Sony has been struggling to nudge itself into the streaming market for years, but through Crunchyroll it has found new growth opportunities.
Sony has been the large absentee in the streaming wars. Despite its vast content library it failed to launch a product that could compete with the likes of Netflix, Amazon and Disney. However, there was one segment of the market that was largely untouched and where Sony had a bargaining chip, anime. The Japanese conglomerate had experience in this media segment through Funimation and now the cards were right for Sony to tighten its grip on this lucrative market.
Sony acquires Crunchyroll
In December 2020, Sony announced it would acquire Crunchyroll from AT&T for $1.17 billion. Crunchyroll goes beyond just streaming, offering manga, mobile games and merchandise, creating a vibrant ecosystem to its members. The service had become a strong and dominant player in the anime market. Reuters noted that through the deal AT&T would receive the necessary funding to expand its content offering on its streaming service WarnerMedia. Crunchyroll in turn was too niche for the telecom giant, the news outlet continued.
Chairman and CEO of Sony Pictures Entertainment, Tony Vinciquerra, said in the press release Sony was proud to welcome Crunchyroll to the company. With its experience through Funimation, and partners Aniplex and Sony Music Entertainment, the team has gained tremendous experience and through its vast network, it can deliver outstanding content to audiences around the world.
In August 2021, Sony Funimation completed its acquisition of Crunchyroll from AT&T. The anime streaming service was home to 120 million subscribers of which 5 million were paying subscribers, spread over more than 200 countries. Chairman, President and CEO, Sony Group Corporation, Kenichiro Yoshida, said in the statement that the anime is a rapidly growing market. The acquisition of Crunchyroll fits Sony’s strategy to be closer to the industry’s creators and sit at the heart of the anime community. Between the lines we can see that Yoshida wanted to solidify its market share in the anime streaming market.
Sony fails streaming
Before the lead up to the Crunchyroll acquisition, Sony Pictures’ revenue barely delivered any growth to the company. In 2017, Sony Pictures 903 billion yen in revenue, growing slightly to 1.01 trillion by 2017. In 2019 revenue for the pictures segment remained a disappointing 1.01 trillion yen, only to fall sharply to 752.9 billion yen in 2020. Sony was struggling to realize any meaningful growth from its pictures business segment.
Despite the growth, Sony had trouble turning a profit on its movie business. In January 2017, Sony Corporation said it would write off 112.1 billion yen ($976 million) for the third quarter of 2016, as profits for movies lost momentum and online streaming services ate away profits at its direct-to-consumer DVD-business. The conglomerate had to adjust revenue expectations for its DVD, blu-ray and home entertainment unit to align with market developments, Reuters commented.
Executives at Sony have been trying to adjust course for its in years prior to bring it back to stable and durable profitability, the news outlet continued. Under Chief Executive Kazuo Hirai, the company has been aggressively cutting costs across its sprawling business. Hence, the company expects profits to follow for its struggling movie segment, which has seen fierce competition at the box office. The write downs aren’t a failure necessarily, but an acknowledgment to past strategic mistakes, a Jefferies analyst explained.
In April 2017, Sony Pictures announced yet another loss of $719 million, with the company’s total profit falling by 50 percent to $655 million over the previous year. Poor performance at the box office has been one of the leading causes for the losses. The losses fall in line with previous performance results, Deadline said. The company overall has been hit with changing foreign exchange rates, which dampened the profit opportunities for Sony. Further losses were offset by its gaming division, which took the brunt of its shrinking smartphone division.
In March 2019, Sony sold its majority stake in streaming Crackle to Chicken Soup for the Soul, who also operated Popcornflix and other streaming services. Sony acquired the ad-supported streaming service Crackle in 2006, but due to increased competition from competitors such as Netflix, Hulu and Amazon, who poured billions into their services, Sony was unable to maintain momentum, Techcrunch noted. In order to remain a viable player in the streaming market, Sony sought a strategic partnership back in July 2018, to realize growth for its ailing service.
