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I guess I belong to that 90s era who still enjoys playing Mario, Contra, etc. Let’s not be nostalgic. Though I know you are. I was introduced to Twitch last year by my gamer friend Siddharth Thakur. I could never have imagined that such a technology exists to live stream gaming activities. Twitch is one example that emphasizes that we are moving towards a virtual age. That made me interested in learning about Twitch’s business model and more so about how Twitch money? Before we delve into the technicalities, let’s get some basic clear.
What is Twitch
Twitch is an American video live streaming service that focuses on video game live streaming, including broadcasts of esports competitions. In addition, it offers music broadcasts, creative content, and, more recently, “in real life” streams. Content on the site can be viewed either live or via video on demand.
Justin Kan and Emmett Shear founded Justin.tv in 2007 with several content categories. Justin.tv allowed anyone to broadcast videos online and encouraged users to broadcast a wide variety of user-generated live video content, called “broadcasts.”
The gaming category grew especially fast and became the most popular content on the site. In June 2011, the company decided to spin off the gaming content as TwitchTV. Twitch attracted $35Mn of investments till 2013, and by then, it was already profitable. Twitch has become the most popular e-sports streaming service by a large margin, leading some to conclude that the website has a “near-monopoly on the market.”
Even though there are multiple gaming services these days like YouTube Gaming, Facebook Gaming, DailyMotion but Twitch has dominated the market. As per Statista Global Consumer Survey, 59% of U.S. gamers said they used Twitch in the last 12 months, ahead of YouTube Gaming’s 50%.You will find more infographics at Statista
Twitch is available on almost any device, including their website, mobile apps (Android and iOS), gaming consoles (PlayStation, Xbox, etc.), or via Smart TVs. There are over 10Mn unique streaming channels on Twitch and has approximately 8Mn active streamers as of September 2021.
Grand Auto Theft V is the most-watched game on Twitch, with 237,000 unique viewers in June 2021 who collectively spent 170Mn hours. Refer to the infographic below for more insights.
What makes Twitch business model so unique?
Twitch is designed to be a platform for content, including esports tournaments, personal streams of individual players, and gaming-related talk shows. Twitch hit 3.2 million users per month within its first year.
In 2014, Google was rumored to be in talks with Twitch for acquisition for $1bn but later on backed out. Amazon took this opportunity to enter into the gaming space and add another jewel to its Prime Model. Amazon acquired Twitch for $970 Mn in an all-cash deal, and Twitch, as per some estimates, is now valued at $15bn, giving Amazon a 1400%+ return on its investment. While Netflix, Disney, and Prime competed for streaming TV, Twitch maintained its dominance in streaming games.
Some of the statistics that prove the success of the Twitch business model:
- Twitch currently gets 140 million unique visitors every month. That’s up from 55 million users in 2015.100,000+ live Twitch broadcasts are going on at any given time.
- The Twitch app has been downloaded over 100 million times.
- League of Legends is the most-watched title on Twitch, with video game streams accumulating 42.55 billion watch hours.
- As per TwitchTracker, Twitch is watched in 30+ languages, with English making up 48%.
- Jan ’21 received the maximum watch time of 88Mn+ hours.
- In 2021, 8.5Mn unique creators and 2,790,000 average concurrent viewers are streaming each month.
Twitch is used as a teaching tool for video game tutorials. The presence of mass numbers makes Twitch an attractive proposition for learners to interact with each other and the instructor in real-time. Twitch is also used for software development learning, with communities of users streaming programming projects and talking through their work.
- In 2014, Twitch acquired GoodGame Agency, which owns the esports teams Evil Geniuses and Alliance. Amazon in 2016 divested GoodGame Agency to their respective members due to conflict of interest concerns.
- In 2016, Twitch acquired Curse, Inc., an online video gaming communities and gaming-oriented VoIP software, operator.
- In 2017, Twitch acquired video indexing platform ClipMine to translate visual information in videos – like objects, text, logos, and scenes – into metadata that can help people more easily find the streams they want to watch.
