Sony has obtained market dominance through its acquisition of Crunchyroll. But why did it step in the anime market to begin with?
In December Sony and AT&T reached a deal where Sony would buy the anime streaming service Crunchyroll for $1.175 billion. Crunchyroll at the time had 3 million paying subscribers. Sony wants to strengthen its position to compete with Netflix who is also heavily investing in anime. But why did Sony move to Crunchyroll and why did they move into streaming?
A history in video and entertainment
Sony is a well-known brand in the media industry and it has been a player for decades in the video, movie and entertainment market. We’ll explore how Sony became such a dominant force in the entertainment industry to properly frame its strategic decisions for acquiring Crunchyroll. In 1964, Sony launched the first VCR for consumers, the CV-2000. The video player was one-hundredth of the price of the broadcast model, but interestingly enough these first home products were used for medical and industrial purposes, far beyond its targeted audience. The lackluster adoption by consumers came due to the lack of colored images supported by the CV-2000, which at its release only displayed black and white images. This proved a major hurdle according to the engineers at Sony, but the company pushed through and came with a working prototype in 1968. A year later Sony would create the U-matic prototype, which had to become the embodiment of a VCR suitable for the average home, namely not bigger than a Japanese paperback book. The economic situation was flourishing for Sony’s VCR business as by the year 1975, 90% of Japanese households owned a color television. For Sony this meant further investing in developing new VCR-products which would complement the need for media consumption by the Japanese population at home.
During the 80s Sony and Philips came with the revolutionary product, the CD. Norio Ohga from Sony said, ‘The CD will become the next generation medium in the audio industry. Let’s go with it.” Naturally resistance followed, many investments into vinyls were made throughout the decades and now a new unproven technology would come and replace this tried and tested medium. But this did not scare off Ohga, who started a strong global campaign to promote the CD and spurring software development. Ohga knew that CD’s had no chance of succeeding without the software to match. This didn’t go without the necessary fight as Sony’s Record division partnered up with CBS in the past to distribute vinyls, gaining significant market share.With the new digital disc coming onto the market, CBS was reluctant to see Sony partner up with Philips for manufacturing as the LP machines had to be replaced to facilitate the CD. Not only that, but as it was a joint venture agreement, CBS needed to fork out the necessary investments for the manufacturing plant. Eventually CBS and Sony came to an agreement where Ohga pledged to pay-out dividends that amount to 100% of its capital annually.
Despite its strong history in the entertainment market such as video and audio. Sony has been struggling in the television space for years. According to Channel News Australia Sony might be the next second Japanese brand to exit the Australian television market, just like Panasonic did in February of 2020. In another article I wrote about the decline of Sony smartphone sales, where Sony cannot keep up with the momentum created by Samsung and Apple. Sony also threw in the towel in the PC-market. In 2014, Sony decided to stop selling its Vaio laptops. Jared Newman at Time Magazine said, ‘Sony was itself a maker of high-end laptops, but often pushed itself too far into luxury territory–a place that PC buyers are reluctant to go.’ Sony was selling too expensive products in a market where prices were decreasing. Although in 2018, Sony still made an attempt to re-enter the laptop market by showcasing its new line-up at Computex.
The rise of anime streaming and strategic alliances
Yahoo reported in 2021 that the global anime market would grow to $48.03 billion in 2028, with an expected 9.5% year over year growth. According to the cited report, the rise can be attributed to the increasing popularity of the medium overseas through optimized distribution which are gathering more subscribers. Digital mediums also enable anime producers to create enhanced experiences for their customers, increasing the longevity of franchises. The wider adoption of high speed internet only accelerates this growth, making streaming more accessible to wider audiences. In a report cited by Market Watch the video streaming market was expected to grow to $102.09 billion by 2023 with most of the growth occurring in North America which has seen strong figures in previous years. Europe is a strong second, where according to research smartphones and its complementary streaming apps have revamped the way media is consumed.
In 1994, Gen Fukunaga founded Funimation. At the time, anime was not being distributed in America, whilst Fukunaga was introduced to anime during his childhood years in Japan where he got enticed with the medium. Through funding he was able to acquire the hit series at the time Dragon Ball Z. In 2005, Funimation was sold for $120 million to Navarre Corporation. Funimation was a strong asset for the Navarre Corporation, but while their latest portfolio addition was developing steadily, the company as a whole was struggling. Fukunaga bought the company back from Navarre in 2011.
In 2009, Crunchyroll would start streaming one of the most popular anime shows at the time, Naruto, worldwide. This would also mark the end of user generated content on the platform. Only licensed shows would now be aired on Crunchyroll, launching the beginning of its route to become a legal alternative for anime viewing. In 2013, Crunchyroll was purchased by the Chernin Group, named after the former president of News Corp, Peter Chernin. While no figure was released, the purchase had an estimated value of $100 million. The Chernin Group allegedly wanted to grow its anime ‘vertical’, but the specifics of the deal remain pretty vague for bystanders. During this period, Netflix was up and coming, reaching a total of 37.6 million subscribers and gaining traction overseas. While this figure alone isn’t telling us much, it’s revealing how big the potential was for streaming content. But Crunchyroll wasn’t sitting idly waiting until Netflix would take over the entire streaming market. In the same year, Crunchyroll launched on the Playstation 4 console, which increased the reach of the platform significantly where it was now able to tap into the potential of television viewing.
