Earlier in the year, Google's YouTube had been reported to be in late-stage acquisition talks for a similar amount.
Founded in 2011, Twitch - formerly known as Twitch.tv - allows users to watch other people play video games.
As of July of this year, the service had over 55 million unique monthly viewers.
"Broadcasting and watching gameplay is a global phenomenon and Twitch has built a platform that brings together tens of millions of people who watch billions of minutes of games each month," said Amazon chief executive Jeff Bezos in a statement.
"We look forward to learning from them and helping them move even faster to build new services for the gaming community," he added.Streaming wars
The move is seen by many analysts as helping Amazon in its quest to beat other streaming video sites like YouTube and Netflix.Twitch allows users to upload clips of their game play as well as stream live games
Twitch allows users to broadcast snippets of their game play and its services are built into gaming platforms like Sony's PlayStation 4 and Microsoft's Xbox One.
Amazon currently offers Prime subscribers access to streaming television and movies on its site, and has recently begun commissioning original programming - following in the footsteps of Netflix, which found success with House of Cards and Orange is the New Black.
Twitch adds a cadre of committed gamers to Amazon's potential audience.
The all-cash deal is one of the company's biggest acquisitions to date.More resources
Twitch's founders have attempted to quell any concerns that the Twitch's community may have about the acquisition.
"We chose Amazon because they believe in our community, they share our values and long-term vision, and they want to help us get there faster," wrote Mr Shear in a letter to users.Continue reading the main story “Start Quote
A billion dollars is what it costs to have a seat at the table”End Quote Brian Blau Gartner
"We're keeping most everything the same: our office, our employees, our brand, and most importantly our independence. But with Amazon's support we'll have the resources to bring you an even better Twitch."
Twitch.tv was created as an offshoot to Justin.tv, which was founded by Justin Kan and Emmett Shear as a platform in which Mr Kan could live-stream his life.
Following the success of Twitch, Justin.tv was closed earlier this month.'Seat at the table'
Twitch had raised over $35m in investment from firms such as Thrive Capital.
Even so, some have scratched their heads that the video game clip firm could be valued at nearly a billion dollars - a similar reaction that greeted news of Facebook's billion-dollar acquisition of photo-sharing service Instagram in 2012.
"I'm sure that there's a spreadsheet somewhere that has a valuation that gets to that," Brian Blau, research director of consumer technology at research firm Gartner told the BBC.
"But in the end, you're starting to see a lot of these billion dollar deals and it seems that if you want to play poker, a billion dollars is what it costs to have a seat at the table," Mr Blau added.