2 ms·

Isn't Twitch very much a net loss?

by Ygg2 3y ago

jmyeet 3y ago
Twitch loses money because Amazon has decided to make Twitch lose money. Why? Because Amazon is charging themselves for the infrastructure Twitch uses (ie AWS). It does that to justify cutting revenue splits (of subscriptions and ads) and increasing ad density. The minimum ad density now is generally 4 minutes per hour. Example: say I'm Pottery Barn and I sell furniture in the US. I sell a table for $500. It costs $100 to make in China, $50 to ship to the US and $150 in store costs (eg utilities, staffing, rent, amortized capex, etc). You might say I've made $200 profit. But let's say my corporate structure is to have 2 subsidiaries: PB Manufacturing and PB Retail. The first makes the table. The second manages the stores and sells the table. If PBM charges PBR $150 for the table then PBM makes $50 in profit and PBR makes $150. If PBM charges $300 for the table then PBM makes $200 in profit and PBR breaks even. This is what I mean when I say Twitch's profitability is a chosen narrative. There are many reasons to do this. Tax is a big one. Maybe you pay less tax in China so you prefer to take profit there. Maybe you want to argue stores aren't profitable to resist demands for higher wages or higher rents. The above is an example of "transfer pricing" or "profit shifting". What's the difference? Transfer pricing is illegal. Profit shifting isn't (within limits; it technically has to be "at arm's length" and other requirements).
- snapcaster 3y ago
  Can you expand on this? You're saying Twitch is only unprofitable in an accounting sense but would be a viable business if on its own? Saying their AWS costs are $0 seems like it would be even more "fake"
  - deleted 3y ago
    [deleted]
  - fkyoureadthedoc 3y ago
    So Twitch is only a viable business model once you own enough data centers.
  - wongarsu 3y ago
    A video streaming platform isn't a natural fit for a hosting service famous for charging outrageous rates for outgoing traffic. If they were neither owned by Amazon nor had a special deal with AWS (like Netflix presumably has) they wouldn't be using AWS for anything touching actual videos.
- plorkyeran 3y ago
  Twitch runs its own data centers and does not use AWS for the video streaming platform. There are probably some incidental expenses which are actually Amazon profits, but they’re much smaller than you’re making them out to be.
  - Quarrel 3y ago
    Say what? https://aws.amazon.com/ivs/ https://aws.amazon.com/ivs/ "Use the same live streaming technology and global infrastructure that powers Twitch." Did IVS grow out of Twitch? Sure. That core is now a piece of AWS infra though, even though the team was initially built at Twitch. (Obviously these things are weird to talk about in a vacuum, because all the pieces are 100% owned by the same parent. The splits we see can be changed with the wave of a CFOs pen, usually when they want to change how we view some overarching piece of the business.)
  - nicolas_17 3y ago
    Not sure what they use for video streaming, and it might even depend on where you're watching from, but VODs are definitely on plain old S3 + Cloudfront.
- Solvency 3y ago
  How does a government meaningfully and objectively determine what is transfer pricing vs profit shifting in practice? Are they even capable of distinguishing the difference in a case like Twitch:Amazon? Furthermore... isn't this the crux of Hollywood accounting..?
- jedberg 3y ago
  > Twitch loses money because Amazon has decided to make Twitch lose money. This is totally untrue but keeps getting repeated. Yes, within Amazon, the non-AWS business units pay AWS to use AWS. But they pay cost plus a small percent, not retail rates. The cost to non-AWS businesses is the same as if they had to do it all on their own (actually a little less since they get to leverage AWS's economies of scale). The profitability of the other business units is actually improved this way. They would be paying more if they were independent and doing it on their own. This is why Amazon is so allergic to spinning out AWS as its own business.
  - stefan_ 3y ago
    That seems impossible to determine. AWS retail charges for things that have an impossible relation to actual costs (think traffic) to begin with.
    - jedberg 3y ago
      AWS knows how much it costs to deliver their own service. How do you think they determine their own profits and prices? They use those same calculations to bill internal customers.
      - wongarsu 3y ago
        Obviously AWS knows how much it costs to run all of AWS. But that doesn't translate to accurately knowing the marginal costs of a gigabyte of outbound traffic. They probably do know, but it isn't necessary at all to determine their profit, or to set their prices. "Just" set prices to what the market is willing to pay, and determine profit as total income minus total expenses over the whole operation.
- gamblor956 3y ago
  The above is an example of "transfer pricing" or "profit shifting". What's the difference? Transfer pricing is illegal. Profit shifting isn't (within limits; it technically has to be "at arm's length" and other requirements) You have it backwards: transfer pricing is legal, profit shifting is not. Transfer pricing is the legal term used to refer to the establishment of prices between related entities pursuant to regulations. The transfer pricing regulations were created to cut down on profit shifting.
PurpleRamen 3y ago
Yes and no. They jump around the profit-point. They made some profit in 2019 or so, but the pandemia peaked them, not just in views and income, but also costs. The thing is, Twitch's business-model is very frail. A streamer with too many viewers can cost them more money than it brings them money. Similar, are there millions of small streamers who barely make them a dollar. And then are there also too many side-costs, like South-Korea's network-fee recently, or the too many law cases where come cranky person sues them for some nonsical reason. And we don't know for real how much Amazon is charging them. Rumors are going, Amazon is charging them a hefty amount for servers, while other says AWS is irrelevant for their Service, so nobody knows for real, officially. But the recent move to a different handling of video-streams is supposed to change this, as it reduce the costs on Twitch's side, and lets the Streamers pay for it themself. By which I mean AV1(?), where the streamer is encoding all streams in all resolutions, and only sends it to Twitch which then acts as a relay. Claim is, Video-Encoding was the biggest cost for them, after employees, which seems kinda strange.. But maybe it will change their game in the next years, we will see.
- nicolas_17 3y ago
  You do know Amazon owns Twitch? I'm sure they aren't using normal AWS billing...
  - PurpleRamen 3y ago
    Owning does not mean receiving benefits. Twitch is still a Company of their own, not a department of Amazon. It's well known that Twitch gets no big benefits from Amazon and is used as a Cash-Cow.
  - dcist 3y ago
    Yeah, I've wondered if Amazon is using Twitch's AWS fees as paper losses to lower taxes. I.e., Twitch is actually making profits but Amazon wants the AWS fees on its books so that Twitch isn't recording profits (and therefore taxes) and Amazon profits off the AWS fees.

