To a non-millennial, someone who plays video games all day is a couch potato, and someone who watches the players is beyond understanding. Yet Twitch, the game-play video-streaming service, had to find a buyer because it needs more hardware to meet overwhelming demand.
In a question-and-answer session on Reddit in May 2013, Emmett Shear, the founder and chief executive of Twitch, was asked why the company's service was "so awful in Europe." His answer, repeated word-for-word below, described a vicious circle:
- Twitch launches
- Twitch is popular in Europe, though has no European data centers
- Twitch struggles to grow in Europe
- Twitch opens first EU data center! Much rejoicing!
- Immediately, European viewers grow. They watch more video, they watch higher bitrates, it's awesome! And then the EU data center is saturated. Everyone says Twitch sucks in Europe.
- Twitch opens two more data centers and expands the first. More rejoicing!
- You know what happens next. Everyone says Twitch sucks in Europe.
This was an expensive race for Twitch. In February, the research company Deepfield established that the company was fourth in the U.S. in Web-traffic generation, after Netflix, Google and Apple -- a rather distant fourth, admittedly, though still ahead of Facebook and Amazon, for example. Twitch sends out petabytes -- thousands of terabytes -- of information every day. Since its sole big competitor, Own3d.tv, went broke early last year, Twitch has struggled to deliver decent video quality, especially outside the U.S. Watching it now from Germany, I get delays and highly pixelated video.
One way to boost capacity quickly -- and perhaps solve the quality problem once and for all -- is to stop building data centers and move to the cloud. That's what Netflix, which dwarfs all other services in traffic volumes, did between 2009 and 2012. It's now a cloud-based platform, and its capacity comes courtesy of Amazon Web Services.
"We are not very good at predicting customer growth or device engagement," Netflix admitted in a 2010 blog post explaining its choice of cloud partner. "Cloud environments are ideal for horizontally scaling architectures. We don't have to guess months ahead what our hardware, storage, and networking needs are going to be."
Twitch is in a similar bind. Like Netflix, it needs architecture changes to move to the cloud, and that costs time and money. It makes sense to find a partner that's already dealt with similar issues on a similar scale, and not many companies are qualified. In fact, there are only three: Google, Microsoft and Amazon, the top competitors in the global market to provide cloud services.
A possible Google purchase of Twitch was much talked about in May, after Variety magazine reported it as a done deal. Google was supposed to have agreed to pay $1 billion, not a wild amount given Twitch's 55 million monthly visitors and the doubling of the site's audience in 2013. The synergies with Google's other services were obvious: Game players often upload videos of their virtual adventures to YouTube. It seemed natural that Google would want to be a leader in streaming all kinds of content, including games-as-sports. Besides, Google's cloud capacity is unmatched, enabling Twitch to expand as fast as demand would allow.
Amazon, it turns out, was offering about as much: $970 million in cash with a further $100 million tied to business objectives. In his deal announcement, Shear explained:
We chose Amazon because they believe in our community, they share our values and long-term vision, and they want to help us get there faster. We're keeping most everything the same: our office, our employees, our brand, and most importantly our independence. But with Amazon's support we'll have the resources to bring you an even better Twitch.
This explains the choice neatly. Twitch won't have to tie-in with another service, as would have inevitably have happened with Google's YouTube, and Shear wants to grow a standalone business. There's probably no need to dwell on why Microsoft wasn't in the running, given its struggles trying to integrate Nokia. Since Shear can't afford Netflix's longer, independent route, he's made an agreement that cedes as little operational control as possible.
For Twitch's engineers, the Amazon deal is good news. Amazon's cloud services are more geared toward external clients than Google's. Twitch's streamers, some of whom make a living by playing video games for their audience, should also be happy. Amazon is a big distributor of games and lately a developer, too, so advertising revenue, which gets shared with the streamers, should increase. It's as an advertising platform, a showcase for its game business, that Twitch is most interesting to Amazon.
So, don't weep for your loss, Google: Amazon was a better fit for Twitch all along.
This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.
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Leonid Bershidsky at email@example.com