Episode 3 Twitch

In episode three of "Acquired," hosts Ben and David explore the acquisition of Twitch by Amazon in 2014, reflecting on its growth from a live streaming platform for gamers to a potential multi-billion dollar business line. They discuss Twitch's monetization strategies, which include advertising, subscriptions, and potential future integrations with Amazon's Prime service. The hosts also consider the broader implications of the acquisition, such as Amazon's expansion into live content and gaming, and how Twitch's success exemplifies technology products that initially seem like toys but can evolve into significant industry disruptors. Additionally, they touch on the importance of maintaining Twitch's independent culture to continue its trajectory. The episode features a sponsorship from Pilot, an accounting firm for startups, and concludes with the hosts speculating on Twitch's future and grading the acquisition from a historical perspective.

• In this episode, Ben and David discuss Twitch and its acquisition history.
• They respond to listener feedback and introduce a change in their approach to include more contentious topics.
• Twitch is highlighted as a recent acquisition with open questions and an exploding market.
• The hosts express gratitude for listener reviews and feedback, and invite more interaction via their website and Twitter.

"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."

• Ben acknowledges the feedback from listeners and indicates a shift towards more diverse and potentially challenging content.

"And there's still a lot of open questions and I think people are generally positive and optimistic and there's an exploding market there, but a lot more to talk about."

• David points out the current state of Twitch, highlighting the optimism and the growing market, but also acknowledging the need for further discussion.

• Pilot is a company that provides accounting, tax, and bookkeeping services to startups and growth companies.
• They are the largest startup-focused accounting firm in the US, with reputable backers like Sequoia, Index, Stripe, and Jeff Bezos.
• Pilot's services include setting up and operating a company's entire financial stack, from general ledger to budgeting and financial sections of board decks.
• The hosts emphasize the importance of focusing on core business activities and outsourcing non-core functions like accounting.

"Pilot is the one team for all of your company's accounting, tax and bookkeeping needs, and in fact, now is the largest startup focused accounting firm in the US."

• The speaker introduces Pilot, highlighting its comprehensive services and its position as a leading accounting firm for startups.

"And accounting is like example number one of what he's talking about. Every company needs it. It needs to be done by a professional. You don't want to take any risk of anything going wrong, but at the same time, it has zero impact on your product or customers."

• The speaker explains the rationale behind outsourcing accounting functions, emphasizing that while essential, these services do not directly impact the product or customers.

• Twitch's history is traced back to its origins as Justin TV, one of the early Y Combinator companies.
• Justin TV began with Justin Kan broadcasting his life 24/7, which was revolutionary at the time but ultimately did not succeed.
• The platform evolved to allow anyone to stream anything live, leading to issues with piracy and a lack of a clear winning use case.
• The team pivoted to Socialcam, an "Instagram for video," which gained traction through Facebook but did not find wide consumer adoption.
• Autodesk acquired Socialcam for $60 million, demonstrating the volatile nature of the startup landscape.
• Twitch emerged as a dedicated platform for streaming video games, tapping into the growing gaming industry and the rise of games as services.

"Justin TV is this incredible. Before smartphones, before a lot of the or, before smartphones got big. Anyway, kind of before GoPro and all that, Justin Khan strapped a camera to himself and broadcast what he was doing all the time, 24/7 ended up going through y combinator with the kind of the crazy."

• Ben describes the groundbreaking concept of Justin TV, which was a precursor to the rise of personal broadcasting and live streaming.

"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."

• David delves into the origins of the name "Twitch" and its association with fast-paced, skill-based gaming.

"It's almost as if in 2007 when the iPhone came out, somebody would have told you that. What did we just said? Was it eleven people working for Instagram when it was acquired or something? 11, 12, 13, something like that. That a company with 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 thought they were crazy."

• Ben reflects on the unpredictability of the tech industry, drawing parallels between the surprising acquisitions of Instagram and Twitch.

