Amazon is buying Twitch for nearly a billion dollars, and it makes all the sense in the world



I recently attended a birthday party for my girlfriend’s great-aunt, hosted by relatives of hers that I hadn’t previously met. As the evening wound down, I finally found a minute to chat with the host and thank her for throwing a pretty great party.

Upon learning that I worked in technology, she said: “Oh! Would you mind talking to my [fourteen year-old] son? He loves computers! We recently bought him a second monitor for his birthday, and he just returned from a summer program at MIT where he learned Java…something.”

I smiled and said of course! (And I also thought these were cool parents for helping their son trick out a sweet rig.)

She brought me upstairs, knocked on her son’s door, and we entered. Her son was relaxing in his chair watching something on his two screens that was unfamiliar to me.

Putting two and two together, and basically assuming every stereotype I’d read, I asked, “are you watching Twitch?”

“Yep,” replied the pre-pubescent, very intelligent teen. On his monitor, I saw a couple of guys on headsets and an in-screen capture of the game they were playing.

“Huh. I’ve never actually watched it. What’s going on in this video?”

“These guys are playing Minecraft,” he replied. “It’s pretty fun to watch along.”

I inched closer to the screen and noticed that the scrubber on the video player indicated that this video was two hours long.

“Are you going to watch the whole thing?” I asked.

“Yeah. It’s pretty entertaining. Some of these guys are really funny.”

——

News broke today that Amazon is acquiring Twitch for close to one billion dollars. When you consider the following four points, it makes all the sense in the world:

1: Amazon wants to build a big advertising business. The question has always been “when will Amazon build a big advertising business?” not “is Amazon going to build a big advertising business?” Amazon is an aggressive company that has a Tier 1 consumer dataset to enable ad targeting. Amazon has thus far avoided bombarding Amazon.com users with intrusive, highly-targeted ads even though the opportunity has been there for years, presumably because it would degrade the consumer experience (a chief priority for the company).

But, conusmers have always tolerated advertising alongside video content.

2: Amazon wants to build a big content business, and the zenith in the content business is owning both the channel and the content.

Twitch is the rare online video company that has proven capable of building an audience away from YouTube — that is, Twitch.tv is the channel, and its videos are the content. Amazon has numerous content initiatives underway, including streaming video (someone else’s content) and original television shows (funding their own costly, risky production).

With Twitch, the content and the channel are already proven, and now they belong to Amazon.

3: Marketers need to reach young consumers. Imagine giving this sales pitch to the CMO of Unilever, Procter & Gamble, Verizon, Samsung, McDonald’s, or State Farm:

“We can target young consumers based on their location, purchase history, and media consumption habits. Ours is the only platform where young conusmers spend nearly two hours per day consuming content.

In the words of a former client of mine, those advertisers will “back the Brinks truck up” to Amazon to reach those consumers.

4: Amazon wants to get into the gaming business, and Twitch is the pre-eminent gaming brand these days.

——

When companies like Twitch get to this point of massive scale, they almost have to sell to a larger partner like Facebook, Google, or Amazon because those companies have (1) ) the targeting data to enable precise, lucrative advertising and (2) large salesforces and existing relationships with the types of marketers that can cut $10–20 million checks every year.

This strikes me as a very savvy move on Amazon’s part. To date, they haven’t found the secret sauce with their media business. This move gives them the channel, the content, and the perfect opportunity to turn on the revenue stream. It may also ameliorate their relationship with Wall St. Analysts are concerned about competition in cloud computing and “margin pressure” in Amazon’s Prime business. I think this will work out very well for Amazon.