Since mid-May the news media had been reporting that a deal between Google's (NASDAQ:GOOG) (NASDAQ: GOOGL) YouTube and Twitch Interactive was imminent. That made sense because Twitch's video-based content fits nicely with what YouTube already does and the two combined companies would have cemented YouTube's dominance of the space.
But that merger never happened as Amazon.com (NASDAQ: AMZN) swooped in and gobbled up the website that allows video game players to share video of their gaming. In buying the popular video-sharing platform Amazon not only becomes an instant player in streaming video, it deals a blow to a rival.
Amazon is buying Twitch for $970 million, slightly less than the $1 billion that YouTube had reportedly offered.
The deal gives Amazon full control of a company which in less than three years has become a huge player in the video game world. Twitch, which calls itself the world's leading video platform and community for gamers, had more than 55 million unique visitors in July who viewed more than 15 billion minutes of content on the platform. That content includes uploads from gamers playing on consoles including the Microsoft (NASDAQ:MSFT) Xbox platform and Sony's (NYSE:SNE) PlayStation line as well as video from professional players, game publishers, news outlets, and e-sports events.
Amazon CEO Jeff Bezos seemed excited about the service's potential and its fit with Amazon. In the Amazon press release on the deal he was quoted as saying:
Broadcasting and watching gameplay is a global phenomenon and Twitch has built a platform that brings together tens of millions of people who watch billions of minutes of games each month -- from The International, to breaking the world record for Mario, to gaming conferences like E3. And, amazingly, Twitch is only three years old. Like Twitch, we obsess over customers and like to think differently, and we look forward to learning from them and helping them move even faster to build new services for the gaming community.
Though Amazon is buying Twitch in its entirety, it does intend to continue to run the brand as a separate company.
It's addition by subtraction
Tensions between Amazon and Google have increased in recent months with both companies making aggressive moves into the other's territory. Google has encroached on Amazon's retail turf with its Shopping Express service, which offers one-day delivery from a variety of retail partners. Amazon has done the same in the advertising space that the search giant dominates with reports that Amazon is testing its own ad service which would not only serve as a rival to Google for advertisers but would kick Google's ads off Amazon.com.
Swooping in and stealing Twitch from YouTube, and by extension Google, cuts off one avenue for the streaming video giant to become even more powerful, which would give it added leverage with advertisers. YouTube accounted for 12.28% of all fixed access video traffic in North America during the first half of 2014 and was the leading provider of mobile video with 17.26% during that period, according to SandVine. Only Netflix (NASDAQ:NFLX) had more fixed access users while Amazon lagged behind with 1.82% of the fixed access market and did not even appear in the top 10 for mobile access.
Twitch does not make the top 10 in North America in either category, but the SandVine report writers specifically cited the company for its growth and becoming "top-ranked" in many regions around the world. Buying Twitch does not vault Amazon into becoming a real rival for YouTube in the video space, but it adds to the online retailer's advertising inventory and keeps those valuable impressions away from YouTube.
Google dominates the online ad market with over $50 billion in advertising revenue in 2013, beating out second place Facebook (NASDAQ: FB), which had nearly $7 billion. Amazon does not break out ad revenue in its financials, but EMarketer estimates that the online retailer will sell nearly $1 billion in advertising revenue this year, up from more than $700 million last year, according to The Wall Street Journal.
Being that big gives Google tremendous leverage and puts other sites/publishers in a position where they are fighting for scraps. Owning Twitch gives Amazon a second platform along with its own website to sell to advertisers. That should help the company start to chip away at Google's dominance.
There are other benefits as well
While snatching Twitch from YouTube make sense as both a defensive and offensive maneuver in Amazon's escalating war with Google, it's also logical for Amazon for a number of other reasons.
Amazon is constantly looking for ways to enhance its Prime service and it could package some of Twitch's premium content as a bonus for Prime members. Amazon should also be able to optimize Twitch for use on its Fire TV set-top box for streaming video and gameplay. Most importantly, owning Twitch gives Amazon a direct portal on the consoles that gamers use to play games. This should allow the company to compete with Microsoft and Sony to sell digital game content to players. That would have been a nice perk for Google as well, which could have sold games and marketed apps from its Google Play store.
Buying Twitch is a rare double win for Amazon. The move makes sense on its own and it hurts a rival. It certainly won't be enough to end Google and YouTube's dominance, but it's a step in the right direction. If YouTube's bid had carried the day it might have put a major crimp in Amazon's fledgling ad business before it really got started.
Daniel Kline has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Facebook, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Amazon.com, Facebook, Google (A shares), Google (C shares), Microsoft, and Netflix. 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.