Let’s start with the premise that Twitch, the video-game watching network, is the next ESPN – you know, the jewel in Disney’s crown that, by itself, is worth $50.8 billion. Like ESPN, Twitch is about live competition, and, like ESPN, Twitch does exceptionally well in the highly desirable young male demographic.1 Obviously this is the best possible outcome, far-fetched though it may sound. It is certainly an outcome that would make Amazon’s purchase of Twitch for $970 million an amazing deal. It would not, however, have anything to do with e-commerce.
Just a few weeks ago I wrote in Losing my Amazon Religion about Amazon’s focus on Prime Video in particular:
It’s this focus on original and exclusive content – and devices that deliver it – that concerns me, and not because it’s expensive. Rather, what exactly does this have to do with e-commerce?
Needless to say, the Twitch acquisition hasn’t exactly quelled my concerns. It has, though, led me to question my premise; if Amazon is behaving, shall we say, erratically, the issue is perhaps not with Amazon but with my understanding of the company. So I went back and reread the origin story of Amazon in Brad Stone’s excellent The Everything Store:
[John] Doerr’s optimism about the Web mixed with Bezos’s own bullish fervor and sparked an explosion of ambitions and expansion plans. Bezos was going to do more than establish an online bookstore; now he was set on building one of the first lasting Internet companies.
Over the following pages Stone documents how Amazon expanded from books to music and then to DVDs. These categories, along with packaged software (including games) eventually made up the “Media” category in Amazon’s earnings. Today this media category is about 25% of Amazon’s revenue, but, according to my understanding, almost all of Amazon’s “profits.” Said profits are reinvested into all the other parts of Amazon’s business, but, it must be asked, to what ends? Is Amazon really an e-commerce company? Or are they a company bent on dominating the world?
Returning to Twitch, I can think of three possible reasons for Amazon’s purchase:
Amazon is looking to buttress their media business – That Media business that underpins the Amazon machine is not in the best of shape; traditional media forms are going away, and, except for books, Amazon does not have a ready-made replacement from a revenue standpoint. In this view, Twitch offers a new revenue model (ads, primarily, although there are also premium subscriptions) that can help fill this gap.
Amazon wants to challenge Valve and/or Sony and Microsoft – I think this is a very underreported aspect of this deal. Steam in particular has taken a significant bite out of Amazon’s packaged software business, and I know that Amazon has at least internally considered building a direct challenger. Amazon has also included gaming capability into the Fire TV, including an optional controller, and has bought their own gaming studio, basically following the script I laid out in How Apple TV Might Disrupt Microsoft and Sony. However, as I insinuated in Gaming and Good Enough, hard core gamers are very unlikely to so easily abandon the established players. In this view Twitch is a backdoor way to “get in” with hardcore gamers; imagine a Fire TV built around Twitch and Amazon’s own games.
Amazon wants to rule the world – I put it this way only partly in jest, because I’m starting to suspect this is a bigger factor than anyone – including Amazon’s everpatient investors – fully appreciates. Remember, Bezos sold books not because he was obsessed with being a bookseller, but because he identified a dominant strategy; as Stone’s book suggests, perhaps Bezos’s goal was simply to build a dominant company, and e-commerce has only ever been a means to an end.
The second reason, that this deal was about gaming, is interesting from a tactical perspective, but the far more intriguing question is the weight one gives to reasons one and three. If you buy reason three – that Bezos wants to rule the world – then there is even more urgency attached to reason one. To be clear: Amazon’s continued expansion is built on the profits from its media category, but it is that category that is the most under threat from the digitalization of said media. In other words, what if Twitch is both offense and defense?
Regardless, the takeaway for me – and what should be the takeaway for all of Amazon’s investors – is that Amazon is not an e-commerce company. No more pointing at the fact that e-commerce is only 6% of U.S. retail, or that Amazon’s multi-sided network of merchants and customer base are the key factors in determining their future success. No, the company is going for something a whole lot bigger, even as their foundation is being slowly watered down by the same Internet that made Bezos feverish nearly 20 years ago.