Twitch rides video game streaming wave to global success

October 4, 2013, 2:05 PM UTC

FORTUNE — The odds are that if you’re under 30 and play video games, you’re already aware of Twitch. If you’re older and don’t play games, then you’re not one of the 45 million unique visitors per month that flock to the social live streaming site. Over 600,000 everyday gamers — as well as game developers, publishers, and even professional gamers — use the site to broadcast to the world every month. The site’s growth helped it secure $20 million in funding this week.

Studios showcase exclusive gameplay demos of new games like Activision’s (ATVI) Call of Duty: Ghosts through Twitch. Professional video game players can chat and connect with fans directly through live streamed practice sessions, all the while making money from the advertisers that are lining up to be part of this newfound phenomenon. As the exclusive streaming partner of ReedPOP, the largest producer of pop culture events in the world, Twitch broadcasts games and other content from events like New York Comic Con and Chicago Comic Con and indie video game shows PAX East and PAX Prime.

Friday night, Riot Games is using Twitch to live stream the League of Legends Championship Series (LCS) World Championship from the sold-out Staples Center in Los Angeles. A record 5 million gamers visited the site on September 15 to watch the top League of Legends pro gamers compete for a chance to battle for more than $2 million in cash prizes and play in front of 12,000 fans from around the world. League of Legends viewers spend an average 70 minutes watching content, compared to the average 7 minutes spent watching general YouTube content.

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“The biggest eSports (electronic sports) events broadcast on Twitch receives millions of unique viewers,” said Matthew DiPietro, vice president of marketing at Twitch. “Collectively, these events match and often beat broadcast/cable TV audience sizes.” DiPietro adds Twitch not only broadcasts these big events, but it also features user-generated content, creating what he calls,”a kind of central social video hub for all things gaming.”

Twitch powers the live streams of the two biggest eSports organizations in the world — Major League Gaming (MLG) and the Electronic Sports League (ESL). According to Peter Warman, founder of video game research firm Newzoo, “to date this year consumers have watched over 33 million hours of video streamed game content on alone — all powered by Twitch.”

That’s helped Twitch grow from 3 million viewers in June 2011, when it was spun from live streaming company, to over 45 million viewers today. These gamers are sticking to the site, as well. On average, 100 minutes are watched per person daily on Twitch. Valve’s recent The Invitational 3 Dota 2 video game tournament saw gamers log in for an average of 2 hours per day to see who would win the $2.8 million in cash prizes.

That type of engagement with the coveted 15-to-34-year-old male gaming demographic resulted in this week’s Series C $20 million investment led by Thrive Capital with participation from WestSummit Capital and Take-Two Interactive Software (TTWO), as well as additional funds from existing investors including Alsop Louie Partners and Bessemer Venture Partners.

DiPietro said this latest investment will enable Twitch to continue scaling its sales division and infrastructure to meet the demand of its rapidly growing viewership. This is especially relevant with the impending launch of the PlayStation 4 and Xbox One in November. Since both consoles will feature Twitch, the door is being opened to an even broader audience. He pointed out that more than half of U.S. households have at least one gaming console, so if the adoption rate of new consoles mirrors this trend, that’s a lot of potential Twitch users. Twitch is expanding its 15 global data centers to handle this influx of new gamers.

“Twitch has done something few have done in live streaming: They have attracted users,” said Michael Pachter, video game analyst, Wedbush Securities. “That is the hardest thing to replicate, and people won’t switch once they are comfortable using Twitch. They are putting up barriers to entry by being an app on Xbox One and PS4, so I think they will broaden their competitive moat.”

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Twitch is facing competition in the gaming live streaming space from the giant YouTube (GOOG) and the smaller Azubu, which are also live streaming the World Championship from Staples Center Friday. According to CEO Ian Sharpe, Azubu has a three-step plan to grow the eSports community: discover and break emerging new talent, attract high-profile marketing sponsors, and broadcast competitions in lag-free HD. Azubu also provides commentary for those with a casual interest in eSports, to make the space more inclusive.

“We say that Azubu is ‘By Players, For Players,’” said Sharpe. “We aren’t just a vehicle for broadcasting games. We are investing in the eSports community, sponsoring teams, nurturing talent, and designing a platform directly with our top players that they can all be proud to be part of. Competition is in our DNA, it’s what helps us grow as a human race. Competition for viewers between Azubu, Twitch, and YouTube can only be good for the eSports industry. Choice is the essence of evolution.”

Warman believes that if Twitch can keep up with the growth on PC and expand with Xbox One and PS4 content, it will be hard for anyone to compete with them.

“It would require a huge initial investment, in addition to the business agreements and brand value that they have built up,” said Warman. “Do not forget that Twitch is becoming a very respected brand among gamers. Twitch is present at every key game event.”

Pachter said that Twitch, which is ad-supported, could already be worth as much as $1 billion, but Warman believes the company is likely valued lower today. The near future could be a different story.

“I am simply fascinated by how Twitch ties together hot trends in gaming like broadcasting and online communities,” said Warman. “If they can keep focused on delivering what gamers want, they will be worth a billion dollars. What Valve did for the distribution of games with Steam, Twitch is doing for the broadcasting of games.”

Coke Zero (KO) just entered the eSports arena with Riot Games and will integrate its brand into a new minor league Challenger Series next year for League of Legends. American Express (AXP), Nissan (NSANY), Papa John’s Pizza (PZZA), Qualcomm (QCOM), and Samsung have already gravitated to pro gaming, thanks in part to the opportunities live streaming has opened up.

“The eSports audience is a particularly valuable one for brand advertisers because they are hard to reach via traditional media channels,” said DiPietro. “They tend to be extremely tech savvy, they are often cord-cutters, and they are hyper-engaged in the online video and chat experience — all of which makes them very valuable for advertisers.”

“Advertisers want to attract eyeballs,” said Pachter. Live events are more compelling than time-shifted or recorded events, meaning that advertisers have an audience that is more likely to be glued to the monitor. That is a huge opportunity, particularly with the Twitch demographic.”

Moving forward, DiPietro said Twitch wants to be everywhere that gamers are. That goes beyond the next-gen consoles. The company is ramping up its mobile offerings so that the Twitch viewing and streaming experience is universal regardless of what platform gamers use.

Twitch has been able to ride the wave of social interactivity, live streaming and video game sharing, which has created a perfect storm of user engagement for the growing number of global gamers.