Can the Steam machine and with it, the Steam OS (Linux based), succeed?
Hard to tell, but there are three major hurdles that need to overcome. The first one is probably the most important, for which if not resolved, would seriously handicap any chances of success of Steam OS in the market.
While there have been numerous AAA games released for Steam OS, three majors game publisher have yet to port a single AAA game to the platform. They are: Electronic Arts, Ubisoft and Blizzard.
Without their AAA games, Steam OS cannot succeed in the market place. Valve needs to get them on board to hope for any success.
It is no secret that consoles are sold below cost. Sony and Microsoft plan to make their money by collecting an important percentage from the sales of games.
Steam machines being built by 3rd parties, would never be subsidized. Thus they start at a cost disadvantage. However, they will cost less than their equivalent Windows PCs since the latter are not subsidized and have the additional cost of a Windows license (at least, for rigs that do not use a pirated version of Windows).
What may favor Steam Machines though is that people have started to get used to free games on tablets and phones. While they will not turn their back completely on AAA games, some casual gamers might lower their purchases habit, buying one or two AAA games instead of five within a year. They may become content with the available AAA games on Steam OS. Games sold on consoles are expensive, while on Steam, they usually cost less. This is particularly true if one waits for Steam sales.
Sony and Microsoft console business plans are based on game sales. If they falter, they may have to revise their business plans, including considering increasing the price of their consoles, or at least, postponing price reductions despite their aging.
Joystick and other controller support
Sure, the Steam machine is supposed to come with its own, fabulous controller and obviously, it will work out of the box. However, what if you want to play a game such as Euro Truck Simulator 2 and need a wheel and pedals? There are no company currently, as far as I know, that supports their controllers under Linux. Luckily, the Logitech Driving Force GT wheel works, except for feedback. But I had to take a chance and blindly buy the hardware to see if it actually worked.
Force feedback is practically non existant under SteamOS, since the linux driver is not very developped. Valve needs to get at least one controller partner to officially support Linux, a partner selling a variaty of types of controllers.
I read that for some game programing frameworks, porting to Linux is as easy as selecting a menu item "Port to Linux". Obviously, if it is that easy, the company would make profit with only maybe 20 sales of the game. That is an incentive to port the game.
Since Mac OS X is Unix based, Linux and Mac share a lot. Thus if a game is ported to one platform, porting it to the other should not be too costly.
Linux desktop market
Going after the Steam OS market is also going, without any additional porting cost, after the Linux desktop market. While that market is not big, it is free extra revenues and some indies report that they made enough to justify the porting costs and made extra profit with it.
You know of any AAA game that runs on a tablet or a phone running Android or IOS?
Well, a tablet or phone using Intel hardware and Ubuntu touch, as far as I know, should be able to play any of the Steam OS games. That is something quite interesting, though I am not sure what the market potential would actually be. A Ubuntu touch tablet with micro HDMI and USB ports could though become a portable console, a general purpose computer and obviously function as a tablet. It is a nice proposition for travelers and families.
Piracy to the rescue of Steam machines
Steam OS might not succeed, but Steam machines could. Steam machines are PCs with a console/terminal form factor. Since PC gamers are usually power users, what these gamers will probably do is purchase a Steam machine and install a pirated version of Windows over Steam OS. Probably some Steam machines will be sold with Windows pre-installed.
This does not help the Linux though. If Steam OS is pushed aside, there would be not much incentive for companies to port their games to the platform (unless the programing environment make it easy).
Contrarily to consoles, some versions of Steam Machines would be upgradeable, like a PC. Thus with time, one could keep the console and only upgrade the graphic card for example. This is appealing to consumers since in the long run, they can save money.