The Growth of eSports
Game 7 of the NBA Finals between Lebron James and the Cleveland Cavaliers and Steph Curry and the Golden State Warriors was one the the most compelling and highest rated NBA games in recent history, attracting the attention of almost 31 million people in the U.S. . That is an impressive viewership, but was 12 million people short of the 43 million unique viewers which tuned in to the 2016 League of Legends World Championship between SK Telecom T1 and Samsung Galaxy .
Tickets to the LoL Finals at the 15,000+ Person Staples Center Sold Out in 1 Hour
Driven heavily by Asia-Pacific, eSports is estimated to have 191mm enthusiasts and an additional 194mm occasional viewers in 2017; this has created a market of an estimated $696mm of total revenues in 2017 from a diverse range of revenue streams such as merchandise, media rights and advertising . Even more impressive, eSports has slowly gained traditional media recognition as tournaments such as Blizzard’s Heroes of the Dorm and the LoL Championship are broadcast on ESPN alongside traditional sports.
How did the viewership of online gaming become so large? Twitch has a whole lot to do with it.
History of Twitch
Twitch.tv was originally the gaming content section of a broader livestreaming site called Justin.tv (which went defunct in 2014) which allowed users to broadcast live video to millions of viewers around the world in real time. Concurrent with the rise of online gaming with the development of new game types such as MMORPG (i.e. World of Warcraft) and MOBA (i.e. LoL, Dota2, HOTS) as well as the rapid growth of online multiplayer in traditional game types like first-person shooters (i.e. Halo, Counter-strike), Twitch took off as a platform gaining millions of new viewers and streamers. In 2014 Amazon acquired Twitch for $970mm, and continues to operate the platform today, developing synergistic product offerings with Amazon Prime and leveraging the computing power of AWS .
How does Twitch Create Value?
Twitch allows of any individual gamer to broadcast themselves playing video games in real time to the Twitch community of viewers looking to watch live gaming content. Users can interact with the streamer as well as other users watching the same stream via a chatbar on the side of the stream. With this simple product offering, Twitch has grown to be a massive platform with over 2.2mm unique streamers on the platform providing content for Twitch’s 9.7mm DAU and 100mm+ unique users who watched 292 billion minutes of video and sent 14.2 billion chat messages in 2016 . Even as early has 2014, Twitch was already ranked 4th behind Netflix, Google and Apple in terms percentage of U.S. peak internet traffic .
Sample Twitch Livestream
Twitch monetizes this massive streamer and user base through a combination of advertising and subscription models. Twitch offers a wide variety of advertising mediums including video, display and natively embedded advertising products which are sold to advertisers. Twitch also has a network of 17,000+ partners, who must have average concurrent viewership of 500+ and broadcast regularly at least 3x a week, with whom Twitch has a revenue sharing agreement with. Viewers can subscribe to these partners for $4.99 a month to support their favorite streamer, access unique emoticons, gain special live chat privileges and various other perks. Twitch shares part of the advertising revenue with these partners (normal streamer get no share) as well as 50% of the monthly subscription fees . In addition, partners are able to have their videos shown in the “past broadcasts” section, giving them opportunity to monetize their stream beyond the livestream.
Why the Twitch Platform is So Formidable?
Twitch is more than just a video streaming platform, it is the premier online community for fans of video games. The platform leverages network effects to create huge volumes of unique streaming content which attracts a large number of viewers. The larger the number of viewers, the more likely streamers can have an audience for their content, which incentivizes streamers to create more content; thus, creating a virtual cycle of indirect network effects. In addition, although streamers may livestream on multiple platforms at once, viewers are usually watching on only one-platform at a time, making this a much less multi-homing platform on the user side. Although individual events, such as a large tournament, may be able to attract users off the platform, because of the livestreaming element, it becomes very hard to to generate enough consistent and quality content 24/7/365 without the type of scale that Twitch has.
In addition, Twitch has worked with console hardware manufacturers to develop an easy livestreaming functionality into the PS4 and Xbox One consoles  , as well as provided software developers with an SDK to easily integrate Twitch into their PC games. Twitch also has sponsorships and partnerships both with the major games on its platform as well as some of the both popular eSports teams such as Cloud9 and Team SoloMid  This has helped Twitch become the standard for video game streaming in the world today. Twitch remains a highly difficult platform for a new entrant to surpass as even if a new platform were able to overcome strong network effects of its core platform, the company ties with the entire gaming ecosystem from hardware producers, to software developers, to leagues and to the teams and players themselves creates a strong protective moat around the platform.