Why Twitch's Massive Layoffs Are Horrific for the Future of Gaming

On Tuesday evening, Bloomberg reported that Amazon-owned livestreaming platform Twitch, one of the most important businesses in video games and the creator economy, was laying off 500 people—roughly 35 percent of its workforce. Combined with two other reductions in force last year, Twitch has laid off nearly 1,000 employees in less than a year.

This will surely be one of the darkest moments in gaming and the creator economy of 2024, and its impact will be felt not just this week, this month or this year, but for years to come.

From a business perspective, the Twitch layoffs make sense: The site hemorrhages money. It can’t generate high ad sales like other social media platforms such as Facebook due to some inherent flaws in its technology. And it has continued to overspend and overstaff since the pandemic pushed it to previously unachievable highs in 2020, before it fell back to earth over the next three years.

Now, with Amazon pressing firmly on its content business to reach profitability, thousands of people are losing their jobs as they’re boiled down to just headcount and salary numbers on a profit-and-loss sheet. (Amazon also made “several hundred” of layoffs at Prime Video and MGM Studios, which are sister groups to Twitch, on Wednesday, according to Deadline.)

In Twitch’s case, its significant loss of staff will not just harm employment opportunities in gaming and the creator economy, but, given Twitch’s role as one of the few successful content platforms in the industry, it will affect the bottom line of thousands more people outside the company as well.

No one company has artificially supported, on a financial level, the creator economy and the gaming industry as much as Twitch has since its founding in 2011. Acquired by Amazon less than three years after its launch, the company became supercharged with billions of dollars in resources from its new owner.

It quickly distributed those resources—offering streamers, esports tournament organizers and teams and game publishers exclusive deals worth millions in up-front fees. It paid for the development of original content both inside and outside the company, providing hundreds of full-time and contract jobs. And as a result, it has become the de facto gathering place for all livestreaming on the internet, not just for video games or gaming-adjacent content.

Twitch is estimated to have 140 million monthly users, according to data aggregated by DemandSage. The majority of its revenue is derived from two sources: subscriptions, which it splits 50-50 with the creator; and ad sales, for content on its site, tournaments and events the company runs, and agency agreements it holds, notably with esports teams.

Its fair to assume that first bucket is significant, though the company has put itself in an advantageous—but in some ways, detrimental—position for its subscriptions.

Two years after the Amazon acquisition, the company introduced what is now known as Twitch Prime, a free, additional benefit for existing Amazon Prime customers. Each Prime sub gets a free subscription to any streamer on the website every month. The streamer still nets 50 percent ($2.50 for a tier-1 subscription), but Twitch doesn’t get its usual 50 percent. Instead, it gets a portion of the Amazon Prime subscription through an internal cost-and-revenue structure with Amazon.

Amazon has never disclosed what that structure exactly is and how much goes toward Twitch’s revenue, nor has Twitch said how many of its paid subscriptions are generated via Twitch Prime. But in May 2021, Stream Hatchet estimated that about 43 percent of Twitch streamers’ paid subscribers originate from Prime. That means Twitch is getting hit hard on the revenue for nearly half of its direct-to-consumer customers.

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Now back to the article…

Now let’s focus on the sales side: Ad sales on social media are always significant. Among gamers, data firm DataReportal estimated that Twitch is the fifth-most used platform when compared to social media sites like Facebook, Instagram, YouTube and X, the app formerly known as Twitter. But unlike those platforms—OK, maybe a little bit like X for other reasons—Twitch lacks two important sets of data: demographic and psychographic.

Facebook and Instagram are both the gold standard for advertisers and the worst for consumers in terms of collecting that data. One, because of algorithms and the user analysis systems that Meta has created, and two, because users tend to be more forthcoming with data on those other platforms.

Most people, within a short period of signing up for Facebook or Instagram, upload a picture of themselves, providing racial data to those platforms. Within a few weeks, if that, of posting and liking material on those sites, Meta has a pretty good idea of: who you are, what you do for a living and an educated guess of how much you make, what you’re interested in and where you live.

It then leverages that demographic and psychographic user profile to sell advertising—from small businesses spending a couple thousand dollars and looking for a specific customer to major corporations spending millions on the platform every year.

Twitch can’t do that. It asks for date of birth when you sign up, but for most of its active monthly users—except for the estimated 5 percent who create content themselves—it doesn’t have a good understanding of the consumer at all. That’s great for consumers, but terrible for ad sales.

