) recently announced its decision to acquire video-game service
company Twitch for a total of $970 million. Twitch essentially
allows gamers to stream their gameplay live to a large audience.
The company has over 50 million monthly unique visitors and could
help Amazon expand its marketing reach. Amazon outbid Google (
) to acquire Twitch, which means that a healthy competition between
Twitch and Youtube could result in a better service for gamers and
game lovers. As far as Amazon is concerned, the company can make
incremental profits by monetizing Twitch's video streams through
pre-roll ads, which tend to be effective. It will most certainly
leverage the platform to promote its own merchandise sales by
gauging viewer preferences. The company has seen a slight slowdown
in the growth of its media segment and the acquisition presents an
opportunity to rejuvenate that growth. If we do a
back-of-the-envelope calculation, we find that the levels of
monetization required to justify the buying price are certainly
within Amazon's reach.
Our price estimate for Amazon stands for $348
, implying a slight premium to the market price.
See our complete analysis for Amazon
Can Amazon Monetize Twitch Effectively?
Amazon is paying nearly $1 billion for Twitch which implies that
the company will expect the acquisition to generate incremental
cash flows of roughly $50 million in 2015, growing annually at a
CAGR (compounded annual growth rate) of 15% in foreseeable future.
This is based on our assumption of weighted average cost of capital
) of 12% and terminal growth rate of 2.5%. WACC is slightly on
higher side as Twitch is a technology company and operates in a
industry that evolves fast. These incremental cash flows can come
either directly from monetizing Twitch's video streaming, or
indirectly through advertisements and promoting the sales of
Amazon's merchandise through Twitch's platform.
Twitch's unique visitor count for July 2014 stood at 55 million.
These users viewed a total of 155 billion minutes of content
generated by over 1 million gamers, video game publishers,
developers and others. This implies that annual viewing could stand
at somewhere around 1.9 trillion minutes. If we assume that an
average gaming video lasts 30 minutes, this could translate into
roughly 60 billion videos viewed annually. Let's further assume
that Amazon manages to put pre-roll video ads in 50% of these
videos, at an average rate of $5 per 1000 views which is still
lower than that for Youtube
, it will imply incremental revenues of roughly $150 million. At an
assumed EBITDA margin of 35% for Twitch, these revenues will imply
EBITDA of roughly $50 million. However, this is just one way to
monetize. Amazon could easily promote sales of its own merchandise
and target Twitch's user base, thus opening more revenue
opportunities. Therefore, the monetization required to justify the
acquisition is achievable.
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