Why Twitch Gaming Service Is Worth $1 Billion to Google

By Don Reisinger

Although some are debating the value of Twitch, it doesn’t really matter that much to a company like Google. Google has plenty of cash to spend on corporate acquisitions it believes will add value to the company. That $1 billion will be easily replenished in just a quarter of good results. So, while Twitch might not seem like a bargain at first blush, for Google it’s just another relatively small investment.

According to the latest data for Twitch, the company has 50 million monthly active users, including more than 1 million people each month who stream games. That’s a large enough user base that it could make a difference for YouTube and for Google, especially in the streaming market. It’s big enough to be an additional attraction to advertisers.

According to several reports, Microsoft was willing to pay more than $1 billion to acquire Twitch and integrate the streaming service into its suite of online gaming services, called Xbox Live. There has been some analyst speculation that Google wanted to take away what Microsoft wanted, which prompted the company to spend $1 billion on Twitch.

Although YouTube has more than 1 billion users, the company has been a bit slow to expand in the live-streaming space. According to data from Sandvine for the first half of 2014, YouTube accounted for 13 percent of downstream traffic in the U.S. at peak periods, and that was almost entirely uploaded content to its site. While YouTube has dabbled in live-streaming with presidential debates and other events, Twitch gives it the entrée it needs to get going in that space.

Twitch has some major partnerships with brands YouTube might want to work with. For instance, Twitch streams content from CBS Interactive, Destructoid and other prominent destinations for gaming news. While that’s part of the Twitch business model, YouTube might want to walk into those companies’ offices and make clear that their reach could extend even further if they partnered with YouTube. Google has been seeking more professional content through YouTube, and Twitch might just help the company achieve that goal.

There’s little doubt that there are synergies between Twitch and YouTube. For one thing, Twitch already has a partnership with YouTube to stream some of it content to its users. In addition, game companies are constantly updating content to YouTube and promoting their trailers on the service. By bringing Twitch into the fold, Google could capitalize even further on the lucrative gaming market.

Twitch is no slouch in the streaming space. At last count, the company had 50 million monthly active users, up from 45 million in April. With Google now joining the mix, those numbers could grow even more quickly in the coming months. Twitch is growing fast, which might have made Google want the company all the more.

It’s hard to believe how high Twitch’s traffic actually is to this point. According to Sandvine, Twitch now accounts for 1.35 percent of peak downstream traffic in the U.S., topping popular services like HBO Go. It also puts the company within striking distance of Hulu, Amazon Video and even Facebook, which account for less than 1.9 percent of peak downstream traffic in the U.S. Wow.

Twitch has a business model already, which makes the acquisition much simpler for Google. In far too many cases, major companies acquire startups that have no business models, and they need to find a way to generate some income. Twitch is using partnerships and ads to generate income, and with Google’s help those figures will only grow. It’s entirely possible Twitch returns a positive investment for Google when it’s all said and done.

Several reports have been swirling over the last several months suggesting Google will be investing heavily in home gaming. While the company has dabbled in it a bit by making Android and Google Play titles more TV-friendly, it hasn’t gone all-in. It’s possible that the Twitch acquisition is the first step in making a determined push into the gaming market.