Coming Recession and Twitch

With all of this inflation that the world has been seeing the last while, it has resulted in various central banks tightening policy in order to stamp it out. The Federal Reserve in America appears to be getting particularly aggressive with this. Now economists are predicting a recession is likely on the horizon as a result of all this. The Fed seems willing to go to great lengths to create demand destruction and stamp out inflation. This got me wondering about just how the Web will weather such a recession. Looking back on history, such economic downturns have not been kind to the Web. The fallout of the Dot Com crash was very painful. What happened in the wake of the 2008 recession saw a pretty big changing of the guard in terms of what the dominant sites on the Web were. Even smaller events like the “Ad-pocolypse” on YouTube caused significant pain for people who post videos there. Now we’re back to a possible large scale, system-wide economic slowdown, and it’s not hard to imagine that the Web will be in for quite the enema.

This brings me to how Twitch in particular will or won’t get by. Over the last year or so, it has become obvious that their corporate overlords at Amazon want Twitch to get serious about making a profit. Amazon spent a lot of money to acquire Twitch, and then were patient with the streaming service for years as they waited for it to achieve an acceptable level of profitability. A lot of time has passed, and Twitch’s earnings remain sub par. So, now Amazon is likely putting the screws to Twitch and users on the streaming platform can see the results already with a lot more ads. There were also reports back in April that Twitch were going to be changing things like the subscription cut between large streamers and Twitch. It would go from a 70-30 split in favor of the streamer to a straight 50-50 cut. Both of these suggest that Twitch leadership is under a lot of pressure to improve profits.

The conundrum here is that even if Twitch figures out a way to get more advertising on the site in a manner that doesn’t alienate viewers, does it even matter if the country plunges into recession shortly thereafter and companies simply stop paying for advertisements? Every New Year from about January to March or so, content creators get a bitter taste as to how simple advertising cycles go. The run up to Christmas sees amazing ad payouts because businesses want people to buy their goods to give as presents. The moment January comes around, those ad payouts are a fraction of what they were a month earlier because the consumer has little desire to spend after Christmas, as such companies have little desire to advertise. As a result, the ad drought that comes along for the first few months of a year is a bad time for content creators that are heavily dependent on ads. Now imagine a recession hits and instead of that ad drought only lasting three or so months it drags on for 18 months (which is the average duration for a recession). If a large chunk of the population is suddenly less inclined to go out shopping because the economy is in trouble, why on Earth would companies want to spend on advertising during that time? That’s going to be a bad time for a lot of people, not the least of which being Twitch itself, a company that seems to want to make advertising a central part of its revenue stream.

Of course, there are still subscriptions. However, in the midst of a recession, how keen will people be to plunk down money on this? In times of economic uncertainty, a lot of belt tightening happens, so it would not come as a surprise if subscriber rates went down during this time. Yes, there likely will be some whales out there that won’t be affected by an economic slowdown, and could well throw around extra subs and gifted subs with their generous nature because they see storm clouds overhead and want to do something to try and help. Even these people have their limits though. There would be an extended period of time where the average person is going to be far less inclined to pay for Twitch subs because during a recession there tend to be a lot of layoffs. Either the person will have lost their job in a round of layoffs leaving them in no position to be paying for Twitch subs, or they’ll be worried that they’ll get the axe next and stop discretionary spending to protect themselves.

These two factors together leave Twitch in a rather precarious position. They want to increase revenue through ads, but if a recession hits companies are not going to want to buy ad spots. Meanwhile, Twitch users are not going to be nearly as keen to subscribe to channels if they’re worried about losing their own jobs. While all of this is happening, there are still those Amazon execs in the background staring down Twitch, tapping their wrist watches, mouthing the words “Time’s a tickin’!”

So, there is certainly a case to be made that if the recession some economists are predicting does come to pass, it could mean big trouble for Twitch. Throughout the short history of the Web, a lot of companies have gotten popular and had quite a lot of venture capital funding thrown at them. Eventually, that company has to prove that the investment was worth it and start turning an impressive profit. The changes that have been happening at Twitch in recent months suggest that this is indeed what has been going on there. Amazon may finally want to start seeing a nice return on its investment. Unfortunately, if a recession does hit, that will likely be quite the rug pull for Twitch.

In previous recessions, we’ve seen a number of companies that were once tech darlings get hit with similar rug pulls. There will be plenty more that suffer a similar fate when the next recession hits and Twitch could well become one of them.

The question after this is what happens to the streamers? Hopefully they have had the good sense to build war chests to get them through bad times, and not done something stupid like fall down the money trap of an ever expanding lifestyle as income increases, never worrying about tomorrow. In general, it’s a good idea for people who run their own business to have a robust emergency fund to help get through bad economic times. Twitch streamers are in the exact same position. If ad rates and ad buys slow down or collapse outright because of a recession, and viewers are reluctant to sub, that could likely lead to a very lean 18 months (again, the average length of a recession). How many streamers on Twitch would be able to survive a year and a half of little to no earnings because of these factors? If a recession does happen, we’ll find out soon enough. This isn’t even considering the possibility of a complete shutdown of Twitch because Amazon decides to cut its losses, dumping unprofitable ventures from its portfolio. Let’s not forget that if a recession happens, Amazon proper will also feel the pain and have to make hard decisions about what business ventures are worth their while to keep around.

So, let’s assume Amazon were to shutter Twitch due to a recession. What next for streamers? Sure, they could migrate to some other streaming platform like YouTube. However, similar problems will exist there. Companies still won’t want to pay for advertising with the economy in the toilet. Likewise, viewers will not be inclined to crowd fund because they’re afraid they might lose their own job. The saving grace at YouTube is that it is much more integrated as a central pillar of Alphabet, and, outside of recessions, has a track record of being quite profitable. So it stands a much better chance of being propped up by its parent company to help it weather the storm.

Even if content creators become nomadic during the next recession in search of homes as the Web cleans house, and disposes of chronically unprofitable outlets, it may be more a matter of trying to maintain a presence rather than seeking revenue streams. There may well be no viable options of making decent money until global economic conditions stabilize and start showing signs of recovery.

The danger with recessions for the Web is that revenue can dry up fast in such environments and it can be very hard for digital companies to survive. This is particularly the case for ones heavily reliant on advertising. Newspapers suffer, blogs suffer, and it stands to reason that Twitch may well suffer also.

Sure, central banks could chicken out and stop or slow down interest rate hikes and quantitative tightening measures if the stock market gets clobbered or companies suddenly stop hiring. However, inflation continues to run hot and be stubbornly persistent. The notion that this inflation is transitory has now been laughed out of the room and even people like Janet Yellen have been forced to admit that it doesn’t show signs of going away on its own. So, sure, the Fed could stop interest rate hikes if stocks took a massive hit or something similar, but that would leave inflation to run rampant, causing basically everything people buy to get more and more expensive reaching catastrophic levels. As such, its hard to imagine central banks stopping their war on inflation until it’s under control.

For now, all we can do is wait to see if this recession materializes. As it stands currently, economists are predicting a recession could hit in late 2022 or early 2023, so there’s still time for people to prepare. From there, we’ll see if a serious 18 month economic slowdown is something that a company like Twitch is capable of surviving.

In the meantime, if streamers haven’t done so already (and really, this can just as well be extended to anyone who makes their living as a content creator regardless of platform), maybe now would be a good time to build that emergency fund. It’s better to have something like that in place now than to wait for a recession to be pounding at the door, because by that time it will be too late.

Pennywhether

pennywhether@posteo.net

June 22, 2022