Twitch’s average CPM on a deal is far less than its social media competitors, according to those familiar with the sales pipeline at the company who I’ve spoken with over the past few years. That makes Twitch’s financial position extremely unstable.

There’s no magic fix to this, either.

No user on the internet likes to be asked for more data about themselves, especially by a corporation as big as Amazon. Blockers of tracking cookies are also becoming more and more common. Some web browsers block them as a core feature. In April 2021, Apple launched an iOS update that allows users to opt out of across-app tracking—severely damaging Facebook and Instagram, and presumably Twitch as well.

Twitch’s user analysis based on the content consumed inside its walls can only get so good, too, and it can get really expensive really quickly, even if Twitch were to implement artificial intelligence to assist with the workload. Analyzing millions of hours of live video to make unclear guesses about the viewers’ race, ethnicity, occupation, income, location and interests is no easy feat. You can’t program your way out of this issue.

That’s why I think these rounds of layoffs at Twitch won’t be the last, because I don’t see a way the company fixes its monetization problems.

The Bloomberg report didn’t make clear which departments at Twitch were most affected. A Wednesday report from Aftermath said the team behind Twitch Rivals, its competitive gaming event series, and Twitch’s community engineering teams were halved. Anonymous interviews with employees in that article seem to suggest that nearly every department at Twitch took a hit.

Here’s why that matters: Twitch has struggled for years now with overhead cost.

I previously wrote an article that outlined the corporate changes at Amazon and how the retailer is scrutinizing the livestreaming site’s margins more than ever. Part of the issue is that Twitch pays Amazon Web Services a fee—though discounted from the publicly-available rate—for the hosting of its livestreams. In a September 2022 blog post, after Twitch universally cut its payout split to 50-50 upon a creator’s first $100,000 earned, now-CEO Dan Clancy intimated that the company loses a lot of money because of small creators.

CommanderRoot, a developer of tools for Twitch streamers, announced on Jan. 1st that there are 3.46 million affiliates on Twitch. Affiliates are streamers who can start earning money from their content, even without a large audience. Additionally, Root mentioned that there are almost 9 million streamers in total on the platform. That means Twitch is losing money on millions of streamers, likely including many of those affiliates, given how expensive livestreaming server costs are.

Twitch’s easiest fix is to not let small creators stream anymore. I doubt they’ll do that, as it would cause a mutiny. How are you supposed to validate if new streamers have an audience size that would allow for profitability? You can’t. Some people hold audiences on one platform that don’t translate to another.

I don’t think there’s a fix, other than Twitch continuing to reduce its headcount, which will bring notable issues to the platform. The actions Twitch has taken over the past two years support that rationale.

Noticeable changes to the platform and limited access to community managers is going to affect the livelihoods of at least a few thousand people who make money from the site. But it’s also going to affect places where Twitch supplemented other industries.

The esports industry, for example, is already in the gutter. One could argue that it’s not even really an industry anymore—more just a marketing expense for game publishers, as it used to be, pre-2017. Twitch used to put hundreds of millions of dollars into esports through partnership deals and broadcast rights agreements. Those have slowly dried up over the past few years, and it’s hard to see them coming back.

There’s almost no market anymore, even for the biggest of creators, for exclusivity deals around their livestreams, either. In 2020 through 2022, maybe early 2023, Twitch competed with YouTube and, to a lesser extent, Facebook for streamer exclusivity. An October 2023 Fortune article suggests both Twitch and YouTube have stopped offering those deals.

Every creator on Twitch worth their salt is trying to diversify away from the platform. Its splits are already bad—it takes 50 percent compared to the likes of Patreon’s eight percent haircut on subscriptions, or even OnlyFans’ cut of 20 percent. Many of Twitch’s biggest stars are hiring low-cost video teams to create YouTube videos using no original content other than recordings of their Twitch streams. At least YouTube’s CPMs are much higher.

Twitch used to serve as the primary income source for many streamers, but it’s now becoming something more akin to TikTok: a top-of-funnel platform that creators use for visibility while they push viewers to other platforms, like Patreon and OnlyFans, where they can make more reliable income.

So Twitch’s layoffs over the past year haven’t just affected the hundreds of people who’ve lost their jobs. They’re affecting thousands more.