Can Twitch Profit From Video Games Going Mainstream?

The growth of video game streaming is an opportunity for publishers and console makers, and Twitch is at the forefront of the genre.

Feb 23, 2014 at 9:00AM

In the late '90s my hobbies did not fit in with the hobbies of the mainstream. I like comic books, video games, and fantasy books. Over the course of the last decade, those things have become the mainstream. Spider-Man, Batman, World of Warcraft, The Lord of the Rings -- the list of things that my younger self was afraid to admit enjoying and that now everyone loves goes on and on. They made an Ender's Game movie, for crying out loud. With Harrison Ford!

In one of the more recent moves to bring the culture out of the shadows and into the bright lights of capitalism, gamers have turned to to make semi-celebrities out of themselves while they play. Previously known as -- named for founder Justin Kan -- Twitch is a platform for gamers of all stripes and skills to broadcast their games live. Recent successes have helped raise the company's public profile and bring in a dedicated group of viewers and contributors.

Raising the profile of games
According to Twitch, its average viewer spends close to two hours watching the website each day. Those viewers have made Twitch one of the most popular websites in the U.S., according to Alexa rankings. They go to watch others play, and in doing so, they consume indirect advertising for the biggest games and consoles in the video game industry.

Sony (NYSE:SNE) saw the value in that advertising and community-building and launched its new PlayStation 4 with a "share" button on the controller that links to Twitch and other broadcasting websites. The games themselves are also getting a boost, with millions of viewers able to watch live and recorded play from consoles and computers.

Big-budget titles from Activision Blizzard (NASDAQ: ATVI) and others take up huge chunks of viewership, promoting themselves as they're played. Games such as World of Warcraft and the digital card game spinoff Hearthstone command thousands of viewers at a time. In a demonstration of its commitment to the medium, Activision recently announced an awards program for Twitch streamers, handing out $45,000 to the winners. 

Expanding on the premise
While the PlayStation is the only console that currently supports integrated streaming in the U.S., Microsoft's (NASDAQ:MSFT) Xbox One will soon give players a similar option. The functionality was announced before the console's launch, but has yet to be implemented. That's going to open up a whole new set of streams based on Xbox-exclusive titles and add to the core streams from cross-console games. 

When I talk to people about Twitch -- or even just the idea of streaming games -- a few "problems" come up. First, the number of viewers is still small compared to traditional programming. Second, it's not always clear to them that this can be a money-making operation. Finally, who wants to watch people play video games?

The final issue is easiest to address -- everyone likes to watch people play video games. Ever since we first had arcade games, players have stood around watching other people play because it's entertaining. Since the idea of streaming games is new, there aren't yet big games geared toward play with an audience. As the idea catches on, I expect that to change.

In terms of scale, it is a smaller operation, but there's lots of room for growth. A quote from then-CBS Sports President Neal Pilson in the early '80s makes a great parallel: "ESPN provides supplemental sports, but it is not a business force." Things change.

For monetization, the company sells ads, provides a premium subscription service, and allows users to support their favorite streams by subscribing to individual channels. Those cash flows have worked well for other businesses, and the sheer size and commitment of the customer base should keep Twitch running. If this keeps up, maybe one day I'll wake up and be genuinely cool. No. That's never happening.

Taking a chance on growth
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Andrew Marder has no position in any stocks mentioned. The Motley Fool recommends Activision Blizzard. The Motley Fool owns shares of Activision Blizzard and Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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