One of the most unexpected trends in gaming over the last decade has been the rise of live streaming, which has mainly been focused on watching other people play video games. It has become a staple in the gaming industry and has been used not only to propel influencers to new heights but also serve as one of the most important user acquisition strategies for games.
Twitch was initially launched in 2007 under the name Justin.tv with a focus on a wide variety of content but quickly found the most traction in gaming. In 2011, Justin.tv founders Justin Kan and Emmett Shear launched Twitch.tv to offer a vertical-specific solution with a focus on live streams of gaming and esports. By the following year, Twitch was attracting 20m unique visitors per month and just 3 years later were acquired for $970m by Amazon (Insider). Since the acquisition in August 2014, Twitch has grown from an average of 392k concurrent viewers to 2.5m in April of 2022. Hours watched have also increased from 291m to 1.86b per month over the same time period.
This was a fantastic acquisition for Amazon. In 2020 Twitch generated an estimated $2.3b revenue through IAPs and subscriptions and $750m from advertising (Business of Apps). Between 2016-2019 they generated a combined revenue of $3.54b from IAPs, subscriptions, and ad revenue.
While it is clear the acquisition has been valuable, we believe that Twitch lacks the ability to continually expand its user base due to a lack of compelling offerings to streamers and increasingly aggressive revenue sharing structures (The Verge).
Over the last two years, Twitch has seen growth stagnate in almost every major metric. Between April 2020 and April 2022, average concurrent viewers is up 4%, average concurrent channels is down 0.6%, and hours watched is up 3.9% (Twitch Tracker). Stay-at-home orders gave Twitch a boost and brought more users to the platform, but Twitch has lacked the ability to keep onboarding new users. Twitch’s biggest asset is its brand name and a portfolio of top streamers, but it is quickly looking like a house of cards.
Here are the main reasons why we believe Twitch will struggle to stay at the top and is in the early stages of dying a slow death:
- Twitch’s reliance on top streamers: Twitch put all of its resources into maintaining relationships with top streamers and keeping them on the platform as that is where the majority of viewership (and monetization) resides. Over the past few years we have seen how weak that relationship is; since 2019 many of their top streamers such as Ninja, Shroud, CouRageJD, Valkyrie, Dr. Lupo, TimTheTatMan, Disguised Toast, and Dr. Disrespect have left Twitch for other streaming platforms (though some have returned).
- Singular unprotected distribution pipeline: Twitch has focused all of its efforts on live streaming, forcing streamers to rely on other platforms for other mediums to stay connected with their fans. A common problem is the lack of video-on-demand (VOD) support which is integral for a live streamer's success. This is an important area for fans and new audiences to access a streamer's most compelling content without having to watch it live. Live streamed content also lacks the high switching costs that uploaded VOD content platforms have. Major streamers such as Ninja have more subscribers on YouTube (23.9m) than they have followers on Twitch (18.2m). In the long run, it will make more sense for streamers to manage their relationships with their fans on one platform (not many).
- Strangling streamer revenue: It was recently reported (Bloomberg) that Amazon is pressuring Twitch to increase profitability and find new ways to monetize the platform. Part of that rumor was that Twitch would be scaling back the subscription revenue of its top-partnered streamers (from 70% to 50%). The other strategy is to increase ad placements within broadcasts. Top Twitch streamers have already become vocal on social media (Hasanabi) and even seem to be open to non-exclusivity being the norm (Stanz).
Takeaway: Twitch is in a precarious position. Streamers have become more important to the platform than the platform is to them with the rise of competitors like YouTube and Facebook. This appears to be the beginning of the end of Twitch in the streaming wars. While we do not believe Twitch is in immediate danger, the lack of a long-term sustainable strategy that benefits both streamers and viewers is why we expect Twitch’s position in the gaming industry to shrink dramatically over the next 2-3 years.