Amazon (AMZN) has agreed to buy live video streaming service Twitch for more than $1 billion dollars, according to the Wall Street Journal Monday. A few months ago, Google (GOOGL, GOOG) was in discussions to buy Twitch but they appear to have fallen through, giving Amazon full rights to the live streaming video service.
A Google acquisition of Twitch may make more sense on the surface - imagine if YouTube had more live streaming videos. But, Twitch could be just as valuable for Amazon. It would allow Amazon to launch a live television streaming service and, in doing so, build up its budding media ecosystem. Open a long position now. Things could escalate very quickly for Amazon.
Amazon "has approached big entertainment companies about licensing their television channels for a possible new online pay-TV service, in what would be a significant expansion of the company's online video efforts," reported the Wall Street Journal back in January. "The new service it has discussed with media companies would offer live TV channels, such as those available now on cable or satellite TV."
Amazon took the first step towards this goal in April when the company launched its Fire TV - a set-top box that allows users to stream Amazon Instant Video as well as popular streaming services like Netflix (NASDAQ:NFLX) and Hulu in addition to listen to music, view pictures, and play games. Moreover, the system is already equipped to allow live streaming video - Amazon just needed to buy the technology to launch such a service on a wide scale basis.
Buying Twitch means that Amazon can start to provide live video on its website and instant video services - and possibly quicker than one might think.
Amazon already has an ecosystem in place to support this.
On the one hand, you have the services you see, like Instant Video, CloudDrive, CloudPlayer, and CloudDrive Photos. These services are available to Amazon Prime members for free and only cost a marginal fee otherwise - and one begets the other. Buy a movie, get a free online rental. Buy an album, get a digital copy playable in CloudPlayer. Buy a book, use Kindle Matchbook to get an e-copy. Have a Kindle? Store everything in CloudDrive, including your own files in addition to the ebooks and magazines you buy. Adding live video streaming to this is just another value added feature that allows Amazon to differentiate its service line.
But then you have the services you don't see. For instance, Amazon Web Services is so secure it hosts Netflix and Amazon even offers a cloud service for the government called GovCloud which is the first cloud service approved to contain every level of unclassified data. Amazon also offers a content delivery service called CloudFront, which designed to deliver dynamic, streaming, static, and interactive content.
Add to this Kindle Fire tablets and the Fire phone, each of which are produced for nearly cost because they function as portals to encourage consumer purchases, particularly in media, and you have a company with the services and the structure to become a real player in television.
WHY IT MATTERS
Amazon customers tend to have strong buy in. Just look at these findings from Consumer Intelligence Research Partners (CIRP): 28% of Amazon.com customers own a Kindle Fire, 21% own a Kindle e-reader, and 9% own both devices. In addition, Kindle device owners buy over 50% more frequently than non-Kindle owners, spending roughly $1,233 per year versus $790 per year for non-Kindle owning customers.
How many of these loyal customers may be encouraged to pay for live Kindle television service?
Moreover, if Amazon becomes the only game in town to offer live streaming television, it will be offering a service that falls somewhere between the streaming video of Netflix and cable television. And, perhaps just as importantly, Amazon would be able to use its ecosystem to deliver live television and interactive content tailored to what you like, your previous purchases, the books you read, the music you stream, the video you watch, the locations of your photos, etc.
This would deliver value to the user but that sort of enriched data would also be of great value to advertisers.
Don't forget that just last week reports surfaced that Amazon is developing its own software for placing ads online. The online retailer and media company already has a small business placing ads on other sites but it is pushing to expand that program, called Amazon Sponsored Links, even venturing into the ads Google supplies.
Google may have data on searches and Facebook on interactions but how many times have you searched for something on Google or looked up an old friend on Facebook just out of curiosity. Amazon has information on what people actually spend money, and could make the ads that much more effective.
Buying behavior would be a good way to gauge real interest and Amazon has nearly 250 million active users. This may be 20-25% of Facebook's 1.23 billion active users and Android's 1 billion active users but it is a strong start, especially when you consider that Amazon's active users are all potential buyers while Facebook, Android, and Google each have large numbers of people who may not be able to make a buying decision.
Amazon's acquisition of Twitch is an important piece to its media ecosystem, and one that could affect the company's business is a variety of ways - from personalized television recommendations to more relevant advertisements. Amazon has the structure and the technology to launch live television services in the near future. From there, expect Amazon's share price to escalate quickly. I'd recommend buying in now for a long position.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.