Twitch's Bad Investment: What Went Wrong?

In 2014, Amazon acquired Twitch for $970 million, intending to create a platform for creators to compete with YouTube, Instagram, and TikTok. Despite its popularity, Twitch has been a bad investment for Amazon, as it has failed to turn a profit. In 2024, Twitch CEO Dan Clancy confirmed that the company was not profitable, and Amazon has since laid off a significant portion of its workforce. While Twitch's business model focuses on close-knit communities and has a large user base, it has struggled to monetise its platform effectively. Amazon's decision to charge Twitch for infrastructure use has also contributed to its losses.

Amazon's acquisition of Twitch for \$970 million

On 25 August 2014, Amazon acquired Twitch for $970 million. The deal was made in cash. The acquisition was one of the most significant in Amazon's history, with the company intending to create a platform for creators to compete with YouTube, Instagram, and TikTok.

Twitch is an interactive video live-streaming platform, which focuses on gaming but also features music, sports, talk shows, and other types of content. The platform is particularly popular among video game enthusiasts, with almost any video game of any genre able to be broadcast and viewed. In 2023, Twitch users spent over 1.3 trillion minutes watching videos on the platform, and it continues to break viewership records.

Despite its popularity, Twitch has been criticised for charging streamers high commissions. In 2023, the company fired 400 people, and in 2024, it laid off a further 500 employees, representing 35% of its workforce. In January 2024, Twitch CEO Dan Clancy confirmed that the company was not profitable, stating that "Amazon has been extremely supportive of Twitch and a big thing for being sustainable over time is ensuring that we don't lose money".

Twitch accounts for less than 0.5% of Amazon's revenue, and it is not possible to invest exclusively in Twitch. However, as Twitch is a subsidiary of Amazon, buying shares of Amazon is a way to invest in Twitch.

Twitch's lack of profitability

There are several reasons for Twitch's lack of profitability. Firstly, the high costs of infrastructure and bandwidth required to support livestreaming are significant. It is expensive to host live video streams, and with 1.3 million streamers going live every day, often for hours, the costs quickly add up. Only a small fraction of these streamers attract large viewerships and the ad revenue that comes with them.

Secondly, Twitch Prime, which is included with Amazon Prime memberships, is likely losing Amazon money in the long run. While it used to be that Prime subs and regular paid subscriptions earned streamers the same amount, Twitch recently changed this so that the value of a Prime subscription will be based on the subscriber's location and what they pay for Amazon Prime. This results in less revenue for Twitch to pay out.

Thirdly, Twitch has been unable to compete with rival streaming platforms like YouTube and Kick. In an attempt to stem losses, Twitch has stopped offering large exclusive streamer deals, and it has also ceased operating in expensive markets like South Korea.

In addition to these issues, Twitch has faced a decrease in user spending on paid subscriptions, and a slowing of new user sign-ups. The company has also had to deal with the impact of streamers leaving the platform for competitors, and the rise of shorter-form video content, which has seen a drop in the number of hours spent on the platform.

To cut costs, Twitch has laid off a significant portion of its workforce, increased ads during streams, and adjusted revenue sharing with streamers, reducing their cut. These changes have been unpopular with streamers and viewers, and it remains to be seen if they will be enough to turn Twitch into a profitable company.

High commissions charged to creators and streamers

Despite its popularity, Twitch has been criticised for charging high commissions to creators and streamers. The platform has been described as "anti-creator", with some arguing that this has led to a loss of content creators to competitors such as YouTube and Mixer.

Twitch's revenue-sharing model allows broadcasters to receive a cut from advertisement and subscription revenue. However, this is dependent on factors such as the number of viewers and broadcasts per week. Broadcasters can also earn money through Bits, which are virtual goods that viewers can purchase to support their favourite streamers. Additionally, viewers can subscribe to channels for a nominal fee, with a portion of these funds going to the streamers.

The high commissions charged by Twitch may be a result of Amazon's decision to make Twitch unprofitable. Amazon has been accused of charging Twitch for the infrastructure it uses, such as AWS, and increasing ad density. This allows Amazon to justify cutting revenue splits and shifting profits to other parts of its business.

While Twitch's popularity continues to grow, with the platform breaking viewership records, it has struggled with decreasing user spending on paid subscriptions and a shift towards shorter-form video content. This, coupled with high operational costs, has resulted in Twitch being unprofitable and a source of net loss for Amazon.

Twitch's business model and revenue streams

Twitch's business model is based on a freemium structure, where users can access most content for free, but pay for premium features through subscriptions. The platform allows content creators to share audiovisual content, with a primary focus on the live-streaming of video games. However, users can also stream other subjects, such as art, sports, music, and cooking.

Twitch generates revenue through a combination of advertising, subscription services, and virtual currency transactions. The company reported an estimated annual revenue of around $500 million in 2023, with over 35 million average daily visitors.

Twitch's revenue streams include:

• Advertising: Twitch displays targeted ads from brands before, during, or after a stream, leveraging its large audience to engage with advertisers.
• Subscription Services: Twitch offers viewers the opportunity to subscribe to their favourite streamers at different price points, ranging from $4.99 to $24.99 monthly. Subscribers gain access to exclusive benefits, such as ad-free viewing, custom emotes, and special chat privileges.
• Virtual Currency Transactions: Twitch introduced "Bits," a virtual currency, to provide viewers with a way to support their favourite streamers. Bits can be purchased directly from Twitch or earned by watching ads. These virtual tokens can be donated to streamers, who can later exchange them for real-world currency.

In addition to these revenue streams, Twitch also generates income through merchandise sales and its partnership program, which offers exclusive benefits to qualified streamers.

Amazon's support for Twitch

Amazon has shown its support for Twitch in a number of ways since acquiring the company in 2014.

Firstly, Amazon has allowed Twitch to operate independently as a subsidiary, giving it the freedom to make its own decisions and maintain its unique brand identity. This was a key reason why Twitch chose to be acquired by Amazon instead of Google's YouTube, which had also made a bid for the company.

Secondly, Amazon has provided financial support to Twitch, with the company receiving the backing of significant investments of venture capital. Amazon has also integrated Twitch with its subscription service, Amazon Prime, providing benefits such as ad-free streaming and monthly offers of free add-on content for Prime members.

Thirdly, Amazon has leveraged its relationships in the media industry to benefit Twitch, particularly in the realm of content licensing. Amazon's Web Services platform has also been advantageous for Twitch.

Finally, Amazon has supported Twitch through its other acquisitions in the video gaming space, such as the developers Reflexive Entertainment and Double Helix Games. These acquisitions have likely provided synergies and opportunities for collaboration with Twitch.

Despite these shows of support, Twitch has faced challenges in recent years, including declining profitability, mass layoffs, and increasing competition from rival streaming platforms. However, Amazon's backing will hopefully enable Twitch to navigate these difficulties and continue to thrive in the live-streaming space.

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