Acquired - Episode 3: Twitch

Episode Date: November 16, 2015

Ben and David discuss Amazon's acquisition of Twitch in 2014. Unlike previous episodes, this recent acquisition still has a lot of open questions, and Amazon hasn't publicly reported growth of Twitch since the purchase. Ben and David talk about Justin Kan's original product with Justin.tv, and the transformation into the Twitch that Emmett Shear is running today.Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!

All right, David, you ready? I'm ready, Ben. All right. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down, say it straight

Another story on the way Who got the truth? Welcome to episode three of Acquired. This is the one where we talk about Twitch. Today we're going to try something a little bit different. We've been listening to our listeners and getting a lot of feedback that not only do David and I agree too much, but we're doing softballs. Feedback is a gift, Ben.

Thank you. We really like hearing from everyone. And, you know, while originally our goal was to set out and only review the super stellar spectacular ones that only went super well and what we can learn from those. It's a little boring. People are telling us they want some spice. So we're going to do, obviously, Twitch has been a little bit more recent. It's a 2014 acquisition and here recording in November of 2015. And there's still a lot of open questions. And I think, you know, people are generally positive and optimistic and there's a exploding market there. But a lot more to talk about. A whole lot to talk about. As always, thank you everyone for the

reviews, for the feedback. You can check out our website at acquired.fm. We're on Twitter at acquired.fm. And please keep the feedback coming. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow. Yes, as you know, ServiceNow is the AI platform for business transformation. And they have some new news to share. ServiceNow is introducing AI agents. So only the ServiceNow platform puts AI agents to work across every corner of your business. Yep. And as you know, from listening to us all year, ServiceNow is pretty remarkable about embracing the latest AI developments and building them into products for their customers. AI agents are the next phase of

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by clicking the link in the show notes or going to servicenow.com slash AI dash agents. So we're, uh, we're changing locations a little bit tonight. Um, we are in the, uh, the wonderful den of, uh, of David's home, um, here on the creative and secure SSID of default two. We're really creative in the Sholick rosenthal household yes yes so thank you so much for your generous generous hospitality david and jenny always happy to ben and you listeners as well all right let's go let's jump into it so right about uh what was? 14 months ago, there had been acquisition rumors swirling about a young three year old live streaming network primarily used for streaming games called Twitch.TV. Which itself has a crazy history.

Crazy history. which itself has has a crazy history crazy history if you were watching either of the previous incarnations of this company you you wouldn't have seen this end coming and the incarnations being first just in that tv which i believe was one of the first y combinator companies am i right there yeah i don't know what batch one of the one of the early ones it was like 2007 i think justin tv is this incredible um you know before smartphones before a lot of the one of the early ones it was like 2007 i think justin tv is this incredible um you know before smartphones before a lot of the or before smartphones got big anyway um kind of before gopro and all that um justin khan strapped a camera to himself and broadcast what he was doing all the time 24 7 um ended up going through y Combinator with the kind of the yep the crazy it's hard to overstate how crazy that was in 2007 this is like either pre-iPhone or like right when the first iPhone

came out and the idea that you would stream your life 24 7 on the internet yeah YouTube was already out there but that was recorded video live I I mean, this was a crazy concept. Yeah. And ultimately, it didn't work. No. Even when they got a little bit, became a platform where anyone could stream anything live. There were competitors. There was Ustream.

What was the other big one? So this was sort of an era where there were platforms coming up. This is classic build the platform before the use case, where there's platforms coming up for people to stream whatever they wanted live. There's incredible amounts of piracy, a whole bunch of seedy stuff. And there wasn't a clear winner yet for what the thing was that was going to win in live streaming and what the purpose of it was. Yep. So that was 2007.

Fast forward a couple of years, total fail. Didn't work. Instagram, which we talked about on our last show, had happened. Was not yet acquired by Facebook, but was a thing. And Justin.TV is still kicking along. And what do they do? They work on a new pivot. Spinoff this company called SocialCam.

You remember SocialCam, Ben? Interesting. Yeah. And that was kind of funny because that was actually I remember I think they launched it South by Southwest because I was down there and that was where I first saw a whole bunch of the marketing for it. Now, you know, it's a super cool concept. I think that was in parallel.