Isn't Twitch very much a net loss?

by Ygg2 3y ago

Isn't Twitch very much a net loss?

Twitch loses money because Amazon has decided to make Twitch lose money. Why? Because Amazon is charging themselves for the infrastructure Twitch uses (ie AWS). It does that to justify cutting revenue splits (of subscriptions and ads) and increasing ad density. The minimum ad density now is generally 4 minutes per hour. Example: say I'm Pottery Barn and I sell furniture in the US. I sell a table for $500. It costs $100 to make in China, $50 to ship to the US and $150 in store costs (eg utilities, staffing, rent, amortized capex, etc). You might say I've made $200 profit. But let's say my corporate structure is to have 2 subsidiaries: PB Manufacturing and PB Retail. The first makes the table. The second manages the stores and sells the table. If PBM charges PBR $150 for the table then PBM makes $50 in profit and PBR makes $150. If PBM charges $300 for the table then PBM makes $200 in profit and PBR breaks even. This is what I mean when I say Twitch's profitability is a chosen narrative. There are many reasons to do this. Tax is a big one. Maybe you pay less tax in China so you prefer to take profit there. Maybe you want to argue stores aren't profitable to resist demands for higher wages or higher rents. The above is an example of "transfer pricing" or "profit shifting". What's the difference? Transfer pricing is illegal. Profit shifting isn't (within limits; it technically has to be "at arm's length" and other requirements).

