Google Inc. Could Put Serious Pressure On Amazon.com Inc.'s $1 Billion Purchase

By Markets Fool.com

Last year, Amazon acquired live game streaming service Twitch for $1.1 billion. Although Twitch represented an expansion of Amazon's presence in the streaming media market, many analysts believed that it acquired the service to keep it out of Google's hands.

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Source: Twitch.

Since then, Twitch expanded to new platforms and added new services like live music streaming. The service now has 100 million monthly viewers and 1.5 million broadcasters. Meanwhile, interest in e-sports has continued to rise. Last November, Twitch's world championship broadcast of League of Legends was watched by 32 million people, 8.5 million of whom were watching simultaneously. By comparison, the live stream of Super Bowl XLVII on CBSwas watched by three million people.

However, Google could soon strike back with its own live-streaming service for YouTube at E3 this June, according to The Daily Dot. If that happens, will Amazon's pricey purchase be put underserious competitive pressure by YouTube's audience of over 1 billion users?

How Twitch makes money
Twitch operates on a freemium model. For $5 per month per channel, viewers can access HD video streams, members-only chat rooms, and receive special badges and emoticons. Twitch also generates revenue from video ads. A limited group of popular broadcasters receive a cut of subscription and ad-based revenue through its Partner program.

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Last August, Re/code estimated that those two sources of revenue generated at least $72 million in annual sales. Considering that Twitch more than doubled its monthly viewers between 2013 and 2014, it could eventually generate hundreds of millions in annual revenues for Amazon as it continues to scale.

Taking down Twitch
If Google wants to challenge Twitch, it will likely try to poach its top broadcasters with more generous ad-based compensation, then nix the subscription requirements for HD streams to attract more viewers.

Google could do this because many users already post Twitch replays and video game content on YouTube. Last year, Nintendoand YouTube signed a partnership which let partners split their ad revenue with Nintendo on videos featuring its first-party games. YouTube also recently upgraded its playback capabilities to 60fps at 4K resolution to enable smoother playback of video game content.

By leveraging those strengths in pre-recorded video game content, YouTube could attract a lot of gamers with a dedicated live-streaming platform.

Lessons of the past
However, Google has dabbled with live streaming before. In 2013, it offered live streaming capabilities to all individual broadcasters, which fueled the creation of live channels for music, sports, news, and even video games.

Unfortunately, Google shot itself in the footby implementing a "Content ID" system which was intended to weed out copyrighted content. That system automatically deleted accounts featuring gameplay videos. Even after publishers told YouTube that the videos had their blessing, many channels never returned. Those jilted broadcasters left in an exodus to Twitch.

Live game streaming on YouTube. Source: Screenshot.

Expanding YouTube's live game streaming section into a major site wouldn't be technically difficult. However, winning back former gaming broadcasters whom it previously booted could be tough, even with more generous ad revenues.

A double-edged sword for YouTube
Even if YouTube can win back broadcasters and viewers, streaming live games in HD will likely increase bandwidth expenses.

Google doesn't disclose YouTube's revenues, but The Wall Street Journal estimates that its revenue rose 33% year-over-year to $4 billion last year, accounting for 6% of Google's top line. However, rising expenses for content licenses and better streaming technology caused YouTube's bottom line to barely break even.

It's tempting to think that launching a full-blown Twitch rival could be an "ecosystem play" which could provide Google with better search data to build targeted ads. Unfortunately, YouTube ads aren't chosen based on Google search data. Instead, it relies on Google's DoubleClick unit, which builds user profiles based on visits to non-Google sites, to build targeted ads. That gap prevents YouTube from displaying ads for games which users previously searched for on Google.

Can Google catch up?
Google already dropped the ball once with live game streaming. Unless Google inks major deals with e-sport giants Valve and Riot Games, which are both currently partnered with Twitch, it will face a tough uphill battle. Google might win back some individual broadcasters with more generous incentives, but that effort could be a costly one which could cause YouTube's bottom line to slip back into the red.

The article Google Inc. Could Put Serious Pressure On Amazon.com Inc.'s $1 Billion Purchase originally appeared on Fool.com.