Throwback Thursday: Amazon Buys Twitch: What is e-sports worth?

For non-gamers, news of Amazon’s purchase of the internet streaming website Twitch Interactive comes as a bit of a surprise.

But for gamers – you might not be as amazed to learn that Amazon acquired Twitch Interactive for nearly a billion dollars in cash.

And even though Twitch, founded in 2011, may not be a household name – it has quietly become the fourth-largest source of U.S. internet traffic and accounts for more than 40% of all live video streaming in the U.S.

What is Twitch?

Twitch is a live streaming website that focuses entirely on gaming, and their deal with Amazon highlights how popular gaming is.

Take Grand Theft Auto Five, a popular open world action-adventure game released in 2013 which achieved record sales – selling over 30 million copies – to go along with its record budget of nearly $250 million!

That exceeds the budgets of most Hollywood blockbusters!

Live game streaming is big businesses and companies are rushing to take advantage. None have done this better than Twitch.tv, which allows users to broadcast their gameplay as well as spectate others playing video games.

You may be wondering: is watching people play video games online really a successful business model?

Well, the growth of a class of games known as “e-sports” tells us that there are PLENTY of people who are willing to watch other people play video games and Amazon is banking on the popularity of such games to help fuel sales of merchandise on their web site.

What is E-Sports?

E-sports refers to electronic sports, a class of games that are the focus of organized competitions – complete with sponsors, commentators and massive cash prizes on offer.

On Twitch, users can follow along from home as elite players compete on games such as Hearthstone, Counter Strike and Minecraft to name a few.

E-sports is growing fast, and as it gains exposure people inevitably start to compare it to real sports. Many are quick to dismiss it as “not real sports”, including ESPN presidentJohn Skipper, but e-sports mirror regular sports in many ways. For example, “Riot Games runs an 8-team league that plays 28-game seasons before moving onto an NBA-style playoff.” And just like the English Premier League, teams can be relegated and players can be traded from one team to another. E-sports teams also have fans and rivals just like other professional sports teams. SK Telecom T1, an e-sports team, is sponsored by South Korean telecom giants SK Telecom and they are part of SK sports, a portfolio of teams that include South Korean baseball and basketball teams.

Dota 2, League of Legends and StarCraft II are some of the most popular games being watched, and each fit the profile of what makes a good e-sport. They all have a winning combination of depth in gameplay that allows the way the game is played to keep evolving, an easy and fun viewing experience, and plenty of global appeal.

In fact, “The International 2”, a tournament featuring battle-arena game Dota 2, was televised on ESPN and offered up a grand prize of 1 million dollars! During the finals of the tournament, the online audience reached a staggeringly high 567,000.

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Source: USA Today

That sounds impressive but consider that 32 million people watched the finals of the championship for League of Legends and you begin to understand just how massive e-sports is. E-sports viewing nearly doubled in 2013 and in a Reddit AMA, the CEO of Twitch opined that “in 10 years e-sports will be bigger than athletic sports…more people play video games than sports already. Viewership will follow.”

How Many People Watch Twitch?

In its short life span, Twitch has amassed 45 million unique visitors per month and over 1 million people broadcasting 13 billion minutes a month. Out of these broadcasters, a small percent participate in Twitch’s Partner program which allows them to take a cut of video ad revenues and offer their fans premium subscriptions. One popular channel on Twitch is FATHERSONGAMING, a father and son gaming duo that streams 7 days a week, and has over 190,000 followers. Just to give you an idea, top professional players who stream on Twitch can make about $8000 a month.

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Source: Twitch 2013 Retrospective

Popular tech news site Re/code says a source close to Twitch informed them that the streaming site has about 600,000 subscriptions – that works out to around $36 million a year, of which broadcasters earn a 50% cut. That same source also said advertising represents the majority of overall revenue.

Bear in mind, we have not even touched upon Twitch’s costs however. Info on Twitch’s streaming costs are hard to find but just to compare: Netflix has 50 million subscribers generating $4.5 billion in revenues and their streaming video costs run about $3.5 billion!

They have a great user base, heavily skewed towards the college and high school demographic, that they can run ads for and are working on growing that user base through strategic partnerships with brands like Sony, Microsoft and others. These partnerships allow Twitch to add more popular titles for people to watch. Other partnerships bring in ad revenue – companies like Activision will pay to get their games promoted.

They also benefit from offering a different service to a service like YouTube, i.e. streaming vs. short video clips, which means they operate in a different niche and are not really competitors. Add in their alliance with Amazon and now they have additional resources that make them a force to be reckoned with; a force that their true competitors will struggle to deal with.

The competition includes Azubu, a South Korean e-sports media company with just a fraction of the viewership that Twitch has, and Hitbox. The former is slowly building up an audience, with over 10 million unique users at present but it appears Twitch has reached critical mass and so others will have to work hard to catch up.

How can you take advantage?

Unfortunately, you can’t really invest in the growth of e-sports directly. You could invest indirectly by investing in Amazon. The only way to invest in Twitch, or companies of a similar ilk, directly is by being part of a venture capital firm and those guys aren’t interested in your dollars unless you have a couple million to spare.

Gaming is growing in general. Competitive gamers are on the threshold of mainstream respectability with top players earning hundreds of thousands of dollars. Mobile gaming is huge now too. There are more than 200 million users playing Angry Birds monthly. Finnish mobile game developer Supercell reported revenues of $892 million in 2013, driven by earnings on their games Clash of Clans and Hay Day.

Clearly we are in a “rising tide lifts all boats” scenario. The growth of gaming is good for gaming companies, computer chip manufacturers and gamers worldwide. When this happens it’s best to stick to the established players – companies with rock solid earnings and established customer bases. Sony, Microsoft, Intel, Amazon as well as publicly traded video game companies such as EA, Ubisoft or Activision are all companies that stand to benefit from the trend of increased gaming.

In conclusion, trends help but investing in companies with sound fundamentals is still the name of the game!

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