snapcaster 3y ago
Can you expand on this? You're saying Twitch is only unprofitable in an accounting sense but would be a viable business if on its own? Saying their AWS costs are $0 seems like it would be even more "fake"
- deleted 3y ago
  [deleted]
- fkyoureadthedoc 3y ago
  So Twitch is only a viable business model once you own enough data centers.
- wongarsu 3y ago
  A video streaming platform isn't a natural fit for a hosting service famous for charging outrageous rates for outgoing traffic. If they were neither owned by Amazon nor had a special deal with AWS (like Netflix presumably has) they wouldn't be using AWS for anything touching actual videos.
plorkyeran 3y ago
Twitch runs its own data centers and does not use AWS for the video streaming platform. There are probably some incidental expenses which are actually Amazon profits, but they’re much smaller than you’re making them out to be.
- Quarrel 3y ago
  Say what? https://aws.amazon.com/ivs/ https://aws.amazon.com/ivs/ "Use the same live streaming technology and global infrastructure that powers Twitch." Did IVS grow out of Twitch? Sure. That core is now a piece of AWS infra though, even though the team was initially built at Twitch. (Obviously these things are weird to talk about in a vacuum, because all the pieces are 100% owned by the same parent. The splits we see can be changed with the wave of a CFOs pen, usually when they want to change how we view some overarching piece of the business.)
- nicolas_17 3y ago
  Not sure what they use for video streaming, and it might even depend on where you're watching from, but VODs are definitely on plain old S3 + Cloudfront.
Solvency 3y ago
How does a government meaningfully and objectively determine what is transfer pricing vs profit shifting in practice? Are they even capable of distinguishing the difference in a case like Twitch:Amazon? Furthermore... isn't this the crux of Hollywood accounting..?
jedberg 3y ago
> Twitch loses money because Amazon has decided to make Twitch lose money. This is totally untrue but keeps getting repeated. Yes, within Amazon, the non-AWS business units pay AWS to use AWS. But they pay cost plus a small percent, not retail rates. The cost to non-AWS businesses is the same as if they had to do it all on their own (actually a little less since they get to leverage AWS's economies of scale). The profitability of the other business units is actually improved this way. They would be paying more if they were independent and doing it on their own. This is why Amazon is so allergic to spinning out AWS as its own business.
- stefan_ 3y ago
  That seems impossible to determine. AWS retail charges for things that have an impossible relation to actual costs (think traffic) to begin with.
  - jedberg 3y ago
    AWS knows how much it costs to deliver their own service. How do you think they determine their own profits and prices? They use those same calculations to bill internal customers.
    - wongarsu 3y ago
      Obviously AWS knows how much it costs to run all of AWS. But that doesn't translate to accurately knowing the marginal costs of a gigabyte of outbound traffic. They probably do know, but it isn't necessary at all to determine their profit, or to set their prices. "Just" set prices to what the market is willing to pay, and determine profit as total income minus total expenses over the whole operation.
gamblor956 3y ago
The above is an example of "transfer pricing" or "profit shifting". What's the difference? Transfer pricing is illegal. Profit shifting isn't (within limits; it technically has to be "at arm's length" and other requirements) You have it backwards: transfer pricing is legal, profit shifting is not. Transfer pricing is the legal term used to refer to the establishment of prices between related entities pursuant to regulations. The transfer pricing regulations were created to cut down on profit shifting.

PurpleRamen 3y ago

Yes and no. They jump around the profit-point. They made some profit in 2019 or so, but the pandemia peaked them, not just in views and income, but also costs. The thing is, Twitch's business-model is very frail. A streamer with too many viewers can cost them more money than it brings them money. Similar, are there millions of small streamers who barely make them a dollar. And then are there also too many side-costs, like South-Korea's network-fee recently, or the too many law cases where come cranky person sues them for some nonsical reason. And we don't know for real how much Amazon is charging them. Rumors are going, Amazon is charging them a hefty amount for servers, while other says AWS is irrelevant for their Service, so nobody knows for real, officially. But the recent move to a different handling of video-streams is supposed to change this, as it reduce the costs on Twitch's side, and lets the Streamers pay for it themself. By which I mean AV1(?), where the streamer is encoding all streams in all resolutions, and only sends it to Twitch which then acts as a relay. Claim is, Video-Encoding was the biggest cost for them, after employees, which seems kinda strange.. But maybe it will change their game in the next years, we will see.

nicolas_17 3y ago
You do know Amazon owns Twitch? I'm sure they aren't using normal AWS billing...
- PurpleRamen 3y ago
  Owning does not mean receiving benefits. Twitch is still a Company of their own, not a department of Amazon. It's well known that Twitch gets no big benefits from Amazon and is used as a Cash-Cow.
- dcist 3y ago
  Yeah, I've wondered if Amazon is using Twitch's AWS fees as paper losses to lower taxes. I.e., Twitch is actually making profits but Amazon wants the AWS fees on its books so that Twitch isn't recording profits (and therefore taxes) and Amazon profits off the AWS fees.