Twitch Deal Makes Sense for Amazon

 | Aug 26, 2014 | 2:16 PM EDT
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Amazon (AMZN) agreed to buy Twitch for $1 billion, not Google (GOOG) as had been rumored months ago.

It's a smart deal for Amazon in my view. 

It's also the latest sign of how the face of Cable TV and consumable content is shifting before our eyes.

You can think of this deal as basically as if Amazon were buying an orphaned cable TV channel. 

What is a user worth?

The value of a basic cable TV subscriber a few years ago was about $6,000 per basic subscriber. Recently, BSkyB paid $1,489 per pay TV subscriber to acquire parts of Sky Italia and Sky Deutschland. Facebook (FB) paid $42 per user for WhatsApp. Rakuten paid much less (something like $18 per user) for Viper. 

In perhaps the most relevant comparison, Disney (DIS) recently paid $1 billion (in total consideration) for Maker Studios in LA. Maker is a big YouTube channel. It had 5.5 billion monthly views, 1 billion unique viewers and 380 million YouTube subscribers. So, on a per-user basis, Disney paid $2.60. That's a lot less than a cable TV subscriber.

Twitch had 55 million unique visitors in July who watched 15 billion minutes of video. For that, Amazon just paid $970 million. So, they are paying $17.63 per user.

Is it a good deal for Amazon?

Basically, people like Disney and Amazon are making a bet on a new type of cable TV channel. They are seeing this as a new audience that is aggregated. What do you do with that audience? Of course, you can sell advertising against it, just as the cable TV channels do. Those old channels also can gather subscriber fees as well.

It will be more difficult to figure out how to draw subscriber revenue from these new communities like Maker and Twitch. But these new communities are potentially much bigger and global compared to the old niche cable TV channels.

The 55 million unique visitors for Twitch sounds small compared with 1 billion for Maker, but BSkyB paid more than $10 billion for an extra 9 million subscribers. 

Plus, Disney's purchase of Maker for $1 billion is looking a lot more sober today post-Twitch than it did a few months ago. One of the risks, but potential rewards, of Disney or Amazon buying one of these big networks now is that their growth is still just starting. Just as Google's (GOOG) buy of YouTube for $1.65 billion looks like a steal now, the hope for these strategic buyers is that these deals will be judged in the future as cheap.

And this is before the other potential strategic benefits are factored in for Amazon, like leveraging AWS and promoting its own content strategy outwards. The bottom line, this deal doesn't seem too bubblicious to me.

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