Answerman

Why is Sony Offering to Buy Kadokawa?

George P. asks:

I've noticed that several anime companies and distributors have been purchased by Sony: Right Stuf, Crunchy, and Funimation. They are currently in negotiations with Kadokawa.

Why is this occurring now? Are big conglomerates paying more attention to the anime industry due to growing popularity? Or is consolidation a frequent occurrence within the industry? What does it mean for the fans of the medium and the industry moving forward?

Note: Although Anime News Network is a Kadokawa Group Company, no inside information was shared with Jerome Mazandarani in the production of this article. The below explanation is Mazandarani's opinion based on his personal experience and knowledge and should be considered speculation.

You're right! Sony has been on a bit of a splurge as of late, but it's not just these American behemoths they now own. In the spring of 2019, they acquired my previous employer, Manga Entertainment, Ltd. (UK), and they made some astute strategic acquisitions in Australia and Europe.

Sony's Sony Music Japan also owns Aniplex, which acquired Madman Anime, Australia's largest anime distributor, and its excellent SVOD platform, Anime Lab, back in February 2018. Aniplex also became the majority owner of France's third-largest anime streaming service, Wakanim, in 2015.

In September 2019, Madman, Wakanim, and Funimation (which MangaUK sat within) merged into one joint venture, the newly named Funimation Global Group, LLC. This new company was a joint venture between Sony Pictures Entertainment (SPE) and Aniplex.

On August 9, 2021, Sony completed its acquisition of Crunchyroll from its previous owner, AT&T Inc., through Funimation Global Group for the princely sum of $1.175 billion after clearing regulatory approval and deftly navigating a year's worth of speculation and rumors.

Around March 2022, it was announced that Funimation Global Group would rebrand as Crunchyroll, LLC, a joint venture between Sony Pictures Entertainment and Aniplex. The Funimation brand began to be phased out, and much of the content sitting on Funimation migrated to the Crunchyroll platform. The Funimation SVOD services shuttered over the next two years.

In 2022, Sony acquired Right Stuf.com, the largest specialist e-commerce platform for anime-related merchandise in North America, including home video, collectibles, and other assorted goodies. In 2023, Right Stuf was rolled into Crunchyroll, which now provides the backbone of its direct-to-consumer business, Crunchyroll Store.

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So! We have all these acquisitions and mergers of some very valuable and important businesses, all of which provide the vital distribution and monetization services any modern media and entertainment company needs to deliver its product (in this case, anime content) to consumers around the world. It's all sewn up and more or less operates under Crunchyroll, LLC, a Sony Entertainment company.

Now! Let me ask you a question. What is missing from Sony's global anime vertical?

That's right. Intellectual property, or “IP,” as we like to refer to it. Sony is acquiring up to a third of all anime output annually, but they don't own it. They are licensing it or co-owing it by joining the production committees as a co-investor, aka “co-producer,” but they don't own or control the underlying copyright to the work. This is because nearly all anime is a derivative of the manga or light novel copyright on which it is based. The only way a large distributor like Sony can “own the IP” is by either starting its own publishing business or by acquiring a manga publisher.

There was a news story published in June that was relatively under-reported regarding private equity firm Blackstone Capital pipping Sony to the post in acquiring Infocom, one of Japan's biggest digital comics platforms. Thankfully! While most large tech-media conglomerates believe that anime is “so hot right now,” most of them don't know much about it or how to go about owning big chunks of the anime-industrial complex. This story highlights the general interest in owning parts of the anime-industrial complex by global equity and media/tech companies, and the underlying weakness of distributors who do not own the underlying copyright of the franchises they build.

Sony is a conglomerate, a global business, one of the biggest entertainment producers in Hollywood, and still one of the largest consumer electronics and video game companies on earth. It is also Japanese. Sony's success in the hyper-consolidation of anime distribution comes from the fact that it has maintained business interests in anime production and distribution for over thirty years.

Perhaps Sony's interest in acquiring Kadokawa, which was reported in Reuters last week, is a way for them to accomplish their ambition to own the IP they produce and distribute. Sony has been clear about its ambitions to own more IP for many months leading up to this news. In September, Sony Entertainment's new CFO, Hiroki Totoki, in an interview with the Financial Times, teased the company's ambitions to become a serious content creator and owner, not just a producer and distributor. When comparing Sony to Disney, it is easy to see the former's deficiencies when it comes to content creation and ownership.

