Acquired - Twitch

0:00All right David you ready. I'm ready Ben. All right Welcome to episode three of acquired This is the one where we talk about Twitch today. We're gonna 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 and You know feedback is a gift Ben. Yeah, thank you We really like hearing from everyone and you know well originally our goal was to set out an 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 space

0:59Yeah, 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 people are generally positive and optimistic and there's exploding market there but a lot more to talk about.

1:24As 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. All right, listeners. Now is a great time to talk about a new partner of ours here on acquired, LaGoura, the agentic operating system that is redefining how the world's best legal teams work.

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3:38Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at logora.com slash acquired and just tell them that Ben and David sent you. So we're changing locations a little bit tonight. We are in the wonderful den of David's home.

4:07here on the creative and secure SSID of default to. We're really creative in the show like Rose and Paul household. Yes. Yes. So thank you so much for your generous generous hospitality, David and Jenny. Always happy to have been. And you listeners as well. All right. Let's get on with it. Let's jump into it. So right about what was this 14 months ago.

4:34There 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. If you were watching either of the previous incarnations of this company, you wouldn't have seen this end coming.

5:02and the incarnations being first just in that TV, which I believe was one of the first white combinator companies. Am I right there? Yeah, I don't know what batch one of the one of the early one is like 2007, I think. Justin TV is this incredible, you know, before smartphones before a lot of the or before smartphones got big anyway. I'm kind of before GoPro and all that. Justin Con.

5:25strapped a camera to himself and broadcast what he was doing all the time 24-7. I ended up going through Y Combinator with the kind of 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 mean, this was a Crazy concept. Yeah, and ultimately it didn't work. No, even when they, you know, they got a little bit became a platform or anyone could stream anything live. There were competitors. There was use stream. 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

6:17To stream whatever they wanted live there's incredible amounts of piracy a whole bunch of CD 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 yeah, so that was 2007 fast forward a couple 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, spin off 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.

7:11Now, you know, it was 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 umbrella company. And I think it was, and social cam being, this is one of those things that like, as VCs, we often hate this for that company's, although sometimes they work, but in this case, Instagram for video quote unquote, not a thing, or at least not a thing at that point in time.

7:39Yeah, great, great idea though. I mean, I think that 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. 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. Yeah. Well, and it's interesting. It got...

8:01Wide adoption with this was the era of the Facebook steroid era. It's like the baseball steroid era of 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, they wanted those companies that stole one of those kind of the graph. They stole the graph. And so and so crazy, you know, social cam spins out from Justin that TV.

8:30In 2011, ends up getting acquired less than a year later by Autodesk. Autodesk bin. Acquires social cam for $60 million. Crazy Vity, 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.

8:59Is twitch and twitch for for anyone is not a gamer out there I actually was looking into a little bit today I'm kind of where the name comes from and and cuz that is a certain feel to it and you go to the site and it's purple and it's got definitely that I'm kind of gamer vibe and it attracts a you know a pro gamer audience and that sort of sort of archetype and Twitch gameplay is the is a reference to you know that there are games that are much more strategy based and there are games that are kind of 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...

9:54a dedicated streaming platform for streaming yourself playing video games on your computer. Which, you know, I think most of our listeners, 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. Increasingly. You know, universes and gaming is itself. I mean, coincided around this time with the development in the gaming industry of MOBAs and things like League of Legends and Dota and basically games becoming services and Prox that could live on and develop these huge, you know, in the past, before about this time, games would be, you know, package software that you buy on a disc and you'd stick in your console or your PC and you'd play it by yourself and you'd have an experience, maybe you'd play it for 100 hours and then you beat it and you're done. But now at this time, games started becoming living, breathing services. World of Warcraft was the first example of this, but then it's just completely

11:08uh come to to revolutionize the whole industry this model and so now you have games that just live on and on as experience is the weekly reset it's incredible to see you know that with with uh the weekly or monthly hearthstone is 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 to 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 play crazy It's it's almost as if in 2007 when the iPhone came out somebody would have told you that What did we just have was 11 people working for Instagram when it was acquired or something 11 12 13 something like that that a company with a number of employees in the teens that made an app whatever that was for this

12:06smartphone, uh, would get acquired by Facebook for a billion dollars in 2012. You thought they were crazy. Yeah. And it's interesting how 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, 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

12:51Open Twitch as a dedicated, I think they spent some time where there were several months where they were just working on Twitch, not improving Justin TV, reopened Twitch to the public. And it goes to show you, 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 get into the topic of the show, which is an acquisition. So to start that off, I don't think we've actually said the actual facts. August 25th, 2014.

