After 6 months on the market, a report by Nikkei Asia suggests that Sony is nearing a deal to acquire niche anime streamer Crunchryoll for nearly $957M. That price tag is undoubtedly steep. Spotlit sources suggest that the streamer’s EBIDTA is somewhere in the range of $70-$90M a year, putting the acquisition at a roughly 11X multiple and well above Sony’s earlier $147M acquisition of competitor Funimation in 2017. But make no mistake, combining Crunchyroll and Funimation could create a powerful accelerant to the conglomerate’s flywheel, charting a different path through the streaming wars and creating massive enterprise value.
This isn’t the first attempt Sony has made at establishing a toehold in the streaming space. The once promising Playstation Vue was one of the first vMVPD bundles to hit the market, but the service struggled to gain market share and was shut down in January. Similarly, Sony’s Crackle platform never managed to gain any significant traction and the conglomerate sold a majority share to Chicken Soup for the Soul Entertainment in 2019. There are a few key differences, however, that suggest a combined Crunchyroll x Funimation will drive significant value:
- Dominant Global Market Share: Sony stands to control distribution rights for 1700+ top performing Anime TV series and Films, a library that no other streamer comes close to (for reference, Netflix distributes somewhere between 100-200 anime titles). On top of that, merging the two companies would bring together two of the world’s largest communities of anime fans. Crunchyroll boasts 70M registered users and 3M paying subscribers across 200 countries and territories. Funimation, doesn’t share a total figure but its subscriber count is estimated to be in the 1M range.
- Demo Alignment Leads to PlayStation Synergies: That far reaching community is important because, unlike Vue or Crackle, anime and video games are deeply intertwined. 90% of Crunchyroll’s user base identifies as gaming enthusiasts – an affinity that creates new consumer pathways into Sony’s PlayStation business. Throw in a growing games division at Crunchryoll that has released seven titles in the past few years and you’ve got the pipeline of content necessary to offer a bundled Anime Streaming x PlayStation Now plan.
- Streaming Wars Strategy: Perhaps most importantly, by choosing to build its streaming strategy around a focused genre vertical vs. the four-quadrant approach that almost every other streamer has taken, Sony is creating a differentiated product in a market that is starting to feel remarkably commoditized. The content strategies of Netflix, HBO Max, Amazon Prime Video, and various others are all designed to cover the broadest possible range of consumer taste. Owning a single vertical on the other hand, leads to clearly defined target audiences, deeper platform engagement, and self reinforcing ancillary revenue streams. In other words, what Disney+ has done with its own genre vertical (Disney content), Sony stands to accomplish with anime content.
In our eyes, the potential upside of acquiring Crunchyroll makes it well worth the price tag, but navigating a major merger in the current pandemic introduces significant risk of disruption, culture clash, and perceived brand confusion. Should a sale close, we foresee three imperatives necessary for long term success:
- Treat Japan as Partners: Anime is one of only a handful of media segments where the most prolific producers operate independently and outside the Hollywood studio system. Thus, Crunchyroll and Funimation, in similar fashion to the early days of Netflix, rarely own the underlying IP of content on their respective platforms and act almost solely as distributors for the predominantly Japanese animation houses. There are benefits to this, Crunchyroll and Funimation largely own the relationship with the end consumer, particularly in the United States. On the supply side, however, this business model exposes them to competitive forces. Netflix, for instance, has struck nine content deals with various anime production houses in the past year. Netflix is going to buy its way into the conversation in some form or another, and Sony shouldn’t try to stop that. What Sony WILL need to do on day one is explain clearly how the combined entity will benefit producers, what will happen to existing Warnermedia distribution (Toonami, HBO Max), and lay out a plan for growth. With the support of broader community, we wouldn’t be surprised to see Netflix’s production houses jump ship in the years to come.
- But Continue to Invest in Originals: While efforts are still relatively nascent, the market dynamics above have begun to shift in regard to IP ownership. Both platforms have acted as co-financiers on select titles, Crunchyroll announced an originals initiative in February, and Funimation’s Simuldubs program has further integrated the company into the early days of production. Sony needs to double down and accelerate this trend as IP ownership will be imperative to future growth – both in terms of margin (through preferred licensing fees and ancillary rights exploitation) and brand (originals further bolster the owned relationship with end consumer and are the most influential component of the platform’s positioning).
- Choose a Single Brand: There are benefits to both brands (Funimation has a legacy with Dragon Ball that still resonates with millennials – Crunchyroll has flashier name recognition with younger audiences) but Sony will need to sunset one or both moving forward. Doing so will not only serve to align the two cultures under one go forward vision but will also mitigate the friction inducing illusion of choice with consumers.