• The success of Twitch is attributed to the perseverance of the Justin TV team and their continuous exploration of live streaming use cases.
• The team observed that gaming was a popular use case on Justin TV, leading to the creation of Twitch.
• The hosts discuss the importance of prototyping and user feedback in developing successful products.
• Twitch's focus on gaming tapped into the evolving landscape of video games as ongoing services and experiences.

"And 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."

• Ben emphasizes the importance of observing user behavior to identify successful product features and directions.

"And so now you have games that just live on and on as experiences."

• David comments on the transformation of the gaming industry, where games have become ongoing services with sustained user engagement.

• Acquisition rumors about Twitch had been circulating for months before the announcement.
• Speculation was that Google and YouTube were set to acquire Twitch.
• Official announcement on August 25, 2014: Amazon acquired Twitch for $970 million in cash.

"August 25, 2014. Acquisition rumors have been swirling about Twitch for months. People think Google and YouTube are about to buy the company."

This quote sets the stage for the acquisition discussion, indicating that prior to Amazon's purchase, there was a common belief that Google/YouTube would be the buyer of Twitch.

• Twitch management and board potentially made a strategic error by not negotiating for stock in the deal with Amazon.
• Amazon's stock price significantly increased 14 months after the acquisition, suggesting the deal could have been worth more if negotiated in stock.

"Who could have foreseen this huge strategic error by the Twitch management team and board not negotiating for stock here?"

This quote criticizes the decision-making of Twitch's management for not considering stock options in the acquisition deal, as the value of Amazon's stock rose considerably after the purchase.

• Twitch experienced rapid growth after being acquired by Amazon.
• Monthly unique viewers increased from 55 million (August 2014) to 100 million (January 2015).
• The platform's demographic is broad and global, with significant viewership outside the United States.

"Twitch has continued post acquisition to just grow like a rocket ship."

This quote emphasizes the significant growth of Twitch following Amazon's acquisition, highlighting its success and expanding viewership.

• Twitch's monetization strategy is robust and diverse, referred to as a "three pronged approach."
• Revenue streams include advertising, Twitch Turbo subscriptions, and revenue shares with broadcasters through viewer subscriptions.
• Twitch keeps 50% of the revenue from broadcaster subscriptions.
• There is potential for additional revenue from tips given to streamers, which Twitch may eventually monetize.

"You could call it a three pronged approach, and it's interesting. It could easily be a four pronged approach."

This quote discusses Twitch's multifaceted monetization strategy, which includes several revenue streams and the potential for more.

• Twitch's business model is highly profitable, with a significant portion of revenue coming from high-margin areas like subscriptions.
• Back-of-the-envelope calculations estimate Twitch's revenue from subscriptions to be substantial, with high margins even after accounting for credit card fees.
• The platform's success is notable given its relatively low amount of venture funding ($42 million) and the short time since its inception (2011).

"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."

This quote presents a rough calculation of Twitch's subscription revenue, highlighting the profitability of this aspect of their business model.

• One of the speakers recounts a personal anecdote of underestimating Twitch's potential during a venture capital internship.
• The speaker's initial analysis concluded that Twitch's valuation was too high and its market too niche.
• The story illustrates the unpredictable nature of venture capital investments and the potential for missed opportunities.

"I thought, there's no way this is going to be big."

This quote reflects the speaker's initial skepticism about Twitch's growth potential, which was proven wrong in hindsight, demonstrating the challenges in predicting the success of tech startups.

• Amazon's acquisition of Twitch for a billion dollars considered cheap in hindsight.
• The challenge for Amazon is to grow the investment and get a return.
• Amazon is recognized for its impressive innovation and impact on Seattle's tech ecosystem.
• Twitch has been left mostly independent post-acquisition, similar to Instagram by Facebook.

"But now look at twitch a year later. Billion dollars is pretty cheap."

"Amazon is one of the most impressive and greatest technology companies not only of our time, but probably ever."

"We really wanted to have an excuse to talk about Amazon."