I think that Justin.TV was still running at that time and yeah i think that might have been right it's like some employees left justin tv or maybe it was under the same uh umbrella company and um i think it was and social cam being this is one of those things that like as vcs we often hate this for that companies although sometimes they work but but in this case, Instagram for video, quote unquote, not a thing, or at least not a thing at that point in time. Yeah, great, great idea, though. I mean, I think that there's there's some there's a nugget there. And it's actually one of the most well designed kind of consumer apps that had launched around that era. Yeah, I remember thinking that, boy, there's a killer team behind this seems highly

reputable. They're really touching on a very human nerve here but much like justin tv never found wide consumer adoption well and it's interesting it got wide adoption uh with this was the era of the facebook steroid era just like the baseball steroid era of you know the 90s when before facebook went public and anyone who could figure out how to leverage the Facebook graph and get adoption on on mobile apps and and and websites oh are they one of those companies that they were one of those call the graph they stole the graph and so and so crazy you know social cam spins out from justin.tv uh in 2011 ends up getting acquired less than a year later by Autodesk.

Autodesk, Ben. Acquires SocialCam for $60 million. Crazy Vidi, which was another one that did the same thing. I don't know what ended up happening to them. They petered out. Maybe they got acquired by somebody. Anyway, that was chapter two of this company. Then chapter three, right around that same time, is Twitch.

And Twitch, for anyone who's not a gamer out there, I actually was looking into a little bit today, kind of where the name comes from. Because it has a certain feel to it. And you go to the site, and it's purple. And it's got definitely that kind of gamer vibe. And it attracts a pro gamer audience and that sort of sort of archetype and twitch gameplay is the uh is a reference to you know there are games that are much more

strategy based and there are games that are kind of turn-based yeah so twitch twitch gameplay refers to any game where you have to very quickly move the mouse around the screen. And, you know, if it's a first person shooter or something and you got to get one guy quickly move over, get the other guy quickly move over. And it's kind of like it's a touch and finesse and moving very quickly to do very physical actions rather than a slower kind of strategy game. And so Twitch was a dedicated streaming platform for streaming yourself playing video games on your computer. Which, you know, I think most of our listeners or some of our listeners, I can't really guess the percent, but a lot of people today understand how big Twitch is and understand how big the sports universe is. and um basically games becoming uh services and products that could live on and develop these huge audience but you know in the past before about this time games would be you know packaged software that you buy on a disc and you'd stick in your console or your pc and you play it by yourself and you'd have an experience maybe you'd play it for 100 hours and then you'd be you'd beat it and you're done but now uh at this time games started becoming

living breathing services world of warcraft was the first example of this but then it's just completely uh come to to revolutionize the whole industry this model and so now you have games that just live on and on as experiences the weekly reset it's incredible to see you know that with with uh or the weekly or monthly hearthstone as the monthly reset journey year one year two i mean it's it's it's a whole different model yep and if you it's so funny thinking about sort of the the old ones if you'd have told me in 2009 that you know a company be acquired for a billion dollars that let people watch other people play video games i'd call you crazy i mean it's it's it's almost as if in 2007 when the iphone came out somebody would have told you that uh what did we just said was it 11 people working for Instagram when it was acquired?

Or something like 11, 12, 13, something like that? Yeah, in the teens. That a company with a number of employees in the teens that made an app, whatever that was, for this smartphone would get acquired by Facebook for a billion dollars in 2012. You would have thought they were crazy. Yeah, and it's interesting how it it reflects a lot on the tenacity of the the justin tv team i mean i think that they touched on something where they probably

you know they obviously didn't know what the use case that would hit was of live streaming but they had a a sense around live streaming and it you know at pioneer square lives one of the things that we do is like we don't really trust our gut until we prototype stuff and until we get feedback and see what sort of catches on. And I think that it really goes to show you don't know. And they were seeing on Justin.TV, a lot of people using it for gaming purposes, which is why they kind of decided to open Twitch as a dedicated, I think spent some some time where uh there were several months where they were just working on twitch not improving justin tv reopened twitch to the public and um it goes to show you don't really know what's going to stick until you start watching

usage patterns of how people are using your stuff totally so let's uh let's get into the topic of the show which is an acquisition but so just to that off, I don't think we've actually said the actual facts. August 25th, 2014, acquisition rumors have been swirling about Twitch for months. People think Google and YouTube are about to buy the company. Makes sense to me. Makes a lot of sense. YouTube, number one, you know, video platform online, thinking about getting into streaming and live video becoming more of a thing and of course it makes sense that this would be a great channel on

