How Much Could Twitch Cost Google Inc?

The rumor mill is running rampant this week with sources claiming Google Inc (NASDAQ: GOOG  ) (NASDAQ: GOOGL  ) is in the market to buy Twitch, a streaming video service for gamers where users watch other gamers do what they do best: play games. Without clear details of Google's intent to acquire Twitch, many investors are wondering what this potential acquisition will cost. In the end, Twitch will likely fetch a hefty sum, potentially north of what some are estimating will be a $1 billion price tag.

It's all about eyeballs
Facebook
's (NASDAQ: FB  ) acquisition of both Instagram and WhatsApp and Yahoo's buyout of Tumblr were all undertaken with a single goal in mind: grab share of as many users as possible -- or as I like to call it, build the biggest estate of eyeballs -- then monetize them.

Google's rumored acquisition of Twitch could follow a similar theme, and the company will have to pay up for Twitch's 45 million unique monthly users and then leverage this base for advertising revenue by integrating the company with Google's YouTube operations.

The aforementioned acquisition strategy is very much the norm in social media where eyeballs are revenue, many times in the form of selling ads or engaging users to upsell services. Facebook learned previously when users transitioned to mobile that revenue is the end goal and double-digit user growth is meaningless without top-line contributions. Investors exited in masses post-IPO and drove shares down more than 50% from the $38 IPO price when mobile was left unattended by management.

Fortunately, the company quickly addressed concerns about mobile user trends, eventually growing mobile ad revenues to $2.5 billion in the first quarter of 2014 -- an overwhelming 59% of ad revenue that did not exist less than three years ago. Targeting highly engaged users through a relevant platform is a powerful medium to attain revenues and Google seems to want Twitch for this reason.

What does this mean for Google and Twitch? $1 billion plus?
Google's rumored plans to fold Twitch into its YouTube operations is an interesting endeavor since the most subscribed to channel on YouTube is for PewDiePie, a Swedish gamer that creates videos of himself playing games. He has nearly 27 million subscribers!

Gamers could represent a significant amount of revenue for Google, and by extension, mean that the company will have to pay up for Twitch. A potential acquisition could surpass $1 billion and approach $1.5 billion. For those running through my upside calculations, the average price-per-user that Facebook paid for Instagram and WhatsApp, and Yahoo for Tumblr, was roughly $32. Based upon the number of current eyeballs that Twitch reaches, we arrive to a $1.5 billion valuation.

With the dynamics of Twitch's engaged, advertising-friendly user base, the price-per-user may come at a premium. In 2013, Twitch amassed over 45 million unique visitors per month that in total watched 12 trillion minutes of gaming content monthly.

Final Foolish thoughts
While valuing any company on its user base is tricky due to differing levels of user activity (monthly active versus unique or registered), varied revenue models etc., Twitch users are arguably more desirable to advertisers than those from Instagram/WhatsApp/Tumblr. Not only did Twitch user growth more than double in 2013 from 20 million, but gamers are also highly engaged participants spending an average of nearly two hours a day on Twitch. With this in mind, Twitch may even be cheap at $1 billion-$1.5 billion.

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