13:20Acquisition rumors have been swirling about Twitch for months. People think Google and YouTube are about to buy the company. It makes sense to me. It 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.

13:48buying Twitch $970 million in cash by the way Who could have foreseen this huge strategic error by the Twitch management team and board Not negotiating for stock here So Amazon closing share price on August 25th 2014 $300 and 3434 and two cents Amazon closing share price today 14 months later $665.60. It would be a win if I actually owned a property here in Seattle. It's a shame of still renting. All right, listeners. Now is a great time to tell you about a longtime friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year on audit or a static PDF. Then everyone would nod and you're done. But in an AI first world, that doesn't hold up anymore.

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15:51Trust has to be continuous now, which is why Vanta automates your security, your compliance, and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get a thousand dollars off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for a thousand dollars off and just tell them that Ben and David sent you. You just mentioned something about not negotiating for stock. Do we know that this is an all cash deal? It was an all cash deal. So that's what a billion dollars in cash looks like. Could have been two billion dollars. But that's a 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

16:49They 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? It's just, yeah, last on Instagram.

17:14you know, celebrating, now years after the acquisition, hitting 400 million monthly active users. Now, these visitors are not necessarily logged in, but they're, I guess they're probably tracked by IP address or something, so they know exactly, you know, how they- Just like any web property. Yeah, not count reaping sessions, but 100 million monthly active visitors. It's crazy. I mean, it's gotta be like every, the demographics are wider spanning than this, but like every teenage boy in America.

17:43Not America. I think this is one of the key things about Twitch too Like it's America, but like That's only a small part of it. It's everywhere. Yeah around the whole world South Korea is the kind of the hub of the gaming right capital the world. Yeah professional gaming capital the world and It's it's a it's pretty amazing platform. So one of the other really cool things I think about Twitch Unlike a lot of Oh, 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 You know the the adage that for every you know 100 in the red at terminology 100 lurkers you have you have one One poster or one Yeah, and that that ratio roughly holds here roughly. Yeah One of the things I think is particularly interesting about twitch as a

18:39internet and digital media property is that it's got a really robust and diverse monetization strategy and has for much of its life. So would you call it a three-pronged approach? You could call it a three-pronged approach and it's interesting. You know, it could easily be a four-pronged approach if Twitch, we know, eventually they will get their act together. But basically for our viewers who don't know, Twitch makes money in three ways today.

19:08They 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. Not to mention all the takeover ads and banner ads all over the site. And then they have Twitch Turbo, which is basically a $9.99 a month subscription that you can pay.

19:33to get rid of that advertising on Twitch. It's true. And you get, you know, there's a variety of other things. You can have, you know, colors of your text and custom emojis and a badge and a lot of the sort of gamified and virtual goods. But like, that's a lot of money just to remove ads from one website. Yep. That's a lot of money. That's more than Netflix to simply remove ads from one website on the internet.

20:02or Spotify or I mean I guess on the family plan Spotify but yeah then I think this is just brilliant the other half of 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 which is a button on the site on the page of a streamer to quote subscribe to that streamer for $5 a month and then Twitch keeps half of that $250 a month. Half. Half. This blows my mind. Think about like marketplace businesses where you can take a, you know, 15% take or a 20% take or you look at like the real estate business or you can get like, or Airbnb has a 6% take. Yeah, it's like 12 to 14% but still. Okay. But.

20:5150% 50% 50% so their twitch is getting away with murder basically getting away with my and then let's let's just run through some of the stats here so this is this is some some numbers that are publicly available on the internet would 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 1%. And we know this from a few Twitch streamers have openly talked about in quote open source their economics.

