Steam effectively pursued a slow, steady, growth-oriented strategy, creating their own customer base instead of following what the rest of the market was doing.
In 2005, updating games was a pain in the ass: you'd have to download (from slow, unreliable sites) patches and manually apply them yourself, carefully managing the order, often having to reinstall from scratch and start over, and watch carefully for when these patches were hitting. Steam fixed this for Valve's own games (after a long period of slow improvement), and then became the first service to fix this for other people's games.
In 2005, buying games was a pain in the ass too: most storefronts had time or quantity limits on downloads; many of them were difficult to buy from, or poorly organized, or had weird gaps in their library. Steam pursued a fairly extensive library early on, made purchasing trivially easy, and helped sell the idea of a permanent library of games that you could buy once, then install anywhere with one click.
In 2005, lots of games came with inconvenient, frustrating DRM that made life hard for the person who bought the game. You'd often have to deal with limited activations or random interactions with other parts of the system (like how SecuROM sometimes broke image-mounting software) Steam successfully identified the least-viable-impact point for DRM: Valve built out something that didn't hook into the OS, didn't affect anything else on your system, and was almost entirely seamless to the user.
In 2005, people were annoyed about digital download pricing; the idea of paying full price for an ephemeral download seemed horrible compared to owning a permanent copy of something. Steam took a two-pronged approach to that: it added value (first eternal downloads and install-anywhere; later stuff like achievements, trading cards, community features, etc.) to make a download purchase seem worthwhile, and it used an aggressive sales strategy to reduce the overall price impact of buying digital games (and to get people to spring for titles they might otherwise pass up, and to create a real long-tail of sales.)
Combine all that along with other trends (better OS support and falling prices making PC gaming more appealing in general; the HD systems making ports of AAA console games far more common; the re-emergence of PC indie gaming and the secondary support systems like bundles that followed) and Steam was just a natural system for PC gamers to congregate around.