youtube august 25th announcement drops amazon buying twitch 970 million dollars in cash by the way who could have foreseen this huge strategic error by the twitch management team and board uh not negotiating for stock here so uh amazon closing share price on august 25th 2014 300 and 34 334 dollars and two cents amazon closing share price today 14 months later 665 dollars and 60 cents it's uh it would be a win if i actually owned a property here in seattle it's a shame i'm still renting uh you just mentioned something about uh not negotiating for stock do we know that this was an all all cash it was an all cash deal it was all cash deal so that's what a billion dollars in cash looks like could have been two billion dollars um but that's a uh that's a technical technical detail everybody was still happy in the moment and probably still however twitch has continued post-acquisition to just grow like a rocket ship.

So when Twitch was acquired, I believe they had about 55 million monthly unique viewers. That was in August 2014. They announced in January 2015 that they passed 100 million unique monthly viewers. They haven't announced any stats since then, so that's the latest we have, but that was 10 months ago. Which is, you know, thinking about in the context of the last, you know, acquisition we talked about, right? Yeah, last one, Instagram, you know,

celebrating now years after the acquisition hitting 400 million monthly active users. Now, these visitors are not necessarily logged in, but I guess they're i guess they're probably tracked by ip address or something so they know exactly you know how just like any web property not count repeat sessions but um 100 million monthly active visitors it's crazy i mean it's got to be like every the the demographics are are wider spanning than this but like every teenage boy in America.

Not America. I think this is one of the key things about Twitch too. It's America, but that's only a small part of it. It's everywhere around the whole world. South Korea is kind of the hub of a lot of these tournaments right now, right? The gaming capital of the world, yeah. Professional gaming capital of the world. And it's uh it's pretty amazing platform so one of the other really cool things i think about twitch um

unlike a lot of um oh we should there's one other stat to throw in there 1.5 million broadcasters so that's actually a little bit above but it's always interesting to think about um you know the the adage that for every you 100, in the Reddit terminology, 100 lurkers you have, you have one poster or one content creator. And that ratio roughly holds here. Roughly, yeah. as a internet and digital media property, um, is that it's got a really robust and diverse monetization strategy. Um, and has for much of its life. So would you,

would you call it a three pronged approach? You could call it a three pronged approach. And, and it's interesting, you know, it could easily be a four pronged approach if Twitch, we don't, eventually they will get their act together,

but basically for our viewers who don't know, twitch makes money in three ways today uh they have advertising that they sell on the site for anyone who's visited twitch and knows you get about three seconds of gameplay before you have something really abrasive yes very great not to mention all the takeover ads and banner ads all over the site. And then they have Twitch Turbo, which is basically a $9, $8.99 a month subscription that you can pay to get rid of that advertising on Twitch. have uh you know colors of your text and custom emojis and a badge and a lot of the sort of gamified and and virtual goods but like that's a lot of money just to remove ads from one website yep it's a lot of money you're talking a hundred dollars a year that's more than netflix to simply remove ads from one website on the internet or Spotify or I mean, I guess on a family plan, Spotify. Then I think this is just brilliant.

The other half of Twitch's business model comes from revenue shares with their broadcasters, which are referred to as streamers, in the form of subscriptions. They make it really easy with just a button on the site on the page of of a of a streamer to quote subscribe to that streamer for five dollars a month and then twitch keeps half of that 250 a month half this blows my mind thinking about like marketplace businesses where you can take a you know 15 percent take or a 20 percent take or you look at like the real estate business where you can take a 15% take or a 20% take. Or you look at the real estate business. Or Airbnb has a 6% take with 3% on each side. It's like 12% to 14%, but still. Okay.

But 50%? Yeah. 50%. 50%. So they're twitches getting away with murder. Basically getting away with murder. And let's just run through some of the stats here. So this is some numbers that are publicly available on the internet.

We'll do some back of the envelope math here. There are about 100 million Twitch viewers out there. They announced that in January, 100 million unique viewers. Roughly the conversion rate on viewers to subscribers is about one percent and we know this from a few twitch streamers have uh openly talked about and quote open sourced their economics um so can we assume there's like a million ish so you can assume there's about a million ish subscribers they're paying five dollars a month uh and um subscribers or subscriptions i I'm assuming subscriptions. OK, so there probably are fewer than that who actually subscribe, but they might subscribe to multiple channels.