21:29So can we assume there's like a millionish? So you can assume there's about a millionish subscribers. They're paying five dollars a month. And... Subscribers or subscriptions? I'm assuming subscriptions. Okay. So there probably are fewer than that who actually subscribe, but they might subscribe to multiple channels. If this is simple data based on an individual... This is one individual streamer, the percentage of people that watches channel to...

21:57convert. So I think it would be actual subscriptions on the site. It could be higher. So if it's 1% 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. 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.

22:28and 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 take...

22:44six double it because they're only taking half of the revenue state so they're paying credit card processing fees on the whole so it takes six percent out of that but so 95% margin not margin that'd be their take right because like the margin we're not figuring in you know AWS costs or but this is this is just completely they're still monetizing in other ways through advertising and turbo this is just like yearly incremental marginal Yeah, yeah, yeah, true. No addition. 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. Yeah. Not to mention synergies with AWS. It's pretty incredible. It's pretty incredible. And then this might be end up being the biggest form of

23:37of 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.

24:04They'll solicit tips just like you know a street performer would they've got a tip jar and they're using third-party plugins to To do this and And and people are paying them like an incredible amounts of money so I mean Streamers have made people have given it's just like the mobile games business You know people their whales that have given like $1,000 tips $10,000 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 this I'm trying to imagine a scenario where something happens that's awesome enough in some gameplay that I'm watching where I decided it's worth $1,000 Their people that spend thousands of dollars on Clash of Clans been

24:52Yeah, but yeah, but this is differential pricing for entertainment. I'd argue, but I know some says. I know. Scary. All right. Basically, I think the punchline of this discussion here is Twitch has very quickly. Remember this whole.

25:13Business even though it was a spin out from Justin TV was started in 2011. Yeah, it's funny. I mean, we say spin out. It's four years old. You would think in all of this, you know, pivoting around and changing companies and spinning out other companies that this gets extremely expensive and, you know, a lot of times like you look at like a job or any of these companies that take like a series E and F round and get into the private equity and you know, that sort of thing that they take huge sums of money. They only took three runs of funding and it was only 42 million dollars. So, I vividly remember, I can. They kept, I mean, 42 million dollars a lot of money, but they kept it relatively cheap, answering the outcome. I think I can talk about that. I won't use any numbers or names, but when I was in business school, I interned the summer between my first and second years at a one of the

26:02the top really, really amazing venture capital firm called Meritech and they're a late-stage venture capital firm. They only do late-stage investments and it was late spring and I had already lined up my internship. I was going to spend the summer with them and I got a call from one of the partners there and said, hey, I'm looking at this a deal for a company that's raising money. The company's called Twitch. Have you ever heard of it? Do you know anything about it? And I didn't know anything about it. And I did a bunch of research and 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, 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 there's no way this is... It's interesting what's happening here, but there's just no way this is going to be big.

26:59This 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 seen like a very large valuation. It was much less than the eventual acquisition price. And so I wrote a long email. I remember I was 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, Sandit's a partner, basically can't recommend we do this. And this goes to show you, I have so many stories like this. Venture Capital is a humbling business. What company name were you not going to say there? Oh, I wasn't going to talk about any of the numbers, right? Oh, yeah. But suffice to say, had Maritak invested in

27:55Twitch in this round that happened and I forget who did lead the round but a little bit of very nice return But you know, it's interesting would have been a very nice return and especially as a late stage investor where you're trying to get a you know a three extra turn is a good return a five extra turn is a great return and you're talking Total fund like 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 gonna get a good return on yeah But I think it's 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. I thought, wow, I was wrong. I guess it did turn out to be a big company. But now look at Twitch a year later. Billion dollars was pretty cheap. Yeah, so this is the fun part of the show. 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.

28:54Very it's almost it's the same reason that gossip is fun conversation to have it's because it's it's low-hanging fruit everyone can very clearly draw the dotted line everyone can laugh about it and everyone everyone can you know Real man to size and fantasize in which they were picking that winner and you see oh my god 42 million and 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. A billion dollars. So now, 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 what are the kind of market forces and things going on within Amazon right now that actually make that fun to watch?

