Twitch Interactive: The Streaming Market War
After Google launched YouTube Gaming, Twitch needs to level up fast in the face of a major competitor in the streaming market
Last summer, the gaming world eagerly anticipated the acquisition of videogame streaming platform Twitch Interactive by Google. But when Google was unable to close the deal due to antitrust concerns, Amazon swiftly entered into negotiations with Twitch and acquired them for $1.1B. Unwilling to give up on the streaming market, Google launched its own version of Twitch – YouTube Gaming.
Twitch.tv is a website that allows users to livestream their computer screen over the internet as they play videogames. Visitors can watch these streams and interact with other users, including the streamer. For the past few years, Twitch has dominated the live game-streaming segment; however, YouTube Gaming’s entry marks a turning point for the industry – Twitch now has a major competitor.
No Lags in the Streaming Industry
The audience for video gaming content has doubled in the past four years, and is projected to double again in the next four. In this booming $3.8B videogame viewing industry, Twitch currently holds 43% of global revenues with its live streaming platform. This is higher than YouTube’s 36%, despite Twitch having 20% lower viewership. It is clear why companies such as YouTube would want to branch out from static video and enter the increasingly lucrative segment of dynamic gaming video content.
The rise of mobile gaming is causing a surge of new casual gamers, while existing gamers are becoming increasingly engaged in the gaming culture and increasing their monthly spend. Another trend is the development of electronic sports (eSports), which are competitions between professional gamers. The International, an annual tournament for the fan favorite game Defense of the Ancients 2 (DotA2), has a prize pool of over $18M in 2015, up from $11M in 2014 and $3M in 2013. Another popular game, League of Legends, hosted their World Championships this year where an estimated 45M viewers worldwide tuned in, up 40% from the previous World Championship. For Twitch, this has translated into 100M unique viewers and 16B minutes views per month in 2014, up 122% and 33% respectively from the previous year.
The YouTube Factor
YouTube Gaming stands out from all of Twitch’s past upstart competitors because of its established brand. YouTube commands 73% of all viewership for video gaming content, due to its dominance in the static video segment. Furthermore, almost every Twitch user is also a YouTube user. In fact, many Twitch streamers also make videos for their YouTube channels, or upload their broadcasts to YouTube for archiving and for additional revenue. This creates a tempting opportunity for users to consolidate their streams and videos on the same platform.
The main advantage of YouTube Gaming over Twitch is its superior functionality. It offers 1080p60 video on an HTML5 engine, as well as a rewind function during live broadcasts – none of which are offered by Twitch. It has already surpassed Twitch in developing innovative features, such as a mobile app that allows users to stream their mobile games while using their front camera to incorporate themselves into the stream.
YouTube offers everything Twitch does, from streaming to monetization to viewer chatrooms, and does many of them better than Twitch. Even though YouTube Gaming is a new project, it has already streamed various eSports events with high viewership alongside Twitch. If Twitch does not address its competition accordingly, Amazon’s billion-dollar investment could be run into the ground.
The Next Level
The live game-streaming segment will become increasingly attractive to new entrants. YouTube is only the first of many competitors that will emerge in an attempt to capitalize on the growth trajectory of the industry. Instead of focusing on competing against YouTube, Twitch will need to establish a unique value proposition for its users going forward. All entrants will be able to create a similar streaming platform and provide the same functionality. With more competition, streamers will have more bargaining power and platforms will need to compete on price. In addition, the existence of multiple platforms will drive functionality and services, so Twitch must invest in infrastructure and service improvements in order to consistently exceed the expectations of its two main users – viewers and streamers.
For viewers, there are two fundamental elements contributing to Twitch’s entertainment value. The first is social interaction with streamers and other viewers through chatrooms links, games, and other platforms. The second is high quality gaming content for viewing. Twitch’s current success is attributable to having the largest community of hardcore gamers and the most popular streamers. Twitch can improve its user experience by facilitating more community interaction. However, relying on this network effect is likely unsustainable as the model is easy to replicate by competitors such as YouTube Gaming, who also hold large established communities.
Ultimately, viewers are attracted to their favourite streamers, not the platform. Twitch consolidates popular streams in one place and makes it convenient for viewers to see who is streaming at any given time. However, there have been cases with famous gamers and foreign events that have moved off Twitch, where viewers visited other streaming platforms. In short, viewers go where the content is, and by attracting popular streamers and event organizers, Twitch will naturally draw in viewers.
There are two types of content on Twitch: organized events and individual streamers. Twitch has long-standing relationships with event organizers, thus there is little risk in losing the former type of content. However, because the largest gaming events stream on multiple platforms internationally Twitch is not unique in this aspect. Twitch differentiates itself because the most popular hardcore personalities are on Twitch and not elsewhere.
Twitch currently has a strategy for retaining streamers that involves 11,000 contracts with exclusivity clauses prohibiting top streamers from using other platforms. However, these contracts are unreliable as they are always subject to efficient breach by streamers and only serve to damage Twitch’s reputation as a customer-first company. Twitch must focus on satisfying streamers’ needs and wants to create pull-factors and the desire for streamers to voluntarily stay on Twitch.
Streamers are gamers at heart who enjoy playing games and sharing the experience with other gamers. They have two key motivators: personal enjoyment and money. While money is secondary, it is still important. Full-time streamers make trade-offs between streaming versus pursuing another career and income is an easily-quantifiable way to compare different opportunities and platforms. In addition, streamers will likely leave for new opportunities as they age, making way for new streamers to replace them. Thus, to create value for streamers, Twitch needs to add new forms of entertainment, facilitate more innovative means of user interactions, and provide competitive incomes.
