How Twitch.tv Works and Its Business Model

Video games are generally perceived as solitary engagements for the gamers, or at the most engaging other gamers in multi-player games. However, the reality is different. People like to watch others play games. Twitch's business model works on the addictive appeal and strong network of gamers and viewers and makes money out of it. This article explains how Twitch works, how it makes money, its developments, and competition. (See related: How to Game the Video Game Industry)

Twitch.tv, owned by Amazon.com (AMZN), is an online service used for watching or broadcasting live or prerecorded videos of gameplays. The broadcasting player usually includes an audio commentary. His own video may optionally appear on the corner of the screen via a webcam, and there is also a chat feature where viewers can comment or ask questions.

Almost any video game of any genre can be broadcast and viewed on Twitch. Twitch regularly hosts E-tournaments where various players fight it out for millions of other viewers to watch with live commentary and news. Twitch also hosts events and demos of new upcoming games.

Viewing games on Twitch is registration-free. Broadcasting and chatting require free-of-cost registration. The real-time interactive chatting makes Twitch a real-life social experience in the virtual world. Broadcasters can archive videos forever, making them available for viewing later.

Twitch content is accessible through multiple devices and mediums including PCs, gaming consoles, and mobile devices. Twitch offers access through web browser and dedicated Twitch apps. Twitch offers dedicated software for improved streaming of videos.

Twitch also offers a software development kit (SDK) and Application Programming Interface (API) to integrate Twitch with game devices, websites, and web applications. For example, using the Twitch API, multiple viewers can play a game by issuing commands through chat. It results in millions of page-views and increased subscription to Twitch. (See related: Can Games Make You A Better Investor?)

According to the official Twitch site traffic stats: Twitch attracts over 100 million unique viewers with 1.5+ million unique broadcasters per month. 16 billion minutes are viewed per month, with 106 minutes viewed per person per day. Twitch reports more than 15 million installations of its iOS and Android apps.

In early 2014, for the percentage of peak Internet traffic, Twitch was listed fourth behind Netflix, Google, and Apple, but ahead of Hulu, Facebook, and Amazon.

Justin.tv was founded in 2007, which had video content in several categories. It raised $7 million in funding from angel investors.

The popularity of the gaming category increased tremendously, which led to a dedicated spin-off called twitch.tv in June 2011. It successfully raised $15 million in Sept. 2012, and then another $20 million in Sept. 2013.

In Feb. 2014, the original justin.tv was renamed to Twitch Interactive as Twitch maintained its prominence. There were rumors of possible acquisition by Google’s YouTube (GOOGL) in mid-2014, but it was Amazon.com that acquired Twitch in August 2014 for $970 million. As of today, Twitch continues to operate independently as a wholly-owned subsidiary of Amazon.

Ustream.tv, YouTube, and Dailymotion are the primary competitors for Twitch. Youtube is the most prominent one, as it recently announced a dedicated YouTube Gaming platform in June 2015.

Twitch makes money by advertising and subscription fees. Advertisers include various gaming companies, game portals, game developers, and game event organizers that get a highly targeted audience-base who are practically addicted to video games.

Twitch offers Turbo membership for $8.99 per month, which allows users ad-free viewing of Twitch content, and other enhanced features for using Twitch.

Its revenue-sharing model with broadcasters is an attractive option that brings lots of talented gamers to its platform. It ultimately results in increased revenue for Twitch. (See related: 5 Video Game Stocks to Power Up Your Portfolio)

Twitch broadcasters can apply for the Twitch partnership program, which enables them to get a cut from the advertisement and subscription revenue received by Twitch. Acceptance into the program requires approval, which is based on certain requirements like having a minimum number of viewers, and a minimum of broadcasts per week. As of now, there are more than 10,000 members of the Twitch Partner Program.

Twitch also allows users to accept PayPal donations from other users, which can be received for sharing game-tips, cheats, and hacks.

Twitch has also partnered with game development companies that offer rewards to outstanding gamers, including scholarships.

E-tournaments are regularly conducted on the Twitch platform, which allows reward opportunities for winning players.

In 2014, Twitch managed to make $1.6 billion, claiming 43% of market share of the total $3.8 billion market (source: SuperData Research). While Twitch has maintained its lead position, Google’s YouTube and others are catching up fast. The technology world sees rapid changes, with new ventures toppling old established leaders in no time. Twitch can bank upon its dedicated user base and backing from Amazon but needs to keep itself innovative and rewarding for users to continue its lead. (Further reading: How the Video Game Industry Is Changing and How the Video Game Industry Works.)