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With Twitch, Amazon Poses Big Threat to Broadcasters, Google

NEW YORK (TheStreet) -- Amazon's (AMZN - Get Report) purchase of Twitch for about $1 billion strikes some as curious. Why is the online retailer paying big money for a gaming network? 

Because this deal makes Amazon something much more. It makes it a company that Comcast (CMCSA) and AT&T (T) need to worry about. It makes it a company that local TV stations, and the companies that own them, need to worry about.

This deal makes Amazon a broadcaster.

Consider. Twitch is currently capable of delivering 1 million live streams at once. It has 45 million subscribers. Amazon is getting its technology as well as the programming. Amazon can use the cash flow generated by Twitch to extend its cloud presence and networking capabilities, not only to 1 million live streams but beyond. Netflix (NFLX) has been building its content delivery network on subscription revenue. Amazon can now follow it with ad revenue.

Amazon can turn a profit on Twitch by integrating its e-commerce capabilities into Twitch programming. Instead of having ads in the stream, Amazon lets Twitch offer commerce. The "sales funnel" on anything a Twitch viewer may buy suddenly narrows. See something you like? You can download it. Or you can order it for delivery tomorrow. This doesn't just mean games but a whole host of technology and gaming-related products. Gamers are big buyers of technology. Many will now be buying Amazon's.

If you have 1 million people watching the same thing at once, over your connection, you are no longer just a merchant, and no longer just an Internet provider. You're a network. You are ABC (a unit of Disney (DIS) ). You are NBC. Or you can be CBS (CBS)  and Twenty-First Century Fox (FOX) . All you need to do is fill that connection with other live streams people will pay to watch. You're Comcast, and you're AT&T. People can now cut the cord on their programming bill and go with you exclusively, because "subscribing" to Amazon may cost less than $10 a month, not $150 a month, and it comes with free shipping.

Assuming, that is, Amazon can get the rights. With Twitch, Amazon has rights to one of the hottest new sports in town, gaming. It could now buy rights to other sports, starting with those that have low ratings, and then move up using this model. Any sport that is selling broadcast rights needs to pay attention, even one based in China. Amazon could resell Time Warner Cable's (TWC) SportsNet LA for $4 a month, to individual subscribers, and probably turn a profit on it. 

Broadcasters and cable-casters live on advertising. Advertising is the first step in taking people down a sales funnel that leads to commerce. But Amazon isn't advertising. Amazon is commerce. Instead of watching a "paid" program for money, you could watch it for offers that are streamed to you, focused on your needs, offers that can be fulfilled instantly. Not just product offers, but service offers as well.

Remember, the offers will come from Amazon's recommendation engine, which knows what you've looked at and knows what you've bought. That will do more than the Napa earthquake did to keep Google (GOOG) executives awake at night.

Add this to Amazon's merchant aggregation, which it's now extending into bricks-and-mortar stores, and Amazon can become a local as well as a national broadcaster. A store can do direct response ads fulfilled either by Amazon or by people walking into the store. You're not buying ads, you're buying orders. Wouldn't you rather be doing that?

We are in the early days of all this this, which is the point. Amazon runs at a more or less break-even pace, paying for infrastructure with cash flow. With Twitch, the company now gets more cash flowing, with which to buy more infrastructure, and extend itself into businesses most people don't even know it's going into.

This may be the smartest deal of the decade. No wonder Rocco Pendola loves it.

At the time of publication the author owned shares of CMCSA, GOOG, GOOGL and AMZN.

Follow @danablankenhorn

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

TheStreet Ratings team rates AMAZON.COM INC as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate AMAZON.COM INC (AMZN) a HOLD. The primary factors that have impacted our rating are mixed ? some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its robust revenue growth, largely solid financial position with reasonable debt levels by most measures and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including unimpressive growth in net income, weak operating cash flow and feeble growth in the company's earnings per share."

You can view the full analysis from the report here: AMZN Ratings Report

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