• by Ashish Mistry , October 7, 2014

Amazon finalized its somewhat surprising $970 million acquisition of Twitch at the end of last month. For months it had been rumored that YouTube was the top suitor for Twitch, which makes sense: the No. 1 online video destination in the world acquiring the No. 1 live video streaming destination for video gaming in the world. Great. Done Deal.

Except, not so fast. Here comes Amazon. Amazon?

For many (probably most that don’t play video games), prior to the billion dollar acquisition rumors and reality, Twitch was an unknown. For those that do follow the fast-growing $93 billion (at last count) gaming industry, or the online video industry overall, Twitch is a company to be reckoned with. The San Francisco-based company has been quietly building a massive following of young gamers – 55 million unique visitors in July alone – that turn to the site an average of one hour and 45 minutes a day to live broadcast their videogame play, watch others game online and chat with like-minded fans.

Many viewers pay a small, $5 monthly subscription fee to support their favorite content creators and watch them ad-free.

At first blush the Amazon-tie doesn’t seem clear, however as Amazon continues to expand beyond being the Internet’s largest purveyor of “things,” and grow its media empire (through original programming; original hardware – the company’s Fire line of phones, TV products, tablets; — its 2-year-old Games Studio, etc.), the Twitch synergy makes more sense. Now, it owns a rapidly growing content company that’s making money by engaging the young, desirable but hard-to-reach cord cutter audience

It makes sense on another level too as Amazon builds up its own advertising network.

U.S. digital video ad spending continues to increase significantly (up 56% this year alone), and YouTube owns close to 20% of the digital video ad market in the U.S., both per eMarketer. If YouTube had snapped up Twitch, as anticipated, the company would control a significant portion of all videos watched online (which is why it’s been speculated that antitrust concerns were the reason for the YouTube deal falling apart)

With its new owner, Twitch can continue its meteoric rise as a serious and worthy competitor for ad dollars against YouTube in gaming – a genre where YouTube has had little competition until now. By not bringing Twitch into the YouTube video behemoth it allows advertising dollars to be more equitably spread across multiple platforms and gives advertisers more options for reaching this desirable audience.

Another key advertising opportunity at play here is Amazon’s ability to capitalize on the higher conversion rates that video advertising has over display ads and leverage these for greater monetization opportunities. With AdWords, Google earns money when an ad is clicked, but it ends there. For Amazon, ad dollars are just the beginning. It also offers an opportunity integrate relevant Marketplace products directly into the Twitch content.

Combined with the higher conversion rates of video, found on Twitch, the company will not only be able to capitalize on the advertising, but also on higher margins of directly selling the product through the Amazon Marketplace. This eases the friction of transactions and brings Amazon’s media ambitions and its traditional retail roots together seamlessly.

Amazon has pledged to let Twitch continue operating as an independent business but I will be watching to see how Amazon integrates this smart buy into its advertising strategies over the coming months now that the ink is dry.