Amazon Buys Twitch: Content Is King

Aug.26.14 | About: Amazon.com, Inc. (AMZN)

Summary

Amazon reported to purchase Twitch for $970m in cash.

Content and core user base seem to be the main motive behind the acquisition.

Online video and gaming the long-term benefit to expanding the Fire OS ecosystem.

Amazon (NASDAQ:AMZN) announced that it will acquire Twitch Interactive, a leading video game streaming platform, for $970m in cash. The specifics of the deal were not disclosed and it seems that Twitch shareholders have already accepted the offer, meaning that we could see the deal close before the end of the year.

Content is king

In my view, the primary motive behind Amazon's acquisition of Twitch is to acquire its content. Twitch is a leading online video game streaming platform that was originally launched in 2007 under the name Justin.tv. Over time, gaming became the platform's most popular channel, and the site was renamed to Twitch Interactive. Currently there are over 55m monthly active visitors and the site's main goal is to connect gamers so they can broadcast, watch and share their game plays with other gamers around the world. The breadth of gaming portfolio from strategy, sports, first-person shooter, or massive multiplayer online role-play games, and period gaming events and live shows makes Twitch the leading online game streaming platform.

Given that Twitch operates under a user-generated-content model, the amount and the quality of content will likely grow in scale, which could prove to be a valuable asset over time. In addition, content exclusivity will be the key differentiating point for Amazon when compared with rival Netflix (NASDAQ:NFLX) and YouTube (NASDAQ:GOOGL) (NASDAQ:GOOG). I expect Amazon to gradually incorporate Twitch content into Amazon Prime and the Fire OS ecosystem to enhance its product offering.

Expanding future revenue stream

Twitch further opens up two key areas of future monetization channels, namely online video and gaming.

On the online video front, Amazon could bring in video advertising revenue with key clients being game developers, console makers and hardware vendors. The longer-term implication could allow Twitch to evolve beyond live stream gaming to other activities such as music and education that is similar to YY (NASDAQ:YY) with additional revenue from value-added-services.

As for the gaming implication, Amazon has been ramping up on its investment in mobile games and Twitch could be a good platform to promote its product awareness. It is worth noting that gaming is in fact an important piece of building a formidable ecosystem given that it accounts for 80% of the total app sales. We can attribute to Apple's (NASDAQ:AAPL) success in the iOS ecosystem to its earlier focus on gaming apps and this acquisition indicates that Amazon understands the importance of gaming in the development of the Firefox OS.

In conclusion, while it is difficult to say whether Amazon paid a fair price for the acquisition, it is nonetheless necessary for the company to maintain its edge and grow its ecosystem. I reiterate my bullish view on Amazon.

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.