Twitch.tv: Amazon’s Billion-Dollar Bet on Network Effects in Streaming Video

In August 2014, Amazon announced it was acquiring the video game live streaming platform Twitch.tv for $970 million. As the largest player in the live streaming industry, Twitch allows gamers to broadcast their real-time game activity online to attract fans and subscribers. Twitch was founded in 2011 and is still relatively unknown outside the gaming and technology worlds, but it currently boasts over 100 million monthly viewers (more than Yelp!) and accounts for over 2% of all Internet traffic in the United States.

Despite its large size, Twitch is still growing quickly. Based on ESPN estimates, the world of competitive gaming (also known as eSports) is growing at over 20% annually. The level of live broadcasting and streaming activity on Twitch is rising even more rapidly, with Twitch viewership more than doubling in the past year. Given the platform’s high growth and attractiveness to advertisers (firms pay 85% more for ads on Twitch due to its reach in the key male millennial demographic), Amazon’s acquisition of Twitch seems like it could be a great investment.

But Twitch’s future success is not guaranteed. This August, Google (which lost its bid to acquire Twitch one year earlier) launched YouTube Gaming as its own live streaming platform to compete with Twitch. Previously uncontested, Twitch now must fend off an experienced competitor with deep pockets and longstanding expertise in online video. As Twitch’s and YouTube’s features converge (YouTube Gaming now emphasizes live streaming, and Twitch will soon allow broadcasters to upload videos), the outcome of this battle will depend on which platform can best (1) utilize network effects to its advantage and (2) lock in users through high switching and multi-homing costs. If no platform can accomplish both, then Twitch and YouTube Gaming will continue to coexist in a market that will not tip in the foreseeable future.

Network Effects

Twitch’s phenomenal growth since 2011 has resulted from both direct and indirect network effects. First, there are strong cross-side network effects between Twitch viewers and broadcasters: the more viewers come to Twitch, the more broadcasters are attracted to the platform by the prospect of gaining more fans, more subscribers, and ultimately more revenue from advertising and donations. In turn, as more broadcasters bring their content to Twitch, more viewers are drawn to the platform to watch and even interact with their favorite players and teams.

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In addition, there is a second form of indirect network effects involving Twitch and third-party console manufacturers: driven by the large and growing number of Twitch broadcasters and viewers, console manufacturers Sony and Microsoft have chosen to incorporate native broadcasting functionality on Twitch into the PlayStation 4 and the Xbox One. This console integration is in turn driving more broadcasters and viewers to Twitch since the universe of easily streamable content has expanded from PC games to now include console games.

Last, there are also direct network effects at play. As more broadcasters and viewers come to Twitch, the more interaction takes place in the form of live commentary and discussion among viewers and often even with broadcasters. Twitch has thus succeeded in creating a strong community of gamers who value the social experience of creating, consuming, and discussing game content together in real time.

Switching and Multi-Homing Costs

Although Twitch has built a strong platform through network effects, neither its viewers nor its broadcasters face significant switching or multi-homing costs. Viewers can easily visit other live streaming sites if they prefer, and broadcasters can stream their live gameplay simultaneously on multiple platforms under the same username. Indeed, the largest event in eSports, the League of Legends World Championship, is being broadcast live from Paris this month on both Twitch and YouTube.

Since few inherent switching or multi-homing costs exist in this market, Twitch is now trying to retain its lead over YouTube by artificially creating switching costs in the form of exclusivity agreements. However, it remains to be seen whether Twitch can successfully secure, monitor, and enforce exclusivity with its broadcasters (a difficult task, considering Twitch has over 1.5 million unique monthly broadcasters). If not, YouTube Gaming seems poised for significant growth at Twitch’s expense in the near future.