In 2014, tech giant Amazon (NASDAQ:AMZN) acquired Twitch for $1.1 billion. Twitch was then primarily a live video streaming platform for gamers. Over the years, it has focused on becoming the primary source for interactive live content with expansions into streaming music, artwork, talk shows, cooking, and more.

With millions of unique monthly streamers, Twitch is one of the top-rated websites in the world. According to data from Alexa.com, it's ranked 36 in terms of global internet engagement.

Twitch leads the esports streaming market by a huge margin. A report from StreamElements, a platform that offers streamers various tools and services, puts Twitch's market share at 61% as of Dec. 2019. The other top players in this space, including YouTube Gaming, Facebook (NASDAQ:FB) Gaming, and Microsoft Mixer, have shares of 28%, 9%, and 3%, respectively.

At the end of 2019, Twitch had approximately 3.4 million monthly broadcasters and 15 million daily users on its platform. And last year, users watched over 11 billion hours of content, up 18% year over year. 

Image shows two mobile gaming players in a gaming tournament

IMAGE SOURCE: GETTY IMAGES.

How does Twitch make money?

Twitch generates sales through advertising, subscriptions, and cheer bits (like a tip for streamers), while free users have access to ad-supported streaming content.

When a user wants to support individual streamers, the subscription fee ranges between $4.99 and $24.99 per month. The subscribed viewer will then enjoy access to ad-free content, special alerts, and exclusive streaming events.

The top streamers also generate revenue by selling merchandise on top of the subscription revenue shared between Twitch and its content creators.

Though Amazon does not disclose the exact amount of revenue Twitch generates, one report from The Information estimates Twitch's ad sales amounted to just $230 million in 2018 and $300 million in 2019. However, these figures fall short of the company's target of $500 million to $600 million in ad revenue for 2019. When Twitch was first acquired for $1.1 billion, ad revenue was estimated at $72 million.

And according to a PC Mag report, Twitch's total GVC (gaming video content) sales topped $1.5 billion in 2019. GVC revenue includes sales from ads, subscriptions, donations, and sponsorships.

These figures are immaterial to a massive enterprise like Amazon, but the company is betting on the huge market opportunity that could make esports a multibillion-dollar industry by the end of this decade.

The growth in esports will drive revenue growth

The esports market is still in a nascent stage. The total number of viewers was 380 million in 2018, though gaming research company Newzoo estimates this figure will reach 557 million by 2021. Despite these seemingly impressive viewership numbers, the global esports industry is valued at only $1 billion as of this writing, and streaming is an integral part of this market.

Twitch has managed to increase user engagement over the years. The average daily time spent on the platform is 95 minutes per user, which is a stellar number for audience engagement. The company is now seeking to engage viewers in other ways.

For example, Twitch's IRL (In Real Life) category is also gaining popularity. Here, users can chat with streamers in real-time. Users can have a sense of personal connection with content creators, something traditional sports have so far failed to do.

Steadily growing viewership and engagement will help Twitch sustain its revenue growth long term, meaning it should ultimately hit the $1 billion ad revenue target the company has in place.

Is competition a concern?

While Twitch accounts for 61% of the esports streaming market, it is losing ground to Facebook Gaming, which experienced a 210% year-over-year increase in hours watched during December. However, smaller players tend to grow at a faster rate compared to the more established competitors. But Facebook does have a massive advantage as it already has billions of users around the world on its various social media platforms.

Twitch, on the other hand, will try to leverage Amazon's reach in online retail and traditional streaming to try and convert its customers into esports enthusiasts. Beyond gaming, Twitch is working with Buzzfeed, Sky News, and Cheddar to create streaming content for the platform.

Investors should know this growth story is far from over. Amazon can continue to benefit from its leadership position in esports streaming and the global growth of esports, which will drive viewership growth and result in incremental subscription and ad sales for Twitch.