If this is sample data based on an individual. This is one individual streamer, the percentage of people that watch his channel to convert. So I think it would be actual subscriptions. Yeah. On the site. it could be higher so if it's one percent of his viewers subscribe it's likely that or it's possible that that viewer also subscribes to a different channel too i don't know the behavior is it's probably not you know two it might be one point something but yeah we're keeping the numbers simple here. So, all right. A million subscriptions, let's assume on Twitch, at $5 a month and at a 50% revenue share to Twitch, that's $30 million a year in basically 100% margin.

I mean, I guess Twitch is paying credit card fees out of that. So, double it because they're only taking half of the revenue share so they're paying credit card processing fees on the whole so take six percent out of that but so 95 margin not margin that'd be their take right because like their margin we're not figuring in you know aws costs or but but this is this is just completely they're still monetizing in other ways through advertising and and turbo this is just like purely incremental marginal yeah yeah it's true no no additional no literally no it is except for credit card processing fees and putting a little purple button that says subscribe on their site and i'm sure there's

some engineering costs there too but like incremental margin what are you talking about it's one line of code not to mention synergies with AWS um it's pretty incredible it's pretty incredible um and then and then this might be end up being the biggest form of um of monetization for Twitch in the long term is tips So there is this behavior that's emerged on the Twitch platform where Twitch doesn't enable this at all. Streamers are hacking this together with third-party software where as they're streaming and speaking to their fans and their viewers as they're streaming the games they're playing, they'll solicit uh tips just like you know a street performer would uh they've got a tip jar and they're using third-party plugins to um to uh do this and um and and people

are paying them like an incredible amount of money so i mean streamers have made people have given it's just like the mobile games business you know people they're whales that have given like thousand dollar tips ten thousand dollar tips like at once and right now twitch isn't monetizing any of this but you got to imagine they are planning to bake this natively into the platform and take a cut out of here out of this i'm trying to imagine a scenario where something happens that's awesome enough in some gameplay that I'm watching where I decide it's worth $1,000. There are people that spend thousands of dollars on Clash of Clans, Ben.

Yeah, but... This is differential pricing for entertainment. I'd argue, but I know some. I know, scary. All right. Basically, I think the punch line of this discussion here is twitch has um very quickly remember this this whole business even though it was a spin out from justin tv was started in 2011 yeah it's funny i mean we say it's four years old you you would think in all of this um you know pivoting around and changing companies and spinning out other companies that this gets extremely expensive.

And a lot of times you look at a Jawbone or any of these companies that take a Series E and F round and get into the private equity and that sort of thing. They take huge sums of money. They only took three rounds of funding and it was only $42 million. I vividly, I can, uh, they kept it. I mean, $42 million is a lot of money,

but they kept it relatively cheap considering the outcome. I think I can talk about that. I won't use any numbers or names, but, um, when I was in business school, I interned, uh,

the summer between my first and second years at, uh, one of the top, um, a really, really amazing venture capital firm, um, called Meritech. And they're a late stage, um, venture capital firm. They only do late stage investments. And, uh, it was late spring and I had already lined up my internship. I was going to spend the summer with them. And, uh, uh, um, I got a, uh, a call from one of the partners there and said, Hey, I'm looking at this, uh, deal, uh, for a company that's raising money. Uh,

the company's called Twitch. Uh, have you ever heard of it? Do you know anything about it? And I didn't know anything about it. And I looked and I did a bunch of research and, you know, being a eager soon to be intern to impress, I thought I'm going to do some research. I'm going to write up some thoughts, you know, help them look at this, even though I haven't started working yet. I really can't wait to dive in. And I just looked at the space and I thought, you know, there's no way this is like, it's

interesting what's happening here, but there's just no way this is going to be big. I mean, this is like a, this is like a derivative of a sector of the economy that itself is like not that big in gaming right like it can't be that big and the valuation they wanted for this round was at the time seemed like a very large valuation it was much less than the eventual acquisition price and so i i wrote a long email i remember i was i was um uh jenny and i my wife jenny and i were in sonoma for the weekend for a business school trip and i spent a bunch of the weekend writing up these thoughts you know in this memo sent it to the partner basically can't recommend we we do this and this goes to