Three years later, Crunchyroll and Japanese publishing giant Kadokawa announced a strategic alliance, which would include marketing partnerships in North America and licensing agreements. Goa who was the General Manager at Crunchyroll at the time said in a press release, ‘The hunger for compelling anime, manga and light novel content is growing at an astounding rate throughout the world, and KADOKAWA has always been at the forefront of creating that content. We look forward to working closely with KADOKAWA to provide Crunchyroll fans with access to the anime, merchandise, and books that they have demonstrated they want time and again.’ Kadokawa had already noticed a growing demand for anime content overseas and locking in a strategic partner on an upcoming medium could only benefit in the long run.
Interestingly enough, Crunchyroll partnered up with its main competitor Funimation in 2016. The partnership would enable content sharing across both streaming platforms, dub production and home video distribution. Gen Fukunaga, CEO of Funimation, spoke about the remarkable partnership to Anime News Network saying, ‘The problem is, the market was fragmenting up a bit – you had other players coming in, [like] Amazon [and] Hulu … The issue with some of those big players is that they’re maybe not as concerned with the fan experience as Crunchyroll and Funimation.’ A year later Crunchyroll reached one million subscribers. In the grand scheme of streaming this number feels like a blimp when it comes down to subscriber counts. But Justin Sevakis from Anime News Network commented that it was an important milestone for the platform noting that a lot of revenue is now flowing back into the anime industry in Japan. No company in the history of the industry is able to generate as much revenue abroad as Crunchyroll does.
Not only did Sony need to counter the decreased demand in Blu-ray sales, it was also seeing competitors trying to enter and capture market share in its domestic market
In 2017 Sony stepped into the anime streaming market by acquiring a majority stake in Funimation. The streaming website distributes Japanese anime such as Attack on Titan, Dragon Ball Z, One Piece and My Hero Academia in the United States. These are one of the biggest franchises in the industry and through this acquisition, Sony had bought its way into the US mainstream anime market. Andy Kaplan, President, Worldwide Networks, Sony Pictures Television said in a press release about the acquisition, ‘Around the world, Sony’s networks have been major players in the anime space for nearly two decades, and in more recent years we have rapidly increased our networks’ over-the-top and digital offerings to consumers.’ Further saying, ‘With the acquisition of Funimation, the combined IP of ANIMAX, KIDS STATION and Funimation allows us to deliver the best anime to fans across all screens and platforms.’ Sony had reason for concern when it came down to its media portfolio and had to look for alternative ways to strengthen, or keep afloat, its media business it had been building for decades. The signs were there in the sales of physical media. In 2015 annual Blu-ray sales reached their peak with sales turnover of 93.8 billion yen, decreasing to 88.36 billion yen in 2016. In 2020 the annual sales turnover was at 2011 levels. Sony would need to expand in other markets to compensate for the decreased results. In the same year, Cruncyroll launched on the Playstation 5.
Netflix bets on Japan
Not only did Sony need to counter the decreased demand in Blu-ray sales, it was also seeing competitors trying to enter and capture market share in its domestic market. Hollywood Reporter noted in 2021 that Netflix is ramping up investments in Japan through anime to capture more of the domestic market.
The strong investments of Netflix are changing the market according to Roland Kelts professor at Waseda University who spoke to CBC radio in 2021 about the phenomenon. When asked why streaming companies want to invest in anime and the ecosystem as a whole, he said, ‘Streaming services are global. They’re not just located in one country or devoted to one culture.’ The medium is well suited for international distribution. This is resulting in a lot of money flowing into an industry that for a long time only found success with its domestic audience. The potential for reaching new audiences has grown exponentially. The foreign influence might also be seen as a threat to the unique style of the medium, but Kelts responded by saying, ‘I think Japanese are starting to realize that what they produce here is special and appeals globally. At the same time, it’s still a fairly insular society. It’s an island nation. There aren’t very many immigrants in Japan, and so maybe the plus side of that is a lot of anime is still made for Japanese.’
Threats from all sides
As with many strategic moves made by companies, Sony’s one isn’t an outlier. It was strong in traditional media such audio and video entertainment, but these markets were and still are rapidly changing. It was losing on all fronts in its hardware business. Laptop sales were decreasing, its televisions weren’t selling and Blu-ray sales were declining for years. The video streaming market is mostly dominated by giants such as Netflix and Amazon who are investing large amounts of resources to attract new audiences. Netflix even ventured into Sony’s home base, Japan. Sony couldn’t win the streaming wars by setting up its own platform. Two goliaths are already battling out, namely Amazon and Netflix.
Sony had to go for a niche market which showed promising signs, a growing global market which was expected to rise over coming years, the overseas anime market. It already had Funimation in its portfolio and to strengthen its hold to not be outcompeted by Netflix, it needed Crunchyroll. Crunchyroll had millions of subscribers and a strong library of popular series. With Crunchyroll, Sony would get dominance in the anime market and obtain all the licenses and network that made Crunchyroll such a success amongst overseas audiences.