These quotes highlight the perceived value of Twitch after its acquisition and Amazon's reputation for innovation. The speakers express their intention to delve into Amazon's business strategies and the rationale behind the Twitch acquisition.

• Twitch's first major launch after acquisition was not integration with Amazon but a creative content initiative.
• There's speculation about potential integration of Twitch with Amazon services like AWS and Prime.
• Twitch has been largely independent, similar to Instagram's relationship with Facebook post-acquisition.

"The first thing they launched was not a unification with the rest of Amazon's properties."

"It was, you know, they did this super, super know marathon of watching Bob Ross paint to kick off."

The quote discusses Twitch's initial steps after being acquired by Amazon, focusing on content rather than immediate integration with Amazon's ecosystem. This independence is noted as a strategic move that could lead to future growth and innovation.

• Twitch's main revenue stream is advertising, which could synergize with Amazon's advertising business.
• Amazon's ad network provides insights into user behavior which can be leveraged with Twitch.
• Potential for Twitch to integrate with Amazon's product selling and advertising, especially in creative channels.

"Advertising still, by all estimates we don't really know. But by all estimates is probably the biggest revenue stream for Twitch and Amazon."

"There's a lot of potential."

The quotes discuss the potential revenue synergy between Twitch's advertising model and Amazon's existing advertising business. The speakers highlight the opportunities for integration and the benefits of Amazon's insights into user behavior for targeted advertising.

• Twitch's integration with Amazon Prime could attract younger audiences and increase Prime subscriptions.
• Amazon Prime subscribers tend to purchase significantly more, and Twitch's Turbo service could be bundled with Prime.
• The potential for Twitch to evolve beyond gaming into other content areas, enhancing Prime's value proposition.

"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."

These quotes suggest a strategic move to integrate Twitch's Turbo service with Amazon Prime, which could significantly increase the value of Prime subscriptions and attract a younger demographic to Amazon's ecosystem.

• Amazon's AWS provides insights into trending tech companies, potentially influencing the Twitch acquisition.
• Twitch had previously migrated back to AWS, indicating a strong technological alignment with Amazon.
• Amazon's significant influence on the tech ecosystem, particularly in Seattle, underscores its strategic moves.

"Amazon might have had a real know for me. I worked in the venture capital business, I spent a lot of time thinking about tech and Twitch was like totally under the radar screen for me."

"Being acquired by the very company that powers your entire technology, there's, there's."

The quotes reflect on Amazon's strategic advantage through AWS and the potential for Amazon to identify undervalued tech opportunities like Twitch. The speakers also note the seamless technological integration due to Twitch's use of AWS.

• Statsig is introduced as a new sponsor for the podcast.
• Statsig is a feature management and experimentation platform that helps companies ship products faster and measure impact.
• Notable Statsig customers include Notion, Brex, and Microsoft.

"Our sponsor for this episode is a brand new one for us, Statsig."

"Statsig is the modern version of that promise and available to all companies building great products."

The quotes introduce Statsig as a sponsor and describe its services, emphasizing its role in aiding companies with product development and data-driven decision-making.

• The speakers propose a framework to categorize acquisitions into people, technology, product, or business line.
• There is debate over whether Twitch falls under the product or business line category.
• The acquisition's potential impact on Amazon Prime is a focal point for its categorization.

"Does it fall in the category of people, technology, product or business line? Or is it another thing completely?"

"I'm going to go business line because I think, especially thinking back to, I really think you're onto something with this prime."

The quotes outline a framework for analyzing acquisitions and suggest that Twitch's acquisition by Amazon might be categorized as a business line move, particularly due to the potential synergies with Amazon Prime.

• Twitch is recognized as a distinct product channel targeting a new audience separate from Amazon's core customer base.
• The gaming video content market's valuation is significant, with Twitch expected to generate a substantial portion of the revenue.
• Even conservative revenue estimates suggest Twitch's acquisition was financially sound with a short payback period.

"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."

The quote emphasizes that Twitch operates as an independent business line with its own customer base, distinct from Amazon's traditional market.