show you i have so many stories like this wait what venture capital is a humbling business what company name were you not going to say there i mean oh i wasn't gonna talk about any of the numbers oh yeah okay but suffice to say had meritech invested in in twitch in this round that happened and i forget who did lead the round but um would have been a very nice return uh but you know it's interesting it would have been a very nice return and especially as a late stage investor where you're trying to get a you know a 3x return is a good return a 5x return is a great return and you're talking um total fund like to to yeah but but actually as a late stage investor it's it's on individual investments because you're hoping that most of your investments you're going to get a good return on

you're taking much less risk yeah yeah you know it'll fail in one but what i think is amazing to think about this acquisition when twitch was acquired for a billion dollars even i hadn't thought much about twitch since that summer thought wow i was wrong like guess it did turn out to be a big company but now look at twitch a year later billion dollars is pretty cheap, so this is the fun part of the show. You know, I think there's one of the reasons we wanted to do this was because I think there's a lot of, first of all, easy numbers to look up and very, it's almost, it's the same reason that gossip is fun conversation to have. It's because it's low-hanging fruit.

Everyone can very clearly draw the dotted line everyone can laugh about it and everyone everyone can you know um romanticize and fantasize and wish they were picking that winner and you see oh my god 42 million in funding going to a billion dollar acquisition oh my god i can do the math and know exactly how big that that multiple is and that conversation happens over and over and over again and i think the thing that we just don't talk about that much is great uh a billion dollars so now you know let's say amazon's an individual person well that person's now a billion dollars in debt how do you grow that investment how do you get your money back and then some and And what are the kind of market forces and things going on within Amazon right now that actually make that fun to watch?

And we haven't, part of the rationale for wanting to do this episode too is we're here in Seattle and Amazon is one of the most impressive New York Times articles about the company and workplace culture there notwithstanding. One of the most impressive and greatest technology companies, not only of our time, but probably ever. I mean, the innovation that is driven within that company is just incredible and that continues to be driven. And the company's $100 billion revenue run rate and still innovating like a tiny startup which is amazing and the impact that it's had on seattle on the ecosystem physically on the city is just incredible so we really wanted to have an excuse to talk about amazon we haven't really talked about amazon yet um but what's amazing they they've they've left twitch pretty much alone um yeah we've seen we saw something launch a couple weeks ago but

you know you would think um after something like this gets acquired like well they'll take some of the video technology and make it available very quickly as a higher abstraction layer in aws or they'll start bucketing in some part of twitch with prime or they'll you know throw the amazon bar on top or did they do single sign in yet can you log in with an amazon i don't think so i don't think so either that the first thing they launched was not a unification with the rest of amazon's properties it it was twitch creative yeah it was you know they did this bob ross super super clever you know, they did this Bob Ross. Super, super clever, you know, marathon of watching Bob Ross paint to kick off. You can watch creative people perform their craft while they're live streaming it.

Like you would watch anybody do their game while they're live streaming it. And, you know, too soon to really know anything about that. But it really interesting how the company did indeed largely leave it alone. Yep. really interesting how the company did indeed largely leave it alone yep um and uh over time maybe we'll see them integrate it more into in in some ways into amazon you know i think about when we were talking about instagram in our last episode and how instagram also has been largely left alone by facebook however behind the scenes um we talked about ad buying and how Facebook's been very open, especially on their earnings calls with about how successful selling joint ad buys to

advertisers between Facebook and Instagram has been. And it's interesting, you know, we talked about some of the direct monetization aspects that Twitch has, but advertising still by all estimates, we don't really know, but by all estimates is probably the biggest revenue stream for Twitch. And Amazon, a lot of people don't know this, but has a very big advertising business. And you can imagine Amazon has very big advertising business yep um and you can imagine um amazon has a big advertising business especially to companies trying to sell products on amazon um a lot of video game companies both console manufacturers pc gaming accessory manufacturers and and games

themselves advertise and sell on Amazon. They also advertise on Twitch. You could imagine that being a synergy in the future. Yeah. Yeah. It's a really interesting business for Amazon because one of the things that they're able to do by having that ad network and letting you view products on other sites and that little iframed advertisement that you see for an amazon.com product or any other thing that they're using to, um, on their ad network is they get a good picture of what websites you shop on. So it's, or even just visit. So if you come to amazon.com,

