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Business Take: Why YouTube Buying Twitch for $1 Billion Makes Sense

By Daniel B. Kline and Jason Hellmann – May 28, 2014 at 1:10PM

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While the service is very popular is it legal and is YouTube the best home for it?

The rumored sale of Twitch to Google's (GOOG 1.56%) YouTube for $1 billion has gamers concerned and non-gamers wondering what the site does.

"The number one thing that Twitch has going for it is they produce millions of hours of content," said host Jason Hellmann on Business Take, the show that gives you the Foolish perspective on the most important business stories of the week. "That should be appealing to Google because they are in the ad sales business. They are not in the search business, they are in the business of selling ads."

Most important for YouTube is that content on Twitch is largely user-generated. The experts and others playing the games create everything from gameplay videos to shows about gaming. This content does not cost Twitch a dime up front. Instead the company shares ad revenue or subscription dollars with the content creators. This is very similar to YouTube's own model. The gameplay recording function is actually built into the current generation of consoles including Microsoft's (MSFT 0.07%) Xbox One and Sony's (SONY 1.66%) PlayStation 4 making it incredibly easy for even casual players to make videos to share.

"I get that this becomes a ton of free content for YouTube, but I question is there a legality issue?" Business Take panelist Daniel Kline asked Hellmannn. "Can Microsoft come in and say 'No, I own Halo, you're not allowed to share this.'"

"There has been one company that has had a run-in with streamers. Nintendo (NTDOY 0.18%) had requested that YouTube take some videos down," he said. In general though the game publishers have encouraged sharing videos. Many of the popular games covered by Twitch users are on a free-to-play model. These are games where people can play for free earning their way to various rewards. Those rewards can also be purchased so the publishers want as many people playing as possible in order to drive revenue.

Gameplay gets so competitive that competitive tournaments can draw millions of viewers. The League Championship Series -- the Super Bowl of League of Legends -- had 32 million viewers.

Rumors persist that Microsoft was also bidding for Twitch, which would have raised the possibility of Sony locking out the service and going with a lesser competitor (the other players in the field are much smaller); Hellmann sees YouTube and Google as a much better fit.

"Google is in the content business. Microsoft is in the software business," Hellmann said. 

Do you watch Twitch? Is YouTube making a smart decision? Should Microsoft have paid more? Share your thoughts and comments below.

Daniel Kline is long Microsoft. Jason Hellmann has no position in any stocks mentioned. The Motley Fool recommends Google (C shares). The Motley Fool owns shares of Google (C shares). 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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