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4 Takeaways from Amazon's Billion Dollar Deal for Twitch

The deal of the week--so far--means a lot more than meets the eye.
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Twitch, the extremely popular platform where spectators watch others play videogames, announced August 25 it will be acquired by Amazon.

The play, with Twitch, is not just in its traffic. Though that's substantial: more than 50 million unique viewers monthly as of July. It's also that roughly a million people a month upload videos of themselves playing videogames, and some popular gamers, dubbed "partners," charge for paid subscriptions or run advertisements against their videos.

The company began as live webcasting site Justin.tv in 2007--which spawned Twitch in 2011--was founded by Justin Kan and Emmett Shear, childhood friends from Seattle (Shear is currently CEO; Kan is on the company's board). Amazon has said it is paying $970 million in cash to acquire Twitch, plus enouhg stock to bring the deal value to $1.1 billion. If that sounds like a lot, well, it is. Especially for Amazon, which is not a tech company known for spending wads of cash on deals. But here are four truths, new and old, illuminated by this deal.

1. What may seem obscure might just be the next big thing.

If your first reaction to Twitch was, "Ah. A platform for a bunch of stoned teenage boys to watch--and chat about--video games," you wouldn't be alone. But these numbers are staggering: 50 million unique viewers visited Twitch in July, and the company reports that more than half of its viewers spent more than 20 hours per week on its site. That, dude, is epic. Just because an idea seems uber-niche, don't discount it. A bonus pointer here: Tween and teen girls may have been this century's hottest market, but don't discount the power of the young male demographic.

2. Don't fear the pivot--or the spin-off.

Somehow over the past few years "pivot" has become a dirty word around San Francisco. Especially when talking to investors, founders working on turning their stagnant company into something different now prefer to euphemize the strategy as "adding a new line of revenue." Twitch started as a segment of Justin.tv's site, until its traffic dwarfed other portions of Justin.tv. By February, Twitch was so big the company changed its name to Twitch Interactive. And don't forget SocialCam had previously been spun off from Justin.tv, and then acquired by Autodesk for $60 million in July 2012. 

3. Perseverance still pays.

This wasn't Shear's first rodeo. Back in 2005, he and Kan co-founded calendar app Kiko while they were undergraduates at Yale. They were members of Y Combinator's first class. Before long they auctioned off their app for a pittance on eBay, around the time Google Calendar launched in 2006. An eBay auction isn't exactly the exit in every founder's dream. But Shear kept on it. He co-founded Justin.tv, and became a part-time partner in Y Combinator--advising other startup founders while working on his own--before becoming CEO of Twitch.

4. Amazon is on the hunt.

Amazon doesn't have a reputation for going for large acquisitions. The Twitch deal ranks among the largest in Amazon's 20-year history. But its previous major purchases have been more obviously in line with Amazon's business model: They include its July 2009 deal for online retailer Zappos, which was ultimately worth over $1 billion, and Kiva Systems, a robotic-fulfillment-systems manufacturer, which Amazon bought in March 2012 for $775 million.

But before regarding Twitch as a wild-card, consider what the website ExtremeTech points out as a pattern in Amazon's potential play to enter the gaming world. "Not only does Amazon sell a (half-hearted) game console, but it’s made a number of strategic gaming acquisitions over the last few months as well," the site reports. "Double Helix, the studio best-known for the 2013 Killer Instinct reboot on the Xbox One, was snatched up in February." And let's not forget Amazon does operate a game studio in Seattle. 

A Forbes report suggests slightly different logic. In it Ethan Kurzweil, who led Bessemer Ventures Partners’s investment in Twitch and sits on the company's board, says "we think that Amazon is investing here in Internet infrastructure and something more than gaming media. What Twitch has really built here is a video-based community around any activity… You have to ask Amazon what kinds of plans they have for that kind of investment, but if you look at technical assets in the company, it goes beyond the gaming vertical."

And video is clearly a significant priority for the company: it has spent $100 million to produce shows for Amazon's Instant Video. Take note, media companies looking for an exit. You may have a new deep-pocketed suitor.

IMAGE: Getty Images
Last updated: Aug 26, 2014

CHRISTINE LAGORIO-CHAFKIN | Staff Writer | Senior Writer

Christine Lagorio-Chafkin is a writer, editor, and reporter whose work has appeared in The New York Times, The Washington Post, The San Francisco Chronicle, The Village Voice, and The Believer, among other publications. She is a senior writer at Inc.




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