messaging, in-game chats and a community market. Steam offers various features, like digital rights management (DRM), game server matchmaking, anti-cheat measures, social networking and game streaming services.

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It was launched as a software client in September 2003 as a way for Valve to provide automatic updates for their games, and expanded to distributing third-party game publishers' titles in late 2005. Steam is a video game digital distribution service and storefront from Valve.