29:51And 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 they're now standing. 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 in the company's or you know a hundred billion dollar 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 but what's amazing they they've left twitch pretty much alone yeah we've seen we saw something launch a couple weeks ago but you know you would think

30:47After something like this gets acquired, 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 I do single sign in yet? Can you log in with an Amazon? I don't think so. I don't think so either. The first thing they launched was not a unification with the rest of Amazon's properties. It was It's which creative 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 while they're live streaming it like you would watch anybody do their game while they're live streaming it and you know to to soon to really know anything about that But it really interesting how the company did indeed largely leave it alone. Yeah, and

31:45Over time, maybe we'll see them integrate it more into 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, we talked about ad buying and how Facebook's been very open, especially on their earnings calls.

32:12with about how successful selling joint ad buys to add to advertisers between Facebook and Instagram has been. And it's interesting. 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.

32:41And you can imagine Amazon has a big advertising business, especially to companies trying to sell products on Amazon. A lot of video game companies, both console manufacturers, PC gaming accessories manufacturers and games themselves advertise and sell on Amazon. They also advertise on Twitch. You can imagine that being a synergy in the future. Yeah.

33:08Yeah, it's a really interesting business frame is on because one of the things that they're able to do you know by having that that ad network and letting you view Products on other sites and that you know that little i-frame advertisement that you see for an Amazon.com product or any other thing that they're using to 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 and aggregate with your purchase history or if you're not assigned an user to just understand what sites you've been visiting and what sort of things you're going to buy. If having Twitch as a first-party property and integrating some of that ad technology with the large advertising business that is Twitch, there's a lot of potential. 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

33:59Let's take creative for example painting digital tool creative tools These are all areas that they're very natural advertising opportunities and very natural product selling opportunities Could imagine integrations with Amazon on that front. Yeah, I'm in integrations with Amazon. There's two two kind of points. I want to bring up looking back at old old post from the the Justin TV folks in the early days. I think they had started on AWS, moved off 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 2012 and 2014, had pretty much wholly moved back on AWS. So, being acquired by the very company that powers your entire technology platform. I mean, that's...

34:52There's a lot of the harbinger of things to come the Amazon you could say Amazon might have had a real window You know for me I worked in the venture capital business I did spend 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 until 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 degree, degrees of separation away from Amazon in everything in this ecosystem here.

35:49Yep, 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, prime has become a mechanism where people buy almost three times the number of things on Amazon when they're a prime subscriber.

36:20and 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. And historically, Amazon has made huge efforts to get young people in the form of students.

36:46Hooked on to prime home with students. I think first year free for yeah for students. Yeah, and maybe all of us in school free What's the average age of a twitch viewer or you know, it's a you know, I wouldn't call well I wouldn't call it either of us old But the average age of a twitch viewer is definitely younger than both of us yeah, I mean Well, let's face it And and 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 as a compelling value prop I could pay my what is it eight eight or nine bucks a month for turbo or I could pay 99 dollars a year for Amazon Prime and get turbo plus everything else in prime all those videos all that free shipping yeah, yeah, drones dropping things off at your doorstep not to be speculative

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39:27So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. 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? Where 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 a framework for what buckets to drop certain things into. And it's a good opportunity for David and I to disagree a little bit too. So David, what do you think? I'm a little torn here. Could be a product, however, I'm going to go business line because I think, especially thinking back to, I really think you're onto something with this prime when we talk about the value of

40:28the acquisition and measuring its success. 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. I mean, there was prime instant video before which you could argue is somewhat similar, but I think this is a different thing.

40:54You know, that's like movies versus television and this adds the television to to Amazon's offerings and to to prime and what prime subscribers get so I think and and I really do think that this is gonna gonna foreshadow what I'm gonna talk about in the section. I like I think Twitch over time will be more than games. I think it will be a a platform for watching live, 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 I think that's the obvious correct choice. I'd say it's 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 and we're really not seeing kind of like the...

