Online retail giant Amazon is to acquire online gaming platform Twitch for approximately $970 million. The acquisition is expected to close by the end of 2014. The companies have not announced plans for strategy or integration but Twitch has commented that its office, employees, brand and independence would remain intact.
Since its launch in July 2011, Twitch has been one of the key games viewing platforms worldwide. In July 2014, more than 55 million unique visitors watched more than 15 billion minutes of content worldwide, uploaded by more than 1 million users.
The acquisition values Twitch, which has approximately 55 million monthly users, at a little below $18 per user. At its acquisition in 2006, YouTube was valued at nearly $1.7 billion dollars at roughly $33 per user – although YouTube has since grown to over 1 billion monthly users globally.
The esports sector has experienced significant growth worldwide over the past few years. Once a province mainly of traditional TV broadcasters in South Korea (the heartland of esports) – online delivery options opened up by widespread broadband uptake have allowed the sector to flourish. IHS estimates that 2.4 billion hours of esports video were consumed globally in 2013 – nearly double the levels consumed in 2012. To read more about the rise of eSports and platforms such as Twitch, see our report “eSports video: a cross platform growth story.”
Amazon’s acquisition of Twitch is partly driven by the growth prospects in the sector, but is fueled by various factors. Roughly a quarter of Amazon’s business revolves around the sale of media products – film, TV, games, music and other entertainment content. Revenues from such products are still weighted towards physical assets – rather than ‘digital’. As the market for physical products declines, Amazon needs to look to expand its digital business in order to make up for the potential shortfalls in growth.
There are challenges to doing this via a simple transposition however. Consumers are currently less inclined to purchase digital products than they their physical counterparts, so as the market shifts away from physical assets, the sector size declines. Some of the shortfall in consumer spending on home entertainment is being made up for by growth in new business models such as subscription – but subscription online video is notoriously low-margin, and Amazon has also positioned its core subscription film and TV product ‘Amazon Prime Instant Video’ as a loss leader, linking it to delivery service Amazon Prime.
A potential avenue of diversification for the companies could be in combining Amazon’s experience in running a subscription based video service and Twitch’s experience with a free-to-view ad-based service to turn Twitch into a freemium tiered service (like Spotify). The lowest tier would mirror Twitch’s current ad-supported model, and then there would be additional paid-for tiers based on Amazon’s subscription model with additional perks.
Twitch consequently offers a number of attractive options for Amazon:
Ultimately however, the video-based community website that defines Twitch is the most unique aspect of the deal. Twitch built the platform to allow users globally to broadcast and stream to one another, from several individuals to several million individuals. The ability to take the underlying infrastructure used for gaming and esports and apply it to other activities undoubtedly represents the most interesting potential application of the assets which Amazon has gained from the acquisition.