Why Amazon's Deal for Twitch Is About Attacking Google's YouTube

NEW YORK (TheStreet) – Amazon (AMZN)  decided a pick off a company called Twitch, which streams video of people playing games.

Given the sometimes impulsive nature of CEO Jeff Bezos, Twitch should fit right in but not for the reasons that you think.

As Bezos put it, "Broadcasting and watching gameplay is a global phenomenon." And he's right. Until three years ago, this industry, which is sometimes referred to as "video in video games," didn't exist. Now it's a billion-dollar business.

Investors applauded the deal, and Amazon shares rose 0.73% in the wake of its announcement. The stock closed Monday at $334.02. Still, Amazon's shares have a way to go to recover from their selloff earlier this year. They're still down more than 16% on the year to date.

Bezos realizes Wall Street no longer drools at his "growth at all cost" mentality. Investors still wonder whether Twitch, which has more than 1 million active broadcasters per month, can be the answer to Amazon's profit woes? I think it can.

Let's not forget that Google (GOOGL) has turned YouTube, for which it paid $1.65 billion, into a lucrative advertising business. This was before anyone realized YouTube's potential. In fact, at the time some proclaimed that Google overspent on the acquisition.

Amazon was not available for comment, and emails to Twitch was not immediately returned.

The way I see it, Twitch has the potential to become the next YouTube. And for $1 billion, Amazon, whose video offerings are currently just TV and film, is now getting into user-generated content.

To that end, it's more important for investors to focus on where Amazon is trying to go. There's a reason why Google was reportedly interested in Twitch back in May. Now Amazon is suddenly armed with what may be the only real threat to YouTube's dominance.

This is because YouTube already has its own live video streaming service for gamers. Twitch's service, however, already comes integrated into both Sony's (SNE) PlayStation 4 and Microsoft's (MSFT) Xbox One console.

After Twitch secured feature placement in those game consoles, Michael Pachter, video game analyst at Wedbush Securities, said, "The first mover advantage on these consoles is a real one, as it will be difficult for Twitch competitors to get users to switch."

Pachter is correct. From my vantage point, however, Twitch, as we know it today, can become more than just a "fringe" gaming service. With the service generating 55 million unique global viewers per month, Bezos can turn his $1 billion investment into a broadcasting behemoth, threatening not just Google, but also Comcast (CMCSA) and Time Warner (TWC) .

Consider that Twitch already generates more live streaming video traffic than Disney's (DIS)  dominant sport franchise, ESPN. And Twitch is already widening its lead on YouTube Live and NBC Sports, according to Qwilt.com.

For Bezos, these 55 million unique global users can become valuable eyeballs. Not to mention, Twitch already makes money selling ads.

All told, this is a well-timed bet for Amazon, which can leverage the popularity of video games and simultaneously grow its library of original and user-generated content.

Interestingly, Bezos has to start playing games to show Wall Street how serious he is.

At the time of publication, the author held no position in any of the stocks mentioned.

Follow @Richard_WSPB

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.


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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