Amazon buys Twitch as video-game world changes

The upstart company is the fourth-largest source of US Internet traffic, and could also help Amazon accelerate a push into Web video.

By MSN Money Partner Aug 26, 2014 4:35PM
Credit: © Ralph Goldmann/dpa/Corbis
Caption: Part of the Twitch display on the first day of Gamescom 2014 in Cologne, Germany, Aug. 13, 2014By Douglas MacMillan and Greg Bensinger, The Wall Street Journal

As videogames become a spectator sport, Amazon.com (AMZN) just bought the world's largest arena.


The e-commerce giant said Monday it agreed to acquire Twitch Interactive, a popular Internet video channel for broadcasting, and watching, people play videogames, for about $970 million in cash.


The deal is Amazon's second biggest, and underscores the popularity of online gaming. Though little-known outside of tech and gaming, Twitch, founded in 2011, is the fourth-largest source of U.S. Internet traffic, behind only Netflix (NFLX), Google (GOOG) and Apple (AAPL), according to network researcher DeepField Inc.


Last October, 32 million people watched the championship of Riot Games Inc.'s "League of Legends" on various streaming services, more than the series finales of television shows "Breaking Bad," "24" and "The Sopranos" put together.


Twitch could also help Amazon accelerate a push into Web video that is brought it into competition with Netflix and Google's YouTube. Twitch seized on the popularity of games like "League of Legends" and "Minecraft," developing tools to let players broadcast their game sessions to an audience of more than 55 million users and generating revenue from advertising and subscriptions.


Twitch owns technology for streaming live video capable of supporting a large number of simultaneous viewers for events like game tournaments and music concerts. Twitch accounts for nearly 2 percent of peak U.S. Internet traffic, DeepField said.


"In the same way that YouTube and Netflix have to develop really robust architecture to stream enormous amounts of video, Twitch had to build a similar infrastructure geared toward live gaming," David Cowan, a partner at Twitch investor Bessemer Venture Partners, said in an interview.


Google held talks about potentially acquiring Twitch as early as May, two people told The Wall Street Journal at the time. Then, Twitch hired star Silicon Valley deal maker Frank Quattrone to shop the company to other potential buyers, including Amazon, Mr. Cowan said. Google declined to comment.


Yahoo (YHOO) also had expressed interest in Twitch, according to people familiar with the matter. A spokeswoman for Yahoo declined to comment.


Amazon has been making a push into gaming, including bulking up its staff of programmers at its studios in Seattle and Southern California. The company has introduced several new videogames to complement its Fire TV set-top box, introduced in April, and sells a devoted controller for gaming.


Mike Frazzini, vice president of Amazon Games, said acquiring Twitch will help the retailer round out its gaming business.


"Amazon is invested heavily in games," Mr. Frazzini said. The acquisition is "a substantial step forward as we think about games generally."


Twitch could also help Amazon expand its fledgling online-ad business. The site is most popular with young male gamers, a segment of Internet users attractive to advertisers, said Seth Bardelas, head of agency development at online-ad analytics firm TubeMogul (TUBE). 


Because of this, advertisers on average pay about 85 percent higher prices for ads on Twitch than other video sites on average, TubeMogul estimates.


Twitch will operate as an independent subsidiary of Amazon, led by co-founder and Chief Executive Emmett Shear, 31, who studied computer science at Yale University. He frequently takes to Reddit and other sites to answer questions from the Twitch community of gamers. The company will keep its San Francisco office and all of its roughly 170 employees will take jobs at Amazon, Mr. Shear said.


Twitch emerged from Justin.tv, one of the earliest streaming-video sites on the Web, founded in 2006 by Justin Kan and Kyle Vogt. Other companies spawned by Justin.tv include Socialcam, a social-video-sharing app acquired by Autodesk (ADSK) for $60 million in 2012, and Exec, a housecleaning service that sold for less than $10 million earlier this year.


Twitch raised $35 million from investors, including Bessemer Venture Partners, Thrive Capital and videogame-maker Take-Two Interactive Software (TTWO). 


The deal for Twitch would be less than Amazon's final price tag for online-shoe retailer Zappos, which rose to about $1.2 billion in late 2009 as Amazon's stock rose. More recently, Amazon paid $775 million in 2012 for Kiva Systems, a maker of robots for moving inventory around warehouses.


For Twitch, Amazon agreed to pay more than $100 million in additional payments if certain performance objectives are met, which could lift the final price tag above $1 billion, said one person familiar with the deal.


Amazon generally keeps its subsidiaries at arm's length, allowing them to maintain their own corporate culture and hiring standards. Zappos, for instance, still maintains its iconoclastic office culture, with events like a day for employees to wear pajamas to work.


—Alistair Barr, Evelyn M. Rusli, Rolfe Winkler and Drew FitzGerald contributed to this article.


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