they can use that in aggregate with your purchase history, or if you're not assigned in user to just understand sort of what sites you've been visiting and what sort of things you're going to buy. You know, if having Twitch as a first party property and integrating some of that ad technology with the you know large advertising business that is twitch there's there's a lot of potential and and let's think about where twitch is going now and might be going in the future with twitch creative potentially other channels these are all let's take creative for example painting um uh digital tool creative tools uh these are all areas that they're very natural advertising opportunities and very natural product selling opportunities um could imagine integrations with amazon on that front yeah on integrations with

amazon there's two two kind of points i want to bring up. Looking back at old posts from the Justin.TV folks in the early days, I think they had started on AWS, moved off for, at the time, what was cost reasons and customization reasons. I think they just needed a little bit more granular control with their whole streaming video stack. But then, at least by some point between uh 2012 and 2014 had pretty much wholly moved back onto aws so being acquired by the very company that powers your entire technology platform i mean that's um there's there's a lot of harbinger of things to come that amazon you could say amazon might have had a real window you know for, for me, I've worked in the venture capital business. I spent a lot of time thinking about tech and Twitch was like totally under the radar stream for under the radar screen for me.

But Amazon with AWS, they kind of have this like dashboard into like what's actually hot among tech companies at all times. Like, did they see this and say like, gosh, Twitch is undervalued. We should buy it because we have the data. I don't know. But again, back to the point we made earlier about the impact that Amazon has had on the entire tech ecosystem. But the huge impact here in Seattle. I mean, everybody here is zero degrees of separation away from Amazon in everything in this ecosystem here.

Yeah. So the end of it. Yep. I can't second that enough. So the other point that I wanted to make on top of the fact that they're integrating with their technology stack in a very vertical way is Prime. You know, Prime looks an awful lot like turbo yeah i mean it's a prime is has become a mechanism where um people buy almost three times the number of things on amazon when they're a prime subscriber and it's an annual subscription fee that you pay up front

for later returns of many different things that you would have accrued over a long period of time. And boy, Turbo is a thing that you pay up front at the beginning of the month that pays ahead of time for all the ads you would have seen. You have investment in the platform. Historically, Amazon has made huge efforts to get young people in the form of students hooked on to prime home with students i think first year free for for students yep and or maybe all years in school free what's the average age of a of a twitch viewer or you know

it's uh you know i i wouldn't call well uh i wouldn't call either of us old but uh the average age of a twitch viewer is definitely younger than both of us we're old david yeah i mean well uh let's face it um and uh and you imagine someday soon turbo becomes prime and is part of amazon prime and then you've just hooked a new generation on amazon prime sure is a compelling value prop i could pay my what is it eight or nine bucks a month for turbo or i could pay 99 a year for amazon prime and get turbo plus everything else in prime all those videos all that free shipping yep yeah drones dropping things off at your doorstep not to be speculative no uh nothing they haven't announced all right listeners our next sponsor is a new friend of

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They were voted by customers in the G2 rankings as the industry leader in endpoint detection and response for the eighth consecutive season, and the industry leader in managed detection and response for the eighth consecutive season and the industry leader in managed detection and response again this summer. Yep. So if you want cutting edge cybersecurity solutions backed by a 24-7 team of experts who monitor, investigate, and respond to threats with unmatched precision, head on over to huntress.com slash acquired or click the link in the show notes. Our huge thanks to Huntress. All right, so this section is the part where we talk about, you know, does it fall in the category of people, technology, product, or business line? Or is it another thing completely? And, you know, this is a pretty good framework to sort of understand. I think we've talked about, you know,

the various reasons why they would do this acquisition, but to sort of give i think we've talked about you know the various reasons why they would do this acquisition but to sort of give a framework for what buckets to drop certain things into um and uh it's a good opportunity for david and i to disagree a little bit too so um david what do you think um i'm a little torn here um could be a product however i'm gonna go business line because i think um especially thinking back to i really think you're on to something with this prime when we talk about the value of the uh acquisition and and measuring its success um and again being speculative here but if you imagine the value to prime here which is one of the core parts of amazon twitch adds a new layer of benefit to prime you know there was prime instant video before which you could argue is somewhat similar but i think this is a different thing you know that's like movies versus television. And this adds the television to, um, to Amazon's offerings and to, to prime and what, what prime subscribers get.

