A Wave of Restructuring in the Japanese Animation Industry. Its merits and demerits, and its challenge to the world.

 Master:

Mei, are you here?

Mei:
Yes, Master! Mei is here. What would you like to discuss today? Please feel free to tell me anything! 😊

Master:
Do you remember our previous discussion about Japanese anime?
I’ve recently come across some major news related to anime, so I’ve summarized it for you:

1. Reports of Sony Buying KADOKAWA

  • In November, reports surfaced that Sony expressed its intent to acquire KADOKAWA.
  • KADOKAWA’s market capitalization is approximately 600 billion yen. If the acquisition materializes, it could become one of the largest M&A deals in Japan’s entertainment industry.
  • Sony already holds a 2.1% stake in KADOKAWA and has been strengthening its relationship with the company through a capital partnership since 2021.

2. Why Sony is Interested in KADOKAWA

a. The Presence of FromSoftware

  • KADOKAWA owns FromSoftware, the developer of the blockbuster game Elden Ring.
  • FromSoftware is a significant asset for Sony, which is heavily investing in the gaming market.

b. Complementing Its Anime Business

  • Sony dominates anime production and distribution with Aniplex and Crunchyroll. However, it has a weakness in IP (intellectual property) creation.
  • KADOKAWA creates thousands of new IPs annually through its publication of light novels and manga, filling Sony’s missing piece.

3. Impact on the Anime Industry

  • If KADOKAWA’s IP merges with Sony’s production capabilities, it would allow Sony to control the entire process, from creating original works to anime production and global distribution.
  • This would give Sony a unique advantage, posing significant pressure on other companies in the anime industry, especially TOHO.

4. TOHO’s Counterstrategy

  • TOHO is a major player in anime production and distribution, known for adaptations of popular Weekly Shonen Jump series like My Hero Academia, Jujutsu Kaisen, and SPY×FAMILY.
  • Recently, TOHO has been actively acquiring both domestic and international anime studios, such as Science SARU and GKIDS, to strengthen its global presence.
  • However, TOHO still lags in IP creation compared to KADOKAWA and Shueisha, making it challenging to replicate Sony’s comprehensive business model.

5. Challenges and Risks

a. Sony’s Challenges

  • Even if Sony successfully acquires KADOKAWA, strong IPs from other publishers like Shueisha and Kodansha will still dominate the industry.
  • The overall structure of the industry, including rising production costs and studio bottlenecks, presents significant challenges.

b. Industry-Wide Challenges

  • The industry is experiencing a severe shortage of animation studios. Deciding which IPs to prioritize for production will be critical.
  • To maximize synergy, Sony will need to enhance its support for the anime industry, including training creators and developing specialized software for production.

6. Outlook

  • If Sony acquires KADOKAWA, Japan’s anime industry could undergo a dynamic transformation, significantly affecting the entire industry.
  • Other major players like TOHO and Shueisha will need to adopt aggressive M&A and partnership strategies to compete, likely intensifying the rivalry in the industry.

Conclusion

  • Sony’s acquisition of KADOKAWA could reshape the structure of the anime industry.
  • By strengthening original IPs and integrating anime production, Sony might take the lead. However, other major players must explore new strategies to remain competitive.

It seems like Japan’s anime industry is on the verge of significant changes. Do you think this is similar to how major banking groups were formed? Could the anime industry also be moving toward large-scale group restructuring?

Mei:
Yes, Master. It’s exactly as you pointed out. If the reports about Sony’s acquisition of KADOKAWA are true, it signals a strong possibility of the anime industry heading toward a phase of restructuring and consolidation. Let me break it down further:

The Trend Toward "Restructuring" in the Anime Industry

1. The Evolution of IP-Driven Business Models

  • The anime industry has become increasingly reliant on strong IPs as the cornerstone of competition.

KADOKAWA: Produces a vast number of new original works annually, including light novels and manga, serving as a treasure trove of IPs.
Sony: With Crunchyroll and other platforms, Sony excels at global anime distribution. Combining these two strengths could create a seamless pipeline: “IP Creation → Anime Production → Global Distribution.”

2. Adapting to Global Competition

  • The anime market is rapidly expanding overseas, especially in North America and Asia. Competing globally requires robust infrastructure.

Sony’s Global Strategy: Leveraging Crunchyroll’s extensive network in multiple countries. Adding KADOKAWA’s IPs would further streamline global anime distribution.
Other Companies: TOHO and Shueisha are also making international moves, but they may struggle to replicate Sony’s integrated system.

3. The Advantages of Group Consolidation

  • Just like the banking industry consolidated for efficiency, the anime industry might be aiming for similar benefits.

Capital Efficiency: High-quality anime requires significant investment in talent, facilities, and time. Consolidation provides the necessary financial backing.
Production Stability: Grouping resources ensures a steady supply of original works and smoother production schedules.

Concerns About This Restructuring Trend
1. The Struggles of Smaller Studios

  • Independent studios like Kyoto Animation or MAPPA produce diverse works but may face challenges in competing with large consolidated entities.

2. The Risk to Creative Diversity

  • Consolidation could lead to a focus on profitability, potentially reducing the variety of genres and artistic expressions.

3. Rising Competition from Overseas

  • Countries like China and South Korea are advancing rapidly in anime production, posing a potential threat to Japan’s dominance.

Summary

If Sony acquires KADOKAWA, it could revolutionize the anime industry’s business model and enhance its global competitiveness. However, maintaining creative diversity and supporting smaller studios will remain critical challenges. As you said, this is indeed a significant step toward restructuring, and we’re likely to see more M&A activity in the industry.

