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Summary

  • While Amazon has a plethora of options with its acquisition of Twitch, there are only a few at this time that would really add to the top and bottom lines.
  • Gaming is here to say, even though a number of commentators have questioned whether or not Twitch represents a fad or a long-term trend.
  • There is potential for some interesting synergies with Twitch and Amazon, not all of which are related to the gaming segment.

The acquisition of Twitch by Amazon (NASDAQ:AMZN) has triggered an avalanche of articles and talking points as everyone seems to have an idea and/or reason why Amazon acquired the live, streaming gaming site.

There are obviously numerous reasons for doing so with many being the probability of moving into more verticals with the property. Those and other potential revenue-generators are important, but the large number of young males, which represent the most difficult demographic to reach, provides an extraordinary opportunity for Amazon beyond the gaming culture in general.

(click to enlarge) source: StockCharts.com

What is Twitch?

Twitch is a company that brings gamers together to play, interact with and follow what have become online gaming celebrities, who can interact with one another in real time while a game is being played.

Amazingly, it's ranked fourth in the U.S. for peak website traffic, and yet is known little outside the tight-knit gaming community. The only companies surpassing Twitch in viewership are Netflix (NASDAQ:NFLX), Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and Apple (NASDAQ:AAPL). That's pretty impressive company.

On a monthly basis it attracts 55 million unique users and 16 billion minutes of streaming gaming is viewed online on a monthly basis.

Again, what is unique and compelling about Twitch is it has successfully bridged the gap between power gamers and viewers by empowering them to chat with one another in real time. This connection is what creates Internet celebrities, but also what gives it potential for staying power for years, even if the names of the celebrities change. It's similar to the traditional entertainment industry in that sense because it will always have new celebrities rising up in the ranks to maintain interest from fans. Twitch is creating the gaming celebrities and fans, while providing opportunities for many to make a living from it and for advertisers to reach the most elusive demographic there is - the young male.

Monetization, at this time, comes from ads or those choosing to forego ads by acquiring a subscription that eliminates any commercials.

How it works is gamers can create a channel of their own in which people can sign up for to watch. It is primarily within those channels that the connections via chat are made. Some gamers have over 500,000 followers. The difference from normal chat rooms is it includes a live stream.

Gamers streaming get a portion of the $4.99 paid subscription fee and a piece of the advertising action. That suggests a business model that should continue to attract gamers over the long term, although I'm sure there will be an increasing number of competitors battling to attract the more popular ones.

Another viewing option besides channels is the covering of live tournaments. Fascinatingly, these tournaments include commentators similar to what you would see in a live sporting even along with digging deeper into the players involved in the tournament. Fans get so involved in these that there are chat chants when the team they favor does some type of play against its opponent is repeated over and over again in the chat box.

A cursory glance at what I just wrote may draw the conclusion Twitch is just for top-end gamers, but it's not. Anyone wanting to create a stream and attempt to build a following can do so, and not all the games are what we would consider of the competitive gaming types. There are a lot of games that don't require the type of dexterity young males have and appeal to a broader base.

Either way, the key appears to be that gaming celebrities and connections are being made which has grown and strengthened the community, with any participant able to make money from an individual channel.

Fad or Trend?

I've lived long enough to remember when Intellivision was considered the gaming standard the industry was measured by, and when Apple released its original computers with screen options of amber or green.

Whatever games were available were consumed by young males way back then, and nothing has changed since then. Gaming isn't a fad in any way, and it has a long-term future ahead of it.

Of course this doesn't mean Twitch will survive, only that it's operating within a well-established trend that isn't going to go away for a long time, if ever. That at least gives it legs to compete against entities that will inevitably come after it to take away market share.

One thing investors need to understand with social media is no matter what it is called, it's really not community, but connections. While the connections can be strong, there isn't necessarily a lot of loyalty on a large scale that real community fosters, but more of a loose connection based upon existing personal interests. This is one of the reasons it's difficult to project who will be the winners and losers over time in the social networking space, as members gravitate from one platform to another, without a sense of sticking with it because of loyalty.

Even if there are family members or close friends involved, they can move to another platform altogether because their loyalty and closeness is to one another, not the particular business being used at the time.

So while gaming isn't a fad, using Twitch as the means of interaction at this time could be, although I don't see anything drastic happening in the near term. I'm just pointing out all of these social networking businesses are vulnerable, and services or products built to maintain the network must be added consistently and at the right time in order to keep it going.

Competitive Challenges

Twitch has momentum going for it, and I believe it has some legs for at least a couple of years, which gives Amazon and Twitch leadership time to enhance the platform to make it a destination beyond gaming alone.

I mean by that retaining gaming as the core product or service, adding things to it that everyone participates in, such as buying certain products or services everyone uses, which of course includes gamers.

By that I don't mean only offering products related to the gaming sector, but things that the young male demographic buys whether it's involved in gaming at the moment or not, i.e., everyone needs footwear, clothes and interesting gadgets to wear or use.

On the gaming side of things, where the competition is likely to come is in an attempt to break the general gaming community Twitch has built and offered services in different gaming verticals, where smaller, targeted networks may be built.

A significant number of these could have a dramatic impact on Twitch over time, and represents the most serious threat to the longevity of the company that I can see.

