Why Amazon's (Nasdaq: AMZN) $1 Billion Twitch Buy Is Worth Every Penny

On Monday, Amazon.com (Nasdaq: AMZN) announced it bought Twitch Interactive Inc. - the world's largest gaming arena and the fourth-largest source of all U.S. web traffic - for $970 million.

AMZN  That makes Twitch AMZN's biggest acquisition of all time, followed by its 2009 purchase of online shoe retailer Zappos for $928 million. AMZN stock is up 3% so far this week on the news.

You may remember Twitch-related headlines from May. Google Inc. (Nasdaq: GOOG, GOOGL) was in negotiations to buy it, but the two companies ultimately failed to reach a deal due to antitrust issues, according to Forbes.

Not so with Amazon. The world's largest online retailer's purchase of Twitch comes after a long line of recent growth.

On August 20, Amazon announced a new headquarters in China to gain Asian market share. On August 13, it announced the launch of a mobile credit card reader called "Amazon Local Register" to compete with the likes of Square. In July, AMZN launched its own smartphone (the "Fire Phone"), and in April, it released its own set-top box TV (the "Amazon Fire").

"These guys leave no stones unturned for the next dollar they can bring in," Money Morning Defense & Tech Specialist Michael A. Robinson said earlier this year. "Amazon is constantly upselling, cross-selling, and looking for new products, and they're great at it."

Acquiring Twitch will benefit Amazon - and AMZN stock - for one big reason...

AMZN to Gain a Dedicated, Hard-to-Reach Audience It Can Monetize

Twitch is a gaming site - but it's atypical in that users aren't actually gaming themselves when they log on. Instead, they're logging on to watch live video streams of other gamers playing popular titles like Starcraft II, DOTA 2, League of Legends, Call of Duty, and Minecraft.

By watching the best players, users can pick up tips and tricks to improve their own gaming strategies, or they simply tune in for sheer entertainment - much like watching a live sporting event.

Last fall, 32 million people watched the "League of Legends Season 3" World Championship - more than twice the number of people who watched the World Series between the Boston Red Sox and the St. Louis Cardinals.

Here are some mind-blowing numbers about Twitch's user base:

  • Approximately 1 million users a month record themselves playing video games on Twitch.
  • 50 million unique viewers logged on in July to watch and comment on the videos.
  • As a group, Twitch fans watch 13 billion minutes a month.
  • Twitch reported that 58% of its viewers spent more than 20 hours per week on the site in January alone.

Those numbers are even more impressive when you consider the service was only launched in June 2011.

But, most importantly for Amazon, Twitch's massive user base is primarily comprised of young adult males - one of the hardest-to-reach online demographics.

"Marketers have scratched their heads over the best ways to reach [18- to 34-year olds] with their brand messages as these men log fewer hours watching television and spend more time multitasking
online, playing games, downloading videos, music, and podcasts, and even window shopping," a 2007 report from tech research firm eMarketer said. "But an increasing number of advertisers and marketers are learning that the right mix of media can make strong impressions on this important segment. Marketers who garner the attention of young men and increase their number of brand interactions will have the competitive advantage..."


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According to data from web demographer Quantcast, in the last one-month period leading to Aug. 25, 22% of Twitch visits were males under 18 years of age, 36% were males aged 18 to 24, and 21% were males aged 25 to 34. By comparison, the same demographics spent their time on other U.S. sites an average of 9%, 6%, and 9% respectively.

And so Twitch's massive following will join Amazon streaming video service as a platform for digital advertising.

"Amazon is clearly taking digital media very seriously, and spending heavily to fund it," tech analyst Jan Dawson said on consumer tech blog Beyond Devices. "Twitch also represents a bigger shift into a new type of media product: non-traditional, non-professionally produced content. YouTube is the world's biggest exemplar of a video product built on user-generated content, and that's why Twitch was such a great fit: it's arguably the first site to rival YouTube in this category."

EMarketer estimates AMZN's ad revenue will climb 40% this year to over $1 billion.

"Once the Amazon franchise is built out, there are billions of dollars in cash flow that will fall to the bottom line," Money Morning's Robinson said.

Next Top Tech Story: Like Amazon, Tesla Motors Inc. (Nasdaq: TSLA) is a company making waves with its innovative business approach. Year to date, TSLA is up 74.5% - and we think it'll double within the next 12 months. Here's why...

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