Consolidation happens all the time in other businesses, but it is rare to see two major players in anime and video games discuss merging on this scale. It is also rare to see consolidation on this scale being discussed within the Japanese media industry. One of the most difficult things about producing anime is accessing a popular manga IP. The rights to these properties are jealously guarded by the publishers, who all have their preferred partners and ways of doing things. Generally speaking, the big four publishers are all independently wealthy and have interests far beyond manga publishing that provide the sound financial fundamentals that underpin them. Perhaps for Kadokawa, they are seeing the coming headwinds and have picked its moment carefully to merge with a larger firm they know well, who has the know-how to deliver them another three decades of continuing success and growth.

Sony and Kadokawa have a long history of working together and co-investing in projects together. One of the jewels in Kadokawa's crown is the video game publisher FromSoftware, the makers of Elden Ring. Sony has a 14% stake in FromSoft, and Kadokawa is the majority owner. These companies know each other, and they collaborate frequently. It is the home advantage of being two titans of Japanese industry.

If this deal goes ahead, it could signal a transformational period in the Japanese manga and anime industry. Major consolidations often lead to other consolidations as competitors attempt to shore up their businesses in response. In the case of this deal, IP owners (publishers) and anime producers, production committee members, studios, and rival distributors, including streamers and TV networks, may need to find a way to consolidate now to avoid collapse and/or hostile takeovers in the future.

Kadokawa is one of the largest book publishers in Japan, and an early-adopter of trans-media IP development, which they've excelled at (“Read the light novel, buy the manga, watch the anime, own the t-shirt”). Kadokawa is the only “Big Four” publisher that seems to be seriously considering a sale at the moment. I wonder if it is true that “anime sells manga” and not the other way around anymore, and whether Shueisha or Kodansha will consider joining forces with a media partner? Perhaps it depends on how vital television and film are to their core business. This may be a key reason why they're motivated to sell to Sony.

Why Kadokawa? Apart from being the only big publisher currently open to a sale, they also own a shitload of IP. Much of it is publishing, but it also includes video games, anime, live-action film, and television productions. According to their latest earnings report, they expect to publish over 6,000 book and magazine IPs annually, and while they aren't Shonen Jump level big, they are the undisputed kings of isekai and seinen publishing. A couple of recent hits include Delicious in Dungeon (US$36.8 million), and Oshi no Ko, which interestingly, Kadokawa licensed the adaptation rights from Shueisha, and produced the anime series. It is reported that this anime IP has generated US$49 million to date.

It is incredibly difficult to launch a successful original anime IP. If it isn't already based on an existing manga or light novel, you may as well not bother. According to the excellent substack, Animenomics, which has written on this topic extensively in their latest edition, “Three out of four anime properties, in which Sony has accelerated investments, are adapted from other media like manga, light novels, video games, according to an analysis of anime broadcasting data published in 2014.”

What does it mean for the fans of the medium and the industry moving forward?
It may mean that this consolidation will result in less anime being produced in the future. That's probably a good thing, as Japan struggles with a capacity problem. Hopefully, fewer productions will mean better quality and bigger franchises. It could improve the standard of the output across the board with smaller productions taken out of the equation, and it will allow each of these series the opportunity to become franchises.

Between them, Sony and Kadokawa own ten of the best anime studios in Japan including CloverWorks and A-1 Pictures. This marriage could signal the locking out of other producers from making their anime in favor of those projects coming through the Kadokawa/Sony IP development funnel.

This consolidation may also mean smaller competitors to Sony's Crunchyroll overseas anime distribution business, like AMC Network's HIDIVE and Europe's ADN, will lose out. Both streamers rely heavily on Kadokawa for exclusive output to feed their own subscribers. It'll also make life harder for Netflix and its anime ambitions. Delicious in Dungeon is a Netflix Original globally. Don't be surprised to read about a new co-production pact between Shueisha and Netflix in the coming months, similar to the one they made in December last year regarding a brand new One Piece anime.

It's funny that we are talking about this today because last week, I was trying to talk you off the ledge regarding Western involvement in anime productions, but another logical conclusion of this hyper-consolidation will be that you're going to see a lot more of those “xxxx: The Anime” type productions you all profess to hate so much if this deal goes ahead. Why? Because it will remove more than a third of all adaptable Japanese IPs from the marketplace, putting it into the hands of a singular owner that can develop, produce, publish, create animation, and self-distribute it as well as control and manage all of the associated rights.

This will likely disrupt the business of many production consortiums and production planning companies. Let this final factoid from Animenomics sink in. “Kadokawa and Sony Music subsidiary Aniplex combined invested in about one-third of the 321 anime productions airing in 2022 and 2023, according to a study published at Tokyo's Comic Market 104 in August.”

Less anime in the future, but of higher quality, and a more long-term commitment to longer-running series. Perhaps a greater diversity of popular anime IP will gradually erode from shonen anime's market dominance, and finally, it will no doubt lead to more consolidation within Japan's anime and IP industry.