5 Key Reasons Why Amazon.com Bought Twitch

Beyond the acquisition price and the gaming platform itself, what does Amazon.com see in Twitch?

Sep 3, 2014 at 7:45PM

Amazon.com (NASDAQ:AMZN) made headlines recently when it paid nearly $1 billion in cash for Twitch, a platform where video games can be played, watched live, and discussed, among other features. However, given Amazon's inability to create profits, and the near $1 billion it paid, many analysts have questioned the motives behind Twitch. Well, it just so happens, there are five key reasons why Amazon likely bought Twitch.

No. 1: Why $970 million?
First, why $970 million for a video game-playing platform? The reason for this purchase price had a lot to do with reports of several bidders, including Google (NASDAQ:GOOG) (NASDAQ:GOOGL). Reportedly, Google was offering $1 billion; but, according to Re/Code, talks died once Amazon came to the table.

While Amazon.com's bid is less than Google's reported offer, Twitch executives must have had some reason for wanting their product with Amazon, assuming Google did, in fact, bid $1 billion. Nonetheless, bidding competition explains why Amazon.com had to pay what seems like a steep price. Amazon.com's plan for Twitch, however, might suggest why Twitch would take less money.

No. 2: Loyal user base
As of July, Twitch had more than 55 million unique visitors, which, compared to other large platforms like Facebook and Twitter, is relatively small. However, while other social media platforms are lucky to gain an hour or so per day from their user base, Twitch recently reported that nearly 60% of its users spend more than 20 hours per week on the platform, or half a workweek.

In other words, Twitch has engagement, loyalty, and more than 15 billion minutes of content produced a month. Hence, as Amazon rolls out its new advertising service, Twitch becomes a valuable asset to target game-related products and ads for a loyal user base.

No. 3: Gaming is an industry that changes, but is sustainable
While consoles have changed over decades, with the most popular becoming mobile, gaming is an industry that has been time-tested since the original Nintendo. How does this fact help Amazon? Gaming is an enormous industry for monetization.

Specifically, during the first quarter, Google's Play, for applications, created 90% of its revenue from games according to techcrunch. For this year, Bank of America expects Google Play to generate $9 billion in gross sales and $1.5 billion in net revenue for the company, which is likely why Google wanted to acquire a gaming platform.

While Amazon.com doesn't yet have a Google Play, it does have its own application store, including games. Therefore, with such interest in gaming, combining the most loyal community of gamers with its own gaming applications is likely part of the reason behind Amazon.com's interest.

No. 4: The YouTube business model works really well
Last year, YouTube reportedly channeled more than $5.5 billion in sales, growth in excess of 50% year over year. YouTube's ability to create billions of dollars in revenue comes from advertising, of course; but, more importantly, YouTube encourages users to create interesting videos. Google, owner of YouTube, shares advertising revenue with the streamer.

Like YouTube, Twitch gives its streamers many advertising options, like running ads on their streams, or charging a subscription price, in order to earn income. Also, like YouTube, anyone can create a stream on Twitch, try to gain followers, and then enter Twitch's partner program.

As said, this is a model that has proven successful for YouTube, and one that Amazon.com might have seen as an opportunity ahead of launching its own advertising platform. With Twitch ranking fourth in peak U.S. website traffic, behind Netflix, Google, and Apple, there is clearly a lot of advertising upside.

No. 5: Live streaming and original content
Twitch is used for games right now, but perhaps the biggest upside, and why Amazon.com really bought the company, is for its technology and the ability to live stream. Obviously, Netflix is streaming movies and shows, and YouTube streams recording videos; but for live stream, there aren't too many options. In fact, these options are most often individual companies like ESPN, which operates a Watch ESPN application that runs off a consumer's cable service provider, not its own streaming technology.

While speculative, Amazon.com could leverage the technology used in Twitch, create live streaming that uses the same business model to compete with the likes of YouTube, or produce original content to complete against Netflix. Lastly, Amazon.com could leverage the live streaming technology as part of its Cloud Services for businesses and consumers, providing the technology for media and Internet companies that wish to stream.

With Amazon.com making a big push into videos with Prime services, investors and consumers have to believe that the company's goal and vision expands far beyond games, and into a more broad service that can grow rapidly.

Foolish Thoughts
All in all, Amazon.com's acquisition of Twitch includes a lot of promise. While it's impossible to put a number on how lucrative it will ultimately become, there are a lot of interesting data points that suggest Twitch could be instrumental in streaming, advertising, and product conversion for Amazon.com. These include Twitch's partnership program, its website traffic ranking, and user engagement, including the social media aspect of the platform. These all explain why Amazon paid nearly $1 billion dollars to acquire Twitch.

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4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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