"Superdata released this research report saying that the gaming video content market is worth $3.8 billion. That was earlier this year in 2015, and they're saying that Twitch is going to generate $1.6 billion of that revenue this year."

This quote highlights the substantial market size for gaming video content and Twitch's expected revenue contribution, indicating the financial promise of the acquisition.

• Twitch exemplifies the theme that transformative technologies often start looking like toys, underestimated in their early stages.
• The acquisition reflects common technology themes like scalability and the unpredictable growth trajectory of innovative platforms.
• Twitch's evolution from a gaming platform to potentially broader live internet content aligns with historical patterns in technology disruption.

"Twitch really illustrates this theme that I just love in technology, which is things, oftentimes things that end up being really big and world changing. When they start out, they look like a toy."

The quote captures the notion that groundbreaking technologies can initially appear insignificant or trivial, as Twitch did with its focus on gaming.

"Sounds a lot like disruption theory. It sounds a lot like the Clayton Christensen sort of."

This quote links Twitch's underestimated beginnings to Clayton Christensen's disruption theory, suggesting that Twitch could disrupt traditional industries like television.

• Twitch has an exceptionally high user engagement, with a significant percentage of users watching content for extended periods.
• The platform's user engagement metrics are comparable to traditional television viewing habits.

"58% of twitch users are watching for more than 3 hours. This is like once you pop the fund, don't stop."

This quote underscores the high level of user engagement on Twitch, with many users watching streams for several hours, similar to TV consumption patterns.

• The acquisition is graded optimistically, considering the potential integration with Amazon's existing business lines and the rapid payback period.
• Concerns are raised about Amazon's ability to maintain Twitch's independent culture and innovative edge within the larger corporate structure.
• The potential for Amazon to underutilize Twitch's capabilities is acknowledged but deemed unlikely given Amazon's track record.

"It's going to be two years or less. Well, it's hard to throw an exact number on that."

The quote suggests that the financial return on Amazon's investment in Twitch could be realized in a very short time, indicating a successful acquisition.

"I really think this could be an Instagram style acquisition."

The quote compares Twitch's potential within Amazon to Instagram's explosive growth and increased valuation after being acquired by Facebook, implying high expectations for Twitch's success.

• Amazon's history of maintaining a monolithic culture and decision-making structure could pose risks to Twitch's innovative environment.
• The independence granted to Twitch and its leadership is crucial for its continued growth and success.
• The discussion explores the balance between integration and independence in the context of corporate acquisitions in the tech industry.

"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."

This quote expresses concern that excessive integration of Twitch into Amazon's corporate structure could diminish its unique culture and impede its growth trajectory.

"And Amazon's not a place that gives that to know. Within core Amazon, it's like you're on the s team or you're not."

The quote highlights the potential cultural clash between Amazon's hierarchical structure and the more egalitarian Silicon Valley model that Twitch embodies, which could affect employee motivation and retention.

• Crusoe is a clean compute cloud provider that specializes in AI workloads, partnering with Nvidia and utilizing stranded or clean energy.
• The company's data centers are located at energy sites where power would otherwise be wasted, providing both environmental and cost benefits.
• Crusoe's approach differs from traditional cloud providers by focusing on AI and leveraging remote energy sources for competitive advantage.

"Because Crusoe's cloud is purpose built for AI and run on wasted, stranded or clean energy, they can provide significantly better performance per dollar than traditional cloud providers."

This quote explains how Crusoe's specialized AI infrastructure and unique energy strategy result in better performance and cost savings compared to general cloud services.

"It's super cool that they can put their data centers out there in these remote locations where quote unquote energy happens, as opposed to the other hyperscalers such as AWS and Google and Azure who need to build their data centers close to major traffic hubs where the Internet happens because they are doing everything in their clouds."

The quote contrasts Crusoe's innovative placement of data centers at energy sites with the location strategy of larger cloud providers, emphasizing Crusoe's unique advantage in the AI cloud market.