After weeks of reporting that Google would acquire game-streaming site Twitch to bolster its YouTube empire, it appears those talks have fallen through and Amazon will now acquire the site. The YouTube logic was so obvious that it didn’t even require explaining, but Amazon’s acquisition is a bit more of a head-scratcher. I thought I’d look at the context for Amazon’s acquisition to see why they might be doing this, and what it might mean. This analysis builds in part on several previous posts on Amazon, which you can see here. The first part of this post focuses on the context, which may be useful if you haven’t looked at Amazon’s media business in depth. If you just want to skip straight to the analysis of where Twitch might fit in, you can click here.
Media is the slowest-growing part of Amazon’s business
First, the obvious stuff. Amazon divides its business into three product segments for reporting purposes: Media, Electronics and other general merchandise, and Other. Other comprises mostly Amazon Web Services (AWS), advertising revenue and Amazon-branded credit cards, while Media includes both physical and digital media including books, music and video. The Electronics and other general merchandise category is basically the catchall for all other e-commerce revenue. When you look at year-on-year growth rates for these three segments, Media is clearly the slowest-growing of the bunch:
That’s not altogether surprising. Essentially all of Amazon’s business rests on the transfer of spending from legacy categories to categories it competes in, whether that’s e-commerce replacing bricks-and-mortar retail or digital content replacing physical content (or even cloud computing replacing premise-based computing). As such, Amazon’s addressable market is directly tied to three factors:
- the size of the legacy markets it’s seeking to disrupt
- the degree to which those markets are shifting into categories Amazon competes in
- the market share Amazon is able to capture.
If we look at these three factors for Amazon in the Media category, the picture isn’t that great:
- The overall size of the various Media markets (principally books, video and music) is small in comparison to the overall retail market (books is about $15 billion a year in the US, video is about $18 billion between sales and rentals, and music is about $7 billion per year, for a total of $40 billion, compared with total retail sales in the US of a trillion dollars per quarter, and e-commerce sales alone of $300 billion per year)
- The switch to digital and online sales is well underway, with 41% of video revenues in the US in the last four quarters going through digital channels, for example
- Amazon’s share in categories other than books is relatively low.
In addition, Media is the one category where Amazon enjoys a very significant share of the legacy as well as the new category, since it’s one of the biggest sellers of CDs, DVDs and physical books. As such, the ceiling is low, the transformation is well underway, and Amazon has such a large stake in the legacy business that even a rapid transition from physical to digital formats doesn’t benefit Amazon greatly (and may actually hurt it in categories where its digital share is lower than its physical share, including music and video). Continue reading