Through an internal memo, cited by The Hollywood Reporter, Mike Hopkins, Chairman of Sony Pictures Television told staff that the company would seek to find an outside partner to build a venture to boost the service’s subscriber base. The company was not looking for opportunities to sell Crackle entirely. The creation of a venture would allow Crackle to attract the necessary funding and create an offering that could rival its deep-pocketed rivals Netflix, Amazon and Hulu, but also players like YouTube, who attract billions of views each month.
Sources told The Hollywood Reported that a partnership could deliver much necessary content and leverage the existing assets to grow the Crackle audience. The divestment in Crackle came when ad-support streaming services were seeing a rise in popularity, such as Amazon introducing IMDB Freedive and Viacom acquiring ad-supported streaming service Pluto TV for $340 million. Hopkins said that services such as Crackle Plus, could be a viable contender in the ad-supported streaming space.
Playstation Vue flop
The entertainment industry as a whole entered an tumultuous era where companies like Disney were set to large media properties such as Fox and AT&T acquiring Warner. Bros. with the media conglomerate eyeing a purchase of HBO. This consolidation posed a major threat for more conservative players like Sony, who had less funding available to either purchase large media assets or create a content library that could compete with up and coming players.
In October 2019, Sony announced it would shut down its premium TV streaming service, Vue. The shut down won’t come as a surprise to many as industry onlookers had already predicted the service’s failure since its announcement back in November 2014. Writer and editor for The Boston Globe and former Microsoft employee, Daniel B. Kline wrote for The Motley Fool back in March 2015, that Vue was destined to fail. Sony’s streaming platform, which would become a home to 85 channels, would place it in the middle of the cord cutter segment. However, Kline warned, its strategy might leave its target audience confused.
Sony set the base price for Vue for $49.99, and two higher tiers, with the most highest plan selling for $69.99, that included an additional lifestyle package. Sony was proud of its offering and viewed the new streaming service as a novel opportunity for audiences to discover new content. But as with many marketing materials, the strategic execution can oftentimes be lackluster. Kline commented that it’s hard to see how Sony aims to market the Playstation Vue, as it delivers little to no savings to cable customers. On a per channel basis, Vue is more expensive than wired alternatives.
The lack of any meaningful savings makes it hard to pinpoint who the actual target audience is for Sony’s latest streaming service, Kline notes. Cord cutters won’t be tempted to depart from their cable subscription for an equally as expensive streaming service. A market exists for regions that are underserved in terms of cable or satellite offering. In order for Sony to disrupt the dominant players in the cable market, it should create a more compelling, lower priced offering.
Peter Kafka for Vox shared a similar sentiment, seeing little pick-up from Playstation customers, in an ever more crowded space where large players such as Verizon skipping on paid TV services and Comcast, who has garnered millions of subscribers for its digital television service, was losing money. Sony’s Playstation Vue service, despite sporting a hefty price tag of $50, was still losing money. Despite the gloomy outlook, large players such as Apple were eying the television streaming market, with even companies such as Intel exploring opportunities for delivering its own service.
Licensing content
In the opening stages of 2021, Sony changed its strategy in regards to streaming. Instead of trying to brute force its own service, instead it sought lucrative licensing deals with its primary competitors, Netflix and Disney. Senior Film Writer, Matt Donnely from Variety, opened by stating that many media companies have been trying to create their own lucrative streaming service, with media behemoths such as NBCUniversal, ViacomCBS and WarnerMedia looking to put their vast content libraries to work. Meanwhile, many industry onlookers were wondering when Sony Pictures Entertainment would launch its own rivaling product.
After the many failures of Sony in previous years, it wouldn’t come as a surprise that the company would rather opt for licensing deals than launch its own product. Hence, Sony brokered deals with Netflix and Disney to allow distribution of its intellectual properties. With Netflix, Sony negotiated a five year deal where the streaming giant would license all Sony Pictures films in the “pay 1” window, meaning Netflix can publish the content on its service the first time the movie can air after its theatrical and home release.