- In 2019, Twitch acquired the Internet Games Database (IGDB), a user-driven website similar in functionality to Internet Movie Database (IMDb), to improve its search capabilities and better direct viewers to precisely the right content.
How does Twitch make money?
Twitch works on a Freemium business model. What does that mean? Twitch platform offers its services free of charge to streamers and consumers. A consumer can unlock some advanced features through premium subscriptions and in-app purchases.
This model works best for Twitch as its target audience is teenagers who have little spending power, but the mass volume of these consumers (~7 Mn a month) has carved out another revenue stream: video advertising.
As per Backlinko, Twitch made an estimated $1.54 billion revenue in 2020, primarily from subscriptions and In-app purchases. So, the three clear revenue streams through which Twitch makes money:
- Premium Subscription– A Subscription allows a viewer to pay a minimum of $4.99 per month to support a channel, either on a recurring or one-time basis. Subscribers (subs) get access to the channel’s emotes and other benefits. There are multiple tiers available to subscribers that want to provide additional levels of support by raising the rate to $9.99 or $24.99 a month. As per the business of apps, Twitch collects 50% of the subscription fees and passes the rest to the channel.
Twitch adopts local subscription pricing. Twitch subscription prices are adjusted to reflect better the cost of living where a subscriber lives. This program lowers the price of subscriptions for viewers in most countries. Twitch claims that a simultaneous increase in volume will compensate for lower revenue. It’s a clear growth strategy adopted by Twitch to increase its subscriber base.
- In-App Purchase– In June 2016, Twitch added a new feature known as “Cheering,” a unique form of emoticon purchased as a microtransaction using an in-site currency known as “Bits.” Bits are bought using Amazon Payments, and cheers act as donations to the channel. Users also earn badges within a channel based on how much they have cheered.
As per Statista, Twitch generated ~$218Mn of revenue in 2020 through In-app purchases and has already generated ~$195Mn of income in H1 of 2021. In Oct ’21, Twitch stated that viewers on iOS could purchase recurring subscriptions by updating their Twitch app to the most recent version. Once the Twitch app is updated and any remaining Sub Tokens are redeemed, viewers can subscribe with as little as three taps. Subscribe. Confirm. Approve purchase.
- Video Advertisement– Post its acquisition by Amazon in 2014, advertisement-free Twitch was offered to Prime customers. In 2018, Twitch announced that it would no longer provide advertising-free access to the full service to Amazon Prime subscribers. This privilege requires a separate “Twitch Turbo” subscription or an individual channel subscription. Twitch shares this revenue with its streamers at varied CPM. As per backlink, Twitch made $231.8Mn in advertising in 2020.
What does the future hold for Twitch?
The success in this space is a function of two factors: the user’s interest in playing online games and the user’s interest in watching content.
- The global video game market was valued at USD 151.06 billion in 2019 and is expected to grow at a Compound Annual Growth Rate (CAGR) of 12.9% from 2020 to 2027. Technological proliferation and innovation in both hardware and software are the key factors driving the growth.
- On the other hand, the global online streaming services market is expected to grow by USD 149.96 billion, at a CAGR of over 18% during 2020-2024. Both the levers of success for game streaming are demonstrating a solid growth trajectory.
YouTube Gaming has poached TimTheTatMan and DrLupo, two massive Twitch stars, in exclusive deals. But Twitch, which holds 70%+ hours watched, has nothing to be afraid about. But what it needs to be careful about is data leakage.
In Oct ’21, there was a data leak as confirmed by Twitch: “The exposed data primarily contained documents from Twitch’s source code repository, as well as a subset of creator payout data.” Although the company claims that no passwords were leaked and consumer impact was minimal, it raises a serious question on data security.
Nevertheless, Twitch has the unsaid advantage of being the first mover with all the loyal userbase and functionality. Competition in business is always healthy. With YouTube sharing 70% of revenue with creators and Twitch only sharing 50%, what would be interesting is to see that how this space evolves in terms of technology and interest from future entrepreneurs.
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