41:54I 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 for sure Amazon doesn't or hasn't yet broken that out on earnings, but Super Data 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. I think there's no way that that could be right. Even if it's even 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

42:53Even if it's a third of that, right? Like, let's say it's like $500 million. Like, 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...

43:19Acquisition what technology theme does this acquisition illustrate for you? One thing Ben and I talk about a lot now that I it's one of my favorite things to talk about is like these Lasting themes and technology technologies a space that changes super quickly But there these themes that that last generation to generation and you know like the idea that technology comes in waves or You know scale ability all sorts of thing how past things change I've got some benefit if you have thoughts go ahead, but I've got well I'll go first for me Twitch really illustrates this this theme that I just love and 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 there's like this is like the definition of it looked like a toy in the beginning when I was writing that memo it looks like a toy to me video games. What's that?

44:18There'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 Again, four shadows a future or pre-sage is a future where Twitch is about the original Justin TV version which was People doing things live on the internet television on the internet and live TV on the internet 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

45:15To 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. Like it sounds a lot like the Clayton Christians, 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 gonna say that anymore. Yeah, or any more than I don't know if the Airbnb founders envisioned that one day, you know, they would have more Airbnb would have more hotel, you know,

46:07Just night stays in a single night. Then all the other hotel chains in the world like combine. I don't know if they're not there. They will be soon. Yeah. Yeah. It's interesting. So I think like 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.

46:36Because it's it's you know what I don't have the stat off hand but something like the average twitch user watches like three hours of twitch. Oh, it's insane. Yeah, I've got to say 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 on a daily basis instead of okay Still are watching for more than three hours. I mean, this is like once you pop a sundown. And that's a 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?

47:20Wait, 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 and the dust is still settling.

47:47We 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's payback period is incredibly short. It's going to be two years or less. Well, it's hard to throw an exact number on that. We don't know the numbers, but yeah. It's going to do well. It's not a long payback period. And the ways that they're tying into all the existing parts of the business are you know, not evident yet, but there's a lot of potential there, and Amazon is so good at testing this stuff. It's just hard to imagine that they're going to screw that part up. I think that, you know, they have had some acquisitions where they did not do that well in the past, but I think that, you know, if we see them do kind of this prime turbo combination, or we see them leverage any of the ad technology sharing or, you know, or even if

48:47It helps AWS's business grow and further develop their video platform for other people. Yep. I think that they just bought elemental technologies, which is a video encoding platform really focused on building up the video platform. Yep. Yeah. It's a solid. Okay. So here's like, I mean, again, we've been very, I know we're looking for disagreement here. It's really hard to disagree with. If you If Twitch stays on the trajectory, it's on no doubt. 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 ahead. And by Instagram style, I mean, when we talked about on the last show, Facebook buys Instagram for $1 billion, two years later, City Group puts out an equity research report on Facebook, valuing Instagram at $35 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.

49:45Here'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 AWS, he's been in Amazon at least 15 years. Amazon itself is only 20 years old. Jeff Blackburn, Jeff Wilkie, all the senior people at Amazon, Jeff Bezos, his quote, S team.

50:34Now Twitch is very smartly like Instagram. They've kept it totally independent. Emmett's share 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 and 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.

51:04I think they can 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? Yeah, you know, and like those, the way, if Twitch is gonna stay on the growth to 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 this podcast? Yeah, right. And Amazon's not a place that gives that to people, you know, within core Amazon. It's like you're on the ST or you're not. So I think that's how they could mess it up. So far they're making the right moves, but that's my doom and gloom scenario. That didn't come with a letter. Oh, yeah.

52:06Well, gosh, in that case, it would be, I don't know, B minus. I mean, of course, it would still be great, but it would have been not realizing its potential. I don't think they're going to do that though. I think you have to sign like a likelihood percentage to that screw up. They're doing all the right things so far. Yeah. So we'll say mine's based on the non-duman gloom perspective, which I think we both agree is no more likely path.

52:33But the kind of impressive thing there is be might as even if they managed to kind of screw it up in a long-term integration. Because it's going to 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 nature, the more freeform nature. We'll see you next time. Thanks everyone.

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