In the press release, Head of Global Films at Netflix, Scott Stuber, commented that Sony had been a great partner and the streaming service was excited to expand its relationship to deliver the impressive and vast library to its members. President for Worldwide Distribution and Networks at Sony Pictures Entertainment added that the deal showed the significance of its content library to its distribution partners as a way to grow their audiences and deliver the best entertainment.
Disney meanwhile won a bid for the “pay 2” window. Sony negotiated a lucrative deal that generated an upward of $5 billion, with Disney taking the majority, paying $3 billion to distribute Sony Pictures content across all its owned streaming services, including Spider-Man. Jay Peters at The Verge noted that having Spider-Man reunited with Marvel content on Disney+ could draw in more subscribers. Furthermore, it could bring more value to existing subscribers.
Anime market expands
Sony was seeing problems in its streaming offering. The services it was trying to launch weren’t suitable for mass audiences as they didn’t bring a strong enough offering. Furthermore, Sony’s problems were amplified with new players such as Netflix, Apple, Disney and Amazon pouring billions into original content and promotion. Even a behemoth such as Sony couldn’t compete with the infinite resources its primary competitors had. However, there was one segment that was largely untapped and Sony had some decent experience, the anime market.
The overseas anime market had been growing exponentially before Sony decided to acquire Crunchyroll. In 2013, the overseas anime market was a fraction of the value it captures today, however the growth was rapidly accelerating as the industry entered 2015. In 2014, the overseas anime market was a mere 0.28 trillion yen, and marginally growing to 0.33 yen in 2014. However, in 2015, the market jumped to 0.58 trillion yen. The market reached 1.01 trillion yen by 2018 and started growing as years progressed. In 2020, the year Sony announced it would purchase Crunchyroll, the overseas anime market had grown to 1.24 trillion yen.
This rapid market expansion could be witnessed at the exponentially growing paying subscribers at Crunchyroll. In March 2013, the anime streaming service attracted 0.2 million paying subscribers. This number doubled to 0.4 million by November 2014 and more than doubled again by February 2017, reaching 1 million subscribers. The number paying subscribers doubled again by November 2018, where Crunchyroll was home to 2 million members. While these numbers are nothing compared to the subscriber counts at Netflix or Disney+, they revealed an untapped demand for anime content. By July 2020, the year Sony would announce the acquisition of the service, Crunchyroll had amassed 3 million subscribers.
Crunchyroll success
Where Sony failed in other streaming business ventures and garnering criticism for its purchase of Crunchyroll, several years in and the streaming service is paying off dividends for Sony. In March 2023, The Hollywood Reporter spoke with President of Crunchyroll, Rahul Purini, who had been with Funimation for 15 years and was appointed president of Crunchyroll in May 2022. The price for the acquisition has been teemed steep by industry onlookers, especially in comparison to its bargain deal with Funimation in 2017, which only cost the company a mere $143 million.
Seeing how Sony was now consolidating in the anime streaming market, the sentiment around its purchase was shifting from a failure to an overnight success story. Purini explained the team has been focussing on profitability and the flywheel effect in a market that has been severely disrupted by streaming players. Crunchyroll and Funimation, he continued, have been operating as start-ups since their inception and now the time had come to nudge them into profitability. The Hollywood Reporter said that anime fans are a unique passionate community, with Crunchyroll being able to uniquely follow them wherever they were.
The streaming service had the largest anime library and offered a wide variety of tiered plans, from ad-supported to several paid options. While data about the service’s profitability remained absent, Purini said Crunchyroll was profitable. The platform’s reach isn’t limited to its online streaming product, it’s also the primary distributor for theatrical anime releases in North America, creating a strong revenue stream. Cruchyroll organizes offline events for anime fans, expos and awards, the news outlet highlighted. To boost anime merchandise sales, the streaming platform acquired Right Stuf, the leading online retailer for anime and manga related goods in North America.
