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Why Google Wants to Hitch Twitch and YouTube

Internet giant's $1 billion acquisition is not just about videogame streaming. It’s about redefining the future of live and social TV

Google is poised to get its mitts on Twitch. But the billion-dollar acquisition isn’t just about live-streaming videogame play, as robust as Twitch’s large and fast-growing audience is. In the long run, the deal would pave the way for YouTube to redefine and lead the future of social TV.

As first reported by Variety, Google has reached a preliminary agreement to buy Twitch for more than $1 billion in cash, according to sources familiar with the talks. (Company reps have declined to comment.)

San Francisco-based Twitch sprang out of Justin.tv, a website designed for users to “lifecast” themselves with online video. That never took off, but videogamers began using the service to broadcast their feats to fans, and the company launched the dedicated Twitch.tv service in mid-2011.

Since then, Twitch has exploded. The service now has 45 million-plus monthly users — who watch an astonishing 106 minutes of video daily (on average!) — with more than 1 million members who stream video. The monthly user number is up from 20 million in 2012 and 3.2 million when it launched. And Twitch is now integrated directly into Microsoft Xbox One and Sony PlayStation 4 consoles, as well as through titles from game publishers.

SEE ALSO: YouTube to Acquire Videogame-Streaming Service Twitch for $1 Billion: Sources

Those big numbers alone make Twitch a valuable target for YouTube, for which gameplay videos already are a popular category. Check out YouTube star PewDiePie, who specializes in the genre: The Swede’s 27 million subscribers make him YouTube’s most-subscribed channel with 4.5 billion views to date.

Twitch’s largely 18-29 male demo “is a large and largely incremental audience to YouTube and is growing quickly,” Citi analyst Mark May wrote in a research note. “In short, we like the strategic synergies and see the building blocks to a rational (even attractive) pricetag” of $1 billion.

Privately held Twitch, which has raised $35 million in funding, doesn’t disclose financials. But the company is cash-flow positive and doesn’t need additional outside funding to maintain its growth, according to sources. Twitch generates revenue through ads as well as subscriptions, with about 300,000 paying members today.

But for YouTube, the potential of Twitch isn’t just about, say, letting fans of “League of Legends,” “Titanfall” or “World of Warcraft” watch superstar gamers narrate the action and chat about it in real time. Again, that’s clearly an attractive business, but beyond that, YouTube would be expected to extend the live-streaming model to other categories — both on YouTube, including with multichannel network partners like Disney’s Maker Studios and Machinima, as well as potentially with mainstream TV channels. YouTube’s own efforts to intro live broadcasting have had limited success so far.

“Twitch delivers the obsessive power of watching something unfold live in a way that YouTube cannot and other media typically do not,” Forrester Research analyst James McQuivey said. “The trick will be finding those genres where the match between interested viewer, obsession for the content and passion for connecting with others socially all line up as elegantly as they do for gamers.”

Think about what YouTube could do with Twitch: Users could watch the Oscars, the Super Bowl or “Dancing With the Stars” — with voiceover commentary from their favorite personalities and a highly interactive set of social features.

Of course, getting to that point would require participation of the traditional TV networks. But as long as they can generate ad revenue, something like Twitch for TV would be a no-brainer. As McQuivey noted: “Live programming is the thing keeping the hopes of the TV industry alive right now.”

It’s worth pointing out that when Twitch first launched, videogame publishers were wary about the service. “Twitch was a hard sell in the early days,” VP of marketing Matt DiPietro said in an interview this week. “People could not wrap their heads around this.” The industry has come around now — big time — and game companies see Twitch as a fantastic promo and lead-generation tool. (DiPietro would not comment on YouTube’s play for Twitch.)

There are caveats to a YouTube-Twitch tie-up. For one thing, U.S. regulators may challenge the deal if they determine the combination of the No. 1 online-video platform (YouTube) and the No. 1 live-streaming Internet service (Twitch) raises anticompetitive issues. Google’s lawyers are preparing for such an objection, sources said. “Anytime Google is involved in any deal, it gets extra scrutiny,” said VideoNuze industry analyst Will Richmond.

YouTube could also mishandle Twitch, and alienate Twitch’s users, if it makes unpopular changes the existing service; witness the negative reaction when YouTube last fall started requiring Google+ to comment on videos.

But if the deal goes through, YouTube would become a place for both on-demand and live video: certainly the model for the future of Internet-video entertainment and perhaps even TV, too.

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