Last week, Amazon.com (NASDAQ:AMZN) bought Twitch, the most popular site for watching people play video games, for $970 million in cash. While Google (NASDAQ:GOOG) (NASDAQ:GOOGL) was reportedly in talks to add Twitch to its streaming video arsenal, Amazon was ultimately a better fit for Twitch, according to a letter from its CEO Emmett Shear.
A lot of analysts have weighed in on what the Twitch acquisition means for Amazon's business -- how it integrates with its video streaming, gaming, Amazon Web Services, display advertising, and tablet sales. Not many are focused on the potential risk of acquiring Twitch.
Twitch must license content from game publishers like Activision Blizzard (NASDAQ:ATVI) and Electronic Arts (NASDAQ:EA). With Twitch's rapid growth, these publishers will be looking for much more lucrative contracts. It's a problem that Google has faced with music publishers and YouTube, and Netflix (NASDAQ:NFLX) has experienced similar issues with its streaming service as it gained popularity.
The cost of content is going through the roof
It's well publicized how much streaming services like Netflix and Amazon Prime are paying for exclusive rights to content. Most recently, Netflix bought the rights to stream Gotham, a Fox drama set in the pre-Batman universe, for $1.75 million before the first episode even aired. That's just under half of what Netflix is paying per episode of its popular House of Cards original.
Netflix's growing slate of originals and its high profile licensed content have increased Netflix's content obligations to a whopping $7.7 billion. That's about double from where it was at the end of 2011, and nearly six-times as much as what Netflix had on the books at the end of 2010.
To be sure, Netflix has done a fine job growing its revenue alongside its streaming catalog. Still, the growth in content obligations have outpaced revenue growth, which points to how expensive content has become.
Disputes are made from rival services
What changed for Netflix at the turn of the decade is that more premium video streaming services started popping up. Other companies saw what Netflix was doing and how quickly it was growing, and decided to enter the space. With higher demand and the same supply, the laws of economics indicate that prices increase, especially now that these companies are paying for exclusive rights to content.
Even YouTube is not immune, despite its dominance of the short-form video streaming market. In 2008, after a long dispute with Warner Music Group, Google was forced to pull all of the music publisher's content from its site. Even today, as YouTube has grown into the largest music streaming service, WMG's music is found at MTV.com.
So, what does any of this have to do with Twitch?
Twitch is a service based around streaming content just like Netflix and YouTube. Where Netflix must negotiate with film and television studios, and YouTube has made deals with music publishers, Twitch must license its content from video game publishers.
Twitch is only three years old. It was in the third year of Netflix's streaming service that the company saw content obligations balloon. Likewise, YouTube started facing pressure from music publishers in year three. Now, Activision Blizzard is reportedly looking to increase the price of its current licensing agreement with Twitch. Activision makes some of the most popular content on Twitch, including Call of Duty and Hearthstone.
With Amazon backing the nascent company, Activision might seek to ask for more than originally planned, especially considering how valuable Twitch appears to be to Amazon.
Amazon's purchase price of $970 million for the company indicates its belief that the world of video game simulcasting has lots of room for growth still. So, what's to stop Activision or EA from making their own version of Twitch and being successful by locking out Amazon. Or they could strike a deal with YouTube or another online streaming company.
The growing market will facilitate competitors, which plays well into the hands of publishers. Just as it has done for other streaming platforms in the past.
Don't worry, Amazon will pony up
It seems unlikely that it will come to the point where Activision or EA start their own simulcasting platform. It's not something they've expressed much interest in, and its much easier for them to simply license the content. Still, it's something they can use as leverage against Amazon when their current licensing agreements expire.
It's a great market for Amazon to be a part of with its relatively new focus on video and gaming. The acquisition of the leader in the area certainly puts it in a strong position compared to YouTube and other, smaller competitors. But those expecting it to be a cheap source of content, ought to think differently.
Adam Levy owns shares of Amazon.com. The Motley Fool recommends Activision Blizzard, Amazon.com, Google (A shares), Google (C shares), and Netflix. The Motley Fool owns shares of Activision Blizzard, Amazon.com, Google (A shares), Google (C shares), 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.