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Amazon acquires Twitch and bests Google in the process


By Barry Dudley, Partner

August 29, 2014 | 6 min read

Another week, and yet another surprise in the M&A space. This time it was Amazon who caught everyone on the hop, spending just under $1bn - $970m in cash, to be precise - on Monday (25 August).

I say “on the hop” because virtually everyone had assumed that Google was as good as Twitch’s new owner. But at the very last minute, the search giant withdrew from the deal, abandoning its assiduous courtship of the games streaming start-up. Exactly why isn’t clear – Google is after all an extraordinarily rich company, and can shell out huge sums (£2bn for Nest, for example) for companies it wants – but it’s likely anti-trust concerns were at the heart of its withdrawal. Google, after all, owns YouTube, by some distance the planet’s largest video and content streaming site, and a buyout of Twitch would have probably attracted the attention of US regulators.

Interestingly, YouTube also has a reasonably well-developed games streaming service on YouTube, so Twitch would have made a nice fit.

So, Amazon stepped in.

What’s really interesting is that despite its size and reputation, Amazon isn’t really an aggressive acquirer. Like Apple, it chooses small targets, and chooses them smartly. Here in the UK, there was LoveFilm in 2011, which Amazon bought for £200m and which it fully integrated into its streaming and “by post” video services earlier this year.

There’s also been, among others, Internet Movie Database, talking book provider Audible, online photography resource DP Review, the online retailer CDNow and clothing and shoe retailer Zappos (acquired for around $950m, it was Amazon’s biggest purchase prior to Twitch).

These and other purchases were either closed, or seamlessly integrated into the overall Amazon “experience”. They have been sensible, almost organic acquisitions – entirely logical when one considers Amazon’s slender profit margins and its need not to unduly frighten its (as these things go, remarkably patient) investors and stockholders.

So what is Twitch, and why did Amazon want it? Twitch is essentially a streaming service that allows gamers worldwide to film themselves playing video games and stream the resulting shows live to the site’s total user base of 50 million people monthly.

To non-gamers that sounds rather niche, if not slightly odd, but Twitch has become a key part of the competitive gaming circuit, letting audiences of up to 30 million people watch professional gamers go head-to-head in massively popular video games such as League of Legends and Dota 2. It’s the gaming equivalent of World Cup coverage and the highlight of the year for many fans. It has also been used by the two biggest games console makers, Sony and Microsoft.

So, big news then, but I suspect that, despite its potential (gaming is now a bigger industry than the movie business), this is about a lot more than just gaming. I think it’s about two things: advertising and infrastructure.

Infrastructure, because Twitch would slot in nicely with Amazon’s Cloud Services offer (Twitch’s developer platform could encourage more people to use the service).

But advertising’s the really important bit. Amazon’s acquisition of Twitch was confirmed on the same day that details leaked about a new product, Amazon Sponsored Links, designed to grab a bigger share of online advertising. This raises the intriguing notion that Amazon could eventually be competing head-to-head with Google over keyword advertising, currently dominated by the search giant’s massively profitable AdWords service, but for now, reports the Wall Street Journal, the plans only extend as far as replacing Google’s ads on Amazon with its in-house service.

Amazon Sponsored Links, combined with Twitch, could offer Amazon an easy way to raise revenues - the company has other investments that Twitch could pair well with; for example, Amazon Game Studios was founded in 2012 to make video games for the company’s [Kindle] Fire line of tablets and set-top boxes.

For the first few years, it ran fairly quietly, but since the beginning of this year, the company has apparently ramped up investment in the division, going on a hiring spree to bulk out the operation.

And of course, Amazon has been building up a broader media business (beginning with LoveFilm, now renamed Amazon Prime Video) for a while, and has even started producing original content, including a number of TV series. And it also quietly acquired games developer Double Helix, the studio which created the hit game Killer Instinct.

Twitch is also, as they say in the business, extremely “sticky” – users stay on the site (or more properly, platform) for hours at a time. At peak times here in the US, only Google, Apple and Netflix command more internet bandwidth; and it boasts average usage of 100 minutes per user each day, and over 15 billion minutes of video watched every month. That’s a phenomenal level of engagement, and thus attractive for brands looking to communicate with the growing and diverse (no longer spotty, lonely boys) gaming community.

But Amazon must also be careful with its new toy. The gaming community is outspoken and, by its very nature, contains a very large number of independent-minded, freewheeling types, who will abandon Twitch at the first sign of heavy-handed advertising or corporate interference; which is why it’s important tat Amazon keeps to its pledge to keep Twitch independent.

And there’s one final thing to consider. This is the second time this year Google has missed out on a potentially game-changing acquisition (it lost out to Facebook on WhatsApp back in February). I wonder what he guys up at Mountain View are thinking right now? Will our recent blog on Google perhaps buying TimeWarner prove prescient?

Barry Dudley is a partner at Green Square, corporate finance advisors to the media and marketing sector

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