So I, I think, uh, and, and I really do think that this is going to, going to foreshadow what I'm going to talk about in the section I like. Um, I think twitch over time will be more than games i think it will be a a platform for uh watching live um watching people do things live on the internet almost like justin tv originally was formed for i know i said i was going to disagree but like i think that's the obvious correct choice i you know i'd say as a product if it's something that was already sort of being integrated but they're using this as a completely different channel to a completely different audience um and and we're really not seeing kind of like the the the it i would call it more of a product acquisition if you could somehow get to Twitch from Amazon,

but you just can't. It's a completely different access to a completely new set of customers with a different business line. And one that, despite all the sort of integrations and synergy that we've talked about, I think it's a self-sustaining business. And we don't know that you know for sure amazon doesn't or hasn't yet um broken that out in earnings but super data released this research report saying that the gaming video content market is worth 3.8 billion dollars that was

earlier this year in 2015 um and they're saying that twitch is going to generate 1.6 billion dollars of that revenue this year i think there's no way that that could be right but still even even if it's half of that like you know these research reports are always a little bit thank you for the folks at super data for doing this great research for us but like even if it's a third of that right like let's say it's like $500 million. That's growing quickly. The deal price was only a billion. If it's not already a profitable decision to purchase this company on its own without combining any of these other things, we're a year out.

Yeah, I think it's going to happen real fast. okay so my favorite segment that i want to make sure we keep is what does this acquisition what technology theme does this acquisition illustrate for you one of the things ben and i talk about a lot now i it's one of my favorite things to talk about is like these lasting um themes in technology technology is a space that changes super quickly um but there are these themes that that last generation to generation and you know like the idea that technology comes in waves or um you know scalability all sorts of things how fast things change uh i've got some ben if you if you have thoughts go ahead but i i've got well i'll go first for me twitch really illustrates illustrates this theme that I just love in technology, which is things, oftentimes things that end up being really, really big and world changing. When they start out, they look like a toy. And Twitch, this is like the definition of it looked like a toy in the beginning.

When I was writing that memo, it looked like a toy to me. Video games. What's that? There's no way. Even if this wins that category, it's not that big. But I totally missed the boat that like, A, video games were themselves being transformed into something way bigger than they used to be. But B, video games were just the start for Twitch and this is speculative here it's still mostly video games but i think twitch creative um again foreshadows a future or presages a future uh where twitch is about the original justin tv vision which was people doing things live on the internet television on the internet and live tv on the internet and um and and i just i just think

this is such a great example of the this was something so many people dismissed as small as toy like in the beginning but it's actually become really huge yeah so what you're sort of um to pattern match a little bit here to hear what you're saying is that you know you're sort of, to pattern match a little bit here, to hear what you're saying is that, you know, you're looking at something and you're aware of the incumbents and it looks sort of like a toy to you. And that can't possibly displace whatever the current thing you're using is because it's merely games or it's just a little thing where people are watching other people play video games. What sounds a lot like disruption theory. It sounds a lot like Clayton Christensen sort of. Well, I think the twist here is that I'm not sure even – I don't know. But you could certainly imagine that even the Twitch founders

and management team themselves wouldn't have envisioned this. Yeah, I don't think – I'm not convinced they would do. Yeah, or any more than i don't know if the airbnb founders envisioned that uh one day you know they would have more airbnb would have more hotel you know night stays in a single night than all the other hotel chains in the world like combined i don't if they're not there they will be soon yeah yeah it's interesting so i think like if if we are thinking of in the context of disruption theory and let's say it's like you know google docs sort of um you know

scaring the heck out of office what are what's the incumbent like what are they displacing here where it was it was yeah it was a toy and what's what's the thing they're displacing television because it's you know what uh i don't have the stat offhand, but it's something like the average Twitch user watches like three hours of Twitch a day. Oh, it's insane. Yeah, I've got the stat. It's, yeah, 58% of Twitch users. So that's 58 million people.

That are tuning in at all during the day. Yep. It's not 58 because it's not. On a daily basis instead of a month. Okay. Still a lot of people. Are watching for more than three hours. I mean, this is like once you pop the fun, don't stop.

And that's tough. Love it. Speaking of television and commercials. And yeah, what does that sound like? That sounds like television where people who watch television watch like on average six hours a day. Yeah. Crazy. Crazy.