If a business were to attack Twitch directly for the general gaming market, I don't see that as having a chance at success, as it pretty much owns that market and there would be little incentive to move to another platform to do the same thing that's already being done with Twitch. Amazon's deep pockets also make that a difficult and costly task to perform.

For now it appears the momentum Twitch enjoys should continue, but over time the potential segmentation of the gaming market would be where Twitch will have to carefully watch.

I don't think at this time it should attempt to disrupt what it has going for it until it comes close to a ceiling on its users. At that time offering its own verticals in anticipation of or response to competitors looks like the strategy to embrace to remain competitive.

Where I See the Real Money With Twitch

Some of my colleagues are game developers, and one of the things they've been talking about for some time is the potential for in-game advertising. I mean by that offering products that can be bought in-game without having to leave the platform. This is beyond the existing ads placed before a stream.

Amazon is of course probably the best-suited company in the world to take advantage of the data available to it, and offering a customized ad in-game would probably be a tremendous revenue generator for the company, as would be having agencies place ads within the giant environment with a demographic they've been trying to pin down for years. Now it may be made available to them, and that could dramatically change the margin performance of Amazon, which is notoriously low.

Not only would this be attractive for products specifically attractive to games, such as consoles, but again, it would be attractive to anyone that happens to need a product or service related to their wants or needs.

That's not to say there isn't a lot of potential in the gaming industry on a standalone basis, as it represents about $100 billion in revenue. The point is the possibilities beyond gaming alone are huge, to show how Amazon could gain a major foothold in a gigantic industry and demographic.

One compelling synergy between Amazon and Twitch that could happen quickly if it's part of Amazon's strategy would be using it as an incentive for Prime, which could be for the purpose of building it out, or possibly adding a tiered option.

But with Amazon Prime members wildly outspending other Amazon customers, just using it as a carrot and stick may be enough to justify the approximate $1 billion in total costs it is paying for Twitch.

Data Collection

Maybe the most valuable part of this deal is in the eventual ability of Amazon to mine the data of this highly-desired demographic, and offer customized marketing and sales campaigns to it.

This can't be underestimated in value to the company, as it may be able to put together data profiles that would be the envy of the industry and extremely lucrative when considering the existing business model and products offered by the company.

While other synergies like its in-house gaming businesses and gaming titles along with Amazon Prime are part of a compelling whole, it's the ability to gather data and find out more about the young male demographic that makes this have such rich potential.

The power of that is once it is able to access this market, it won't be as reliant on whether or not Twitch is successful over the long term. It's the habits of the users that is the most valuable commodity, although I'm sure having the community continue to be robust and grow is desirable. What I'm saying is once it garners the data, it will have that for the life of the young male demo, no matter what happens to Twitch. Where it could be negative is in the upcoming young male consumer it hasn't had the time to discover their likes and wants, and so may lose out on that generation if Twitch can't hold onto the demographic over time.

Whatever happens over the long haul, Amazon will have unique access to the young male demographic which should provide it with a competitive advantage for years.

Participants vs. Viewers

It seems a lot of those using Twitch are both participants and viewers, which on the advertising side provides some interesting options for Amazon. With the viewers, this provides a chance to market to them while they're watching an individual player or tournament.

A large number will no doubt be interested in what's streaming, but if they're not playing, having a shopping option that allows them to remain on the platform would be a very compelling service offered to them.

It would be irritating for users to have to leave something they're watching and miss out on the live action streaming. But to be able to open a small shopping box and order products while still watching what's going on is a terrific service. I would be surprised if something like this isn't added in the future.

With users on the site for almost two hours a day on average, that's an opportunity to acquire something without disturbing the experience that could be provided. It's not hard to see how that would add up with 55 million unique monthly users being presented with buying options.

Original Content

There are many more possibilities with Twitch, such as original content, leveraging live streaming, etc., but these are presented to make investors think through and see how this has the potential to be a significant revenue generator for Amazon.

Original content is interesting because it could be syndicated, and if there is interest outside the gaming world, or an attempt to reach a broader audience, syndicating some of the action could be another revenue stream.

One thing for sure, Amazon is likely to get a big boost in advertising revenue, and in-game product sales should be robust once it starts to influence the platform.

I don't see this as a negative to the Twitch gaming community as long as it doesn't interfere the streaming and interactive aspects of the experience.

Conclusion

Amazon appears to have hit a home run with the acquisition of Twitch, but investors will have to be patient to see how it is used to improve the top and bottom lines of Amazon.

Twitch, as with all online businesses, is susceptible to rapid disruption, but because it has attracted a general user base, it has built a moat that in that regard will be difficult to compete against directly.

The threat is one where a lot of verticals from a variety of competitors could be built which would siphon off a small percentage of users, to the point the aggregate total could significantly reduce the number of Twitch participants. That would take time though, and Amazon would hopefully circumvent that by carefully building out some verticals itself.

I don't see Twitch being brought down in the near future, as the celebrities gamers it has built are making a significant amount of money, and that could be boosted with the deep pockets of Amazon if some companies decide a direct assault on that part of the business.

Either way, this is a good acquisition, and it has enormous potential to be a key part of Amazon in the years ahead. Twitch will need to be watched closely as to the potential impact on Amazon, and so the company doesn't become overly intrusive in its day-to-day operations, which it promised the management it wouldn't.

It includes risk, but the reward has so much upside that I don't see anything negative about the decision at all.

Source: Why Amazon Acquired Twitch: The Larger Picture