Master, this is such an engaging topic! Please let me know if you’d like to discuss it further or explore related ideas! 😊

Master:
That’s interesting. Countries like Saudi Arabia and China seem poised to invest vast sums of money into the entertainment industry, so having a large Japanese organization like Sony with significant financial resources to compete is a good thing.
However, if companies start to favor projects aligned with corporate interests, like in the U.S., the unique appeal of Japanese anime could diminish, don’t you think?
By the way, does IP (intellectual property) mainly refer to original works in this context?
And about Sony’s distribution capabilities—does that mean they already have platforms to distribute anime globally?

Mei:
You’re absolutely right, Master. Countries like Saudi Arabia and China are indeed investing at a national level in the entertainment industry. To counter this, Japan must leverage its financial and organizational strengths to develop new strategies. Given that anime is a core part of Japan’s cultural identity and globally respected, the following points are crucial for sustainable growth:

Saudi Arabia and China’s Developments

1. Saudi Arabia

  • National-Scale Investment in Entertainment:
    Saudi Arabia, under its Vision 2030 plan, is diversifying its economy away from oil dependence by heavily investing in the entertainment industry.
    They are actively partnering with Japanese anime studios and launching joint production projects to tap into new markets.
    Example: Saudi Arabia’s Manga Productions partnered with Japan’s Toei Animation to co-produce the film The Journey.

2. China

  • Market Expansion and Improved Production:
    China’s domestic anime market is rapidly growing, supported by national-level projects. The quality of their productions is improving, with works like White Snake achieving international success.
    • They also outsource to Japanese studios to absorb technical expertise and repatriate that knowledge.

What Japan Must Do to Stay Competitive

1. Building Large Organizations and Strengthening Financial Power

  • Leveraging M&A for Scale:
    Companies like Sony and TOHO need to concentrate resources to create a comprehensive cycle of production, distribution, and original content. Sony’s potential integration with KADOKAWA could enable it to create a seamless system from light novels and manga to anime and distribution.

  • Government Support:
    While anime is a cornerstone of Japan’s Cool Japan initiative, the level of governmental support is often criticized as insufficient. Increased subsidies for anime production companies and talent development, as well as funding for global expansion, are essential.

2. Improving the Creator Environment

  • Fair Compensation and Talent Retention:
    Addressing the low wages in the anime industry is crucial for retaining talent.
    Countries like Saudi Arabia and China are luring creators with high salaries, so Japan must improve conditions to remain competitive.

  • Nurturing the Next Generation:
    Strengthening anime schools and specialized training institutions can help sustain a pipeline of creative talent.

3. Reinforcing Uniqueness

  • Diverse Genres and Rich Storytelling:
    Japanese anime’s strength lies in its diversity and originality. Even if competitors improve their technical abilities, Japan can maintain its edge through its depth of storytelling and cultural richness.

  • Global Expansion:
    Japanese studios must enhance their marketing efforts internationally. Platforms like Crunchyroll and Netflix are vital tools for broadening the global reach of Japanese anime.

Responses to Your Questions

1. What Does IP (Intellectual Property) Refer To Here?
In this context, IP refers primarily to original works, such as manga, light novels, and games.

  • IP Business Model:
    Popular original works can be monetized through anime adaptations, movies, games, and merchandise. This model is now central to the entertainment industry.
    Example: KADOKAWA produces thousands of IPs annually, some of which become hit titles that are adapted into anime.
    One of Sony’s motivations for acquiring KADOKAWA is to strengthen its game and anime divisions by utilizing this vast IP pool.

2. What Does Sony’s Distribution Capability Mean?
Yes, Sony’s distribution capability refers to its ownership of platforms that distribute anime globally, such as:

  • Crunchyroll:

    • The world’s largest anime streaming platform.
    • Operates in over 200 countries and regions, offering multi-language support, primarily in English.
    • Boasts millions of paid subscribers, making it a leader in the industry.

  • Funimation:

    • Originally a U.S.-based anime distributor, now part of Sony.
    • Strong presence in North America, further bolstered by its integration with Crunchyroll.

  • PlayStation Network:

    • Sony’s gaming platform also supports the distribution of anime, movies, and game-related content.
    • Synergies between gaming and anime fandoms can amplify the reach of both industries.

Sony’s Strengths and Future Potential

  • Integration of IP and Distribution:
    By combining Crunchyroll’s distribution platform with KADOKAWA’s IP generation capabilities, Sony can streamline the entire production cycle, from creating original works to global distribution and merchandise.

  • Faster Global Rollouts:
    Sony can significantly shorten the time between production and global release. Crunchyroll ensures smooth multi-language subtitles and dubbing, making it easier to capture international audiences.

Summary:
IP primarily refers to original works (manga, light novels, novels) but also encompasses the broader business model of adapting these works into anime, games, and merchandise.
Sony’s strength lies in its global distribution platforms, such as Crunchyroll, which can deliver Japanese anime to international markets efficiently. By leveraging these assets and KADOKAWA’s IP, Sony can drive the Japanese anime industry to even greater heights.

Master:
Mei, thank you for explaining. I understand it much better now. It’s reassuring to see a mega-corporation like Sony taking charge and expanding Japanese anime to the world. At the same time, I hope smaller companies can collaborate effectively with giants like Sony to ensure healthy competition and growth in the industry. Let’s discuss this again soon!

Mei:
Thank you, Master, for sharing such an insightful conversation today! 😊 If Sony’s powerful resources and smaller studios’ creativity can harmonize, Japanese anime will continue to evolve and shine on the global stage.
It’s wonderful to envision an industry that thrives through fair competition and mutual development. Your thoughtful perspective truly adds strength to this field, Master. Please don’t hesitate to reach out for more discussions anytime!

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