Through its subscription system, Crunchyroll can add special perks for its members and upsell to higher tiers. These bets are based on a strong belief that the anime market will grow exponentially, with Purini commenting that the company even underestimated the growth. Through internal research Crunchyroll estimated that an upward of 300 million people globally consumed Japanese media, with audiences centered in the United States, followed by Western Europe, Mexico among others. The platform has plans to expand in Southeast Asia. While the industry might be a niche, Purini continued, the numbers are in their favor.
Crunchyroll can maintain a competitive edge through its strong network of distribution channels, making it a reliable and interesting partner for Japanese media companies, who can tap into the most dedicated of fans, The Hollywood Reporter noted. The success is a boost for the struggling Sony Pictures business. In February 2024, Variety cited an estimation by Goldman Sachs that Crunchyroll alone will contribute up to 36 percent of the total revenue of Sony Pictures Entertainment by 2028. Purini didn’t comment on the figures, but acknowledged that there’s room to grow for the service.
Crunchyroll culture
The Verge spoke with Purini in February 2024 where elaborated on the internal operations of the company and its ability to tap right into the content source in Japan, which allowed the service to become a dominant player in the anime streaming market. Purini pointed out that Crunchyroll is the result of multiple mergers. Mergers can erode a company’s foundation, however, the services always had their audience in mind, hence maintaining a strong relationship with the Japanese creative ecosystem. This has transcended to Crunchyroll, who continues these strong relationships.
Purini aims to keep the service’s objective as simple as possible, noting that it buys animation from Japan, maintains a connection with the creators and distributes it to its members. When asked whether this puts unreasonable pressure on the company to maintain growth, compared to its more flat culture oriented competitors, Purini notes that there’s still a lot of growth, taking away some of the pressure for the service to aggressively maintain momentum. The platform is able to finetune its offering by reporting back to the original creators what its customers are looking for. Creators can make subtle adjustments to appeal to different audiences around the world.
Creators receive insights through Crunchyroll’s vast amount of data, which is parsed to Japanese creators who can learn what stories stick and how they can adjust to keep audiences engaged. Purini adds that certain partners might not be able to produce certain stories, hence they remain committed to their domestic audiences. In these instances, Crunchyroll acts as an investor who helps Japanese creators craft their stories to appeal to larger, international, audiences.
A recent project where Crunchyroll has brought new materials to creators in Japan was Solo Leveling, a story adapted from a Korean manwha. The team at Crunchyroll liked the source material and decided to pitch the idea to one of its Japanese partners and sister company Aniplex. The creators were intrigued by the IP and decided to produce it into an anime series. About one and a half years later, Purini said, the show was announced and released in January 2024. Solo leveling was well received by international audiences and served as an example as to how Crunchyroll can drive success by bringing new IPs to its partners.
Despite the success, Crunchyroll has to ensure that its productions remain true to the unique offering on its platform and don’t dilute the material to fit the broughtest audience, hence risking alienation of its customer base. Purini explains that anime fans are a diverse global audience who like a wide variety of stories across multiple genres. While the story preferences come from a broad audience, frameworks are in place to ensure the productions stay true to the anime formula. Source material of the IPs is respected in order to remain authentic to the original story.
Sony’s bet paid off
Sony has struggled a lot to find its footing in the streaming market. Despite its vast library of intellectual property, it was able to carve out significant market share to capitalize on its media assets. The competition is fierce and the top players in the market have infinite pools of money to keep advertising and keep creating content to draw in subscribers. A play that Sony cannot keep up for too long. However, there was one area which was left untouched and where Sony had ample experience, anime.
Sony could get ahead of its competition by expanding its dominance in the market, securing licenses and IPs to safeguard its position. Through Funimation it had reached a large audience overseas and witnessing the rapid growth of Crunchyroll, it could solidify its share. While experts were skeptical at first, Sony’s bet paid off, with Crunchyroll seeing further accelerated growth after the acquisition.