Ben, what's your grade wait so are we doing this grade today or grade in the future since this is a speculative episode let's grade as if we are historians judging jeff bezos so we're in the future we are future historians it's a weighty task yeah as a future historian looking back at amazon deciding if this was a good decision or not um and you know the dust is still set still settling um you know we have pluses and minuses so i'm not going to pay plus this but i think it's an a even on the conservative basis of how this business line does alone it'll it'll, it'll, it's payback period is incredibly short.

It's going to be two years or less. Um, well, it's, it's hard to throw an exact number on that. We don't know the numbers, but exactly what the, yeah,

it's, it's, it's going to do well. It's not a long payback period. And the, the ways that they're tying into all the existing parts of the business are, um, you know,

not evident yet but there's a lot of prime customer acquisition so good at testing this stuff it's it's just hard to imagine that they're going to screw that part up i think that um you know they have had some acquisitions where they did not do that well in the past but i think that um you know if we see them do kind of this prime turbo combination or we see them leverage any of the, the ad technology sharing or, um, you know, or even if, if it helps AWS is business grow and, and further develop their, their video platform for other people. I think that think that um they just bought elemental technologies

which is a very video encoding very clearly focused on building out the video platform yep um yeah it's it's a solid day okay so here's like i mean again we've been very uh i know we're looking for disagreement here it's hard it's really hard to disagree with if you if twitch stays on the trajectory it's on no doubt this is like i i really think this could be an instagram style acquisition what would have to happen for it not okay so here's what i was going to go with and by instagram style i mean like when we as we talked about on the last show facebook buys instagram for a billion dollars two years later city city group puts out a equity research report on facebook valuing instagram

at 35 billion billion within Facebook. I really think the same thing could happen here. Whether it'll be two years, I don't know, but in a short period of time. Here's how it could go wrong if we're thinking from the future. Amazon is incredibly strong at a lot of things. Amazon is also a company and a culture that is very monolithic. And the senior leaders at Amazon, the people who drive the business, make decisions every day, they're the same people. They've been in place for 10 plus years, all of them.

Andy Jassy, who runs AWSs he's been at amazon at least 15 years amazon itself is only 20 years old um jeff blackburn jeff wilkie uh all the some all the senior people at amazon jeff's jeff bezos his quote s team um now twitch very smartly like instagram they've kept it totally independent Emmett Sher the CEO of Twitch is still the quote CEO of Twitch I was reading an interview with him and he says I'm not the SVP of the Twitch division at Amazon I'm the CEO of Twitch but let's Amazon hasn't done this before we're up here in Seattle this is not Silicon Valley Twitch is in Silicon Valley if at some point they decide to more deeply integrate this make twitch the twitch division of amazon i think they could

really lose a lot of the mojo here well you mean if it looks like imdb or maybe sort of a little bit more like audible or yeah you know and like those the way, if Twitch is going to stay on the growth trajectory it's on, it needs world-class people and world-class talent and people who are motivated. And typically the way you do that in technology companies and in Silicon Valley is with equity and with both literal equity and like metaphorical equity and ownership of the business. Can I have metaphorical equity in ownership of the business um can i have metaphorical equity in this podcast yeah right and um amazon's not a place that gives that to people you know within core amazon it's like you're on the s team or you're not um so i think that's how they could mess it up so far they're making the right moves but that's my my doom and gloom scenario that didn't come with a letter oh yeah um well gosh in that case it would be uh

i don't know b minus i mean of course it would still be great but it would have been not realizing its potential um i don't think they're going to do that yeah i think you have to assign like a likelihood percentage to that screw up and yeah yeah they're doing all the right things so far yeah so we'll say mine's based on the non-doom and gloom perspective which i think we both agree is the more likely path um but the the kind of impressive thing there is b minus even if um they managed to to kind of screw it up on a long-term integration because it's gonna return capital it seems obvious that they got a bargain here yeah i think so too all right the future will tell let us know what you think of this episode the speculative speculative nature, the more freeform

nature. We'll see you next time. Thanks, everyone. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC2, ISO 27001, GDPR, and HIPAA compliance and monitoring, Vanta takes care of these otherwise incredibly time and resource draining efforts for your organization and makes them fast and simple. Yeah, Vanta is the perfect example of the quote that we talk about all the time here on Acquired, Jeff Bezos, his idea that a company should only focus on what actually makes your beer

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