Amazon (AMZN) has agreed to shell out $970 million for Twitch, the hugely popular video platform that allows viewers to watch video games.
The deal is the second-largest in the e-commerce operator’s history, behind the $1.2 billion purchase of Zappos back in 2009. The acquisition should provide AMZN with a much stronger footprint in the fast-growing video content business, which is dominated by companies like Google (GOOG) and Netflix (NFLX).
The Amazon purchase of Twitch is definitely a surprise. Google seemed to have the deal locked up. But apparently Twitch was aggressive in shopping itself, talking to a myriad of companies like Yahoo! (YHOO). But in the end, it looked like the co-founders liked the synergies of AMZN as well as the company’s agreement to keep Twitch independent.
Why AMZN Wanted Twitch
So, why all the interest? What makes Amazon want Twitch so badly? For starters, Twitch seems to have hit hit a nerve in the gaming community — in the best way possible. The service was instantly popular when it launched, attracting a massive 8 million users after the first month. And the momentum has continued apace. Amazon wanted Twitch, because AMZN is constantly looking for growth, and Twitch is certainly an attractive platform.
People love to watch real-time videos. In the case of Twitch, users are able to spectate top gamers who play titles like Call of Duty, League of Legends, Minecraft and Dota 2. The channel is accessible online or or through Microsoft’s (MSFT) Xbox consoles or Sony’s (SNE) PlayStation consoles.
The folks at AMZN must have salivated over the big traffic numbers at Twitch. The platform generates more than 16 billion minutes of video each month. In fact, it is the No. 4 source of Internet traffic in the U.S.
Twitch relies on an advertising model for its revenues. While there are no details on the levels of revenues, it appears that the company commands premiums for video content because the demographics skew heavily to Millennial males, which is a huge potential audience.
For Amazon, Twitch will be a nice fit with its growing gaming business. Of course, the company is the largest e-tailer of titles, but it also has two studios. AMZN also wants to get a piece of the online ad business, recently announcing that the company is working on its own ad network.
Risks for AMZN
Despite all these benefits, there are risks for the Amazon acquisition of Twitch. For example, Twitch may not be able to sustain its growth over years. Even worse, it could simply prove be a fad — a very expensive fad for Amazon. And even if the popularity continues, AMZN could have a tough time negotiating lucrative deals with the game publishers. Let’s face it, content creators have lots of power.
Finally, AMZN may be getting overstretched. Just some of its diverse businesses include cloud computing, movie/music streaming, smartphones, payments and so on. Managing all this will be far from easy, particularly when you factor in AMZN’s razor-thin margins. So if it suffers from a couple failures, the impact could be devastating.
So yes, the Amazon deal for Twitch looks spot-on. But it’s another reminder of how difficult — and expensive — it is to remain competitive. And with AMZN stock off 18% from its 52-week high, investors are already beginning to get antsy.
With that in mind, the Amazon buyout of Twitch looks like a high-risk, high-reward play. Time for investors to do as the Twitch audience does: Sit back, and watch how things play out.
Tom Taulli runs the InvestorPlace blog IPO Playbook. He is also the author of High-Profit IPO Strategies, All About Commodities and All About Short Selling. Follow him on Twitter at @ttaulli. As of this writing, he did not hold a position in any of the aforementioned securities.