Collecting the Coins
As the industry becomes increasingly more competitive, streaming as a service will become commoditized and platforms will reach a point in the long-run where price competition is not a feasible way to retain streamers. Therefore, Twitch will need to find new ways to generate revenue to match these prices and create a unique competitive advantage to retain streamers that cannot be easily replicated.
Within a standardized streaming space, cross-selling presents Twitch with a new way of generating revenue. Although Twitch only represents 1.8% of Amazon’s revenues, it holds a user base of 100M people, consisting of many hardcore gamers that can be monetized. Hardcore gamers spend over $128 on gaming products every month and Twitch can use promotions to move spending from competitors to Amazon. While Twitch currently provides streamers with a merchandising platform on the website, these offerings can be extended by linking to Amazon’s online retail, making merchandising more convenient for streamers. For example, Twitch can advertise discounts for headsets, keyboards, mobile games, console games, and other products that viewers would already want to purchase. Amazon can further take advantage of the specific genre of video content prevalent on Twitch and target advertisements of the aforementioned gaming accessories and peripherals directly to the gaming community. Thus, the introduction of cross-selling presents a $3B opportunity, which is almost double Twitch’s current revenues. In addition, Twitch can collect data on viewer spending and use it to offer more targeted advertisements at higher rates. However, Twitch and Amazon must make sure that both stay true to their customer- centric philosophy. Twitch should be cautious not to bombard users unaccustomed to such advertising with an excessive amount of cross-selling offerings.
These new revenue streams allow Twitch to be more flexible with regard to profit margins in comparison to competitors. The ability to monetize each streamer directly influences how much Twitch can pay streamers. Thus, as other platforms compete for streamers, Twitch will always be able to offer higher revenue shares, which protects it against price competition.
However, the gaming industry is susceptible to a quick and constant generational flush effect of gamers leaving and new gamers moving in. In this landscape of increasing competition, Twitch’s biggest risk is that its unique content is heavily dependent on a constantly changing streamer base. Twitch needs to find a way to ensure viewer retention long-term that is not susceptible to streamer churn.
To help mitigate the risk of streamer generational flush, Twitch should grow beyond a streaming platform and move upstream into content creation. This strategy will further establish Twitch as a hub of eSports to build brand equity. If streamers and viewers recognize exclusive quality content as originating from Twitch, it will create customer loyalty as users develop preferences for their favorite content and by extension the content creator. Moreover, the introduction of unique content will attract new viewers to which Amazon can cross-sell products.
As Twitch already streams many large gaming tournaments and conventions, it should organize some of its own events as well. Twitch has close relationships with game developers and event organizers, and the success of TwitchCon, which attracted 20,000 visitors in September 2015, proves Twitch’s capabilities. These events will be streamed exclusively on Twitch, which creates a new channel of unique content apart from streamers.
Unique content has been shown to successfully increase viewership. Netflix’s largest growth period to date was in 2011 when they began producing their first original show House of Cards and grew revenues by 48%. Similar to Netflix, Twitch has established a large audience which secures an initial viewer base for newly produced content to grow off of. Twitch’s advertising charges based on number of impressions, thus an increase in viewership directly translates into increases in advertising revenue.
Upstream movement addresses the issues created by the generation flush by providing a sustainable source of unique content that is not affected by a changing viewer base. It also creates a competitive advantage that will be difficult to replicate. If Twitch is proactive in undertaking this content creation while operating as the most prominent service among hardcore gamers, the degree of loyalty it accumulates will serve as a sustainable leadership position.
TwitchCup: a Twitch Original
Currently, the most popular games such as DotA 2 can have a standalone tournament and attract 3M concurrent viewers worldwide. On the other hand, less popular games like Hearthstone and Call of Duty only attracted 80,000 to 135,000 concurrent viewers at their events, despite being supported by the powerhouse Blizzard. There are also many games that only have online tournaments because there is not enough interest to support a physical event. In comparison, Twitch hosted the inaugural tournament for H1Z1, a much lesser-known game at TwitchCon, and drew 140,000 concurrent viewers.
In TwitchCon, Twitch’s largec ommunity allowed it to consolidate several small events and draw an overall larger audience. This can be applied to consolidate mid- sized tournaments for games such as Hearthstone and Street Fighter, as well as intercollegiate tournaments that have little organizational support. Twitch can host the “TwitchCup” throughout two days where several gaming tournaments are held, and add in panels and mini-events similar to how it did in TwitchCon. Doing so will generate a larger audience for each tournament, which benefits all partnering organizations. As for Twitch, merchandise shops, sponsorships, and ticket sales can generate over $1M in revenue for the inaugural TwitchCup, which will grow every year. Increasing involvement and further investing in the gaming community will cement Twitch as the preferred streaming platform.
Creating the Next Gen
By recognizing the changing landscape of the live game- streaming industry and reacting accordingly, Twitch will be able to build upon a foundation of new revenue streams and unique upstream content creation. The exclusive content, rich community interaction, effective monetization, and brand equity will serve as pillars of differentiation that allow Twitch to provide a unique value proposition that captures gamers. This strategy will build a defensible competitive advantage for Twitch, and thus sustain its growth in the long run. At the rate that the gaming industry is growing at, Twitch is on track to become the best acquisition Amazon has made to date.