Monday, July 20, 2015

Why did Amazon buy Twitch.tv?

Twitch.tv is a livestreaming content and ad delivery platform centered on video games.  Players can livestream a game, and observers choose between these hundreds or thousands of ‘channels’ for entertainment.  And, like YouTube, the infrastructure (and business model) is ad supported, with players receiving a portion of the ad revenue their channel generates.

In August of 2014, Amazon and Twitch announced a $970 million cash deal.  Twitch, who had been courting offers from both Google and Amazon, was to become a wholly owned subsidiary of Amazon.  Twitch is growing at a phenomenal rate, jumping from 45 million viewers in 2013 to 100 million in 2014.1  Despite these numbers, Twitch reported only $16 million in revenue in Q1 of this year.2  (For comparison, Amazon had about $187 million in ad revenue, which is still orders of magnitude below Facebook and Google’s ad revenue for the quarter.3

Amazon is famously in it for the long game.  They are known for reinvesting Amazon revenue back into Amazon growth, rather than posting quarterly profits.  However, they’re also known for making some big bets, not all of which pay off.  (The Fire phone is a great example of a failed bet, and AWS (Amazon Web Service) is a poster child of a successful bet.) 

The Twitch bet, though it’s honestly too early to tell, looks like a fantastic deal for Twitch, but a not-so-great deal for Amazon.  Twitch gains better access to the AWS platform, enabling them to reduce their largest overhead infrastructure costs, but what is Amazon gaining?  An additional 10% ad revenue in the coveted 18-34 mail viewer market?  Is Twitch advertising going to be another channel driving Amazon customers to Amazon Prime and other Amazon purchases?

I’m not so sure.  I think this will end up being a Pseudo-Adjacency (as laid out in the Seven Ways to Fail Big article.)  Fundamentally, Amazon is not an advertising company, nor a media company.  While they do offer media on demand, it’s more of a leveraging of the strength of the AWS service than a core competency.  (And Amazon streaming media itself can be cast as just another driver to direct customers to Amazon Prime and purchases through the Amazon site.)  If the purchase of Twitch is to succeed, I think it must be handled as an advertisement for Amazon products itself, and not as a platform for generating advertising revenue.



1 comment:

  1. Justin, I'm not sure if we are supposed to comment on posts (or encouraged) but I just wanted to chime in to say that I loved your article. My boyfriend and I watch Twitch nearly daily--it's almost replaced any other TV we watch, mostly because we are both fascinated with games, gaming, and watching people play.

    In watching any of the streamers who are 'partnered' with Twitch, you occasionally hear them say (or see in their profile) that if their viewers are interested in purchasing items off of Amazon to do so using the link they provide, because they are affiliated with Amazon. Every sale that gets made, as I'm sure you are aware, gives a small kickback to the streamer. Even further, every streamer that mentions that people use their affiliate link are required not to personally say what it gains them or why people should use it--just that it helps them out.

    I'd say that this possibly assists Amazon tremendously. A lot of streamers talk about their computer setups, what kind of mouse or keyboard they use, their microphones/cameras that help them stream. Those mentions could get into the minds of the viewers who are interested in making similar purchases and they might be more willing to make those purchases on Amazon, via the streamer's affiliate link, because they know it will support the streamer. But it also helps them get cool stuff, and, of course, it also directly benefits Amazon.

    Seeing where the gaming world exists today, even compared to 2-3 years ago, is astounding. I think the partnership between Twitch and Amazon could be very, very beneficial to both parties for the long run.

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