In Q1 2023, PARQOR will be focusing on four trends. This essay focuses on "Media companies have millions of consumer credit cards on file. What happens next?"
One big, broad brushstroke theme lately has a growing sense of inevitability that the legacy media model is in an accelerating death spiral. There will be no one-to-one replacement for it, not even streaming. This has been the story of the decline of Regional Sports Networks (Diamond Sports declared bankruptcy on Tuesday night) and of the reorganization of AMC Networks. There are also questions about the theatrical model’s future beyond recent blockbuster hits.
Another big, broad brushstroke theme is the growing uncertainty that the future of streaming entertainment is as many had imagined it to be. As Disney CEO Robert Iger recently described it, the uncertainty is “being mindful of a world that is not getting any less complicated” but where streaming is still “a great consumer proposition.”
Sitting in between both themes is anime streaming subscription and video-on-demand service Crunchyroll. Sony’s post-acquisition strategy has moved the service beyond its streaming DNA into a “flywheel” model: theatrical releases of new anime content, sales of home entertainment products (e.g. DVD box sets), merchandise licensing, and secondary distribution.
That streaming-centric flywheel is the key difference between Crunchyroll and other streamers, and the key difference with other traditional media distribution businesses. In the past week, we have learned a little more about the business, and those revelations may explain why we may not see legacy media businesses find a similar equilibrium to Crunchyroll’s.
Key Takeaway
Crunchyroll's success highlights how the politics of owning a lot of IP in the streaming era may be a core strategic *disadvantage* at a time when fans increasingly want to be served with flywheels.
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"Obsessed" fans
The Financial Times recently shared some data on the global anime market:
The most recent figures available in 2021 show the global market for Japanese anime grew to a record high ¥2.7tn ($20bn). Estimates produced by SkyQuest Technology Consulting, and used by several Sony analysts to inform their own forecasts, suggest that the global anime market is now growing at about 10 per cent a year and could reach a value of $47.14bn by 2028.
Crunchyroll recently shared internal research with The Hollywood Reporter that shows “about 300 million people around the world watched Japanese anime in some form or another in 2022 — which is double 2020’s total viewership.” Its user base — primarily centered in the U.S., followed by Western Europe, Mexico, Brazil and Australia, with plans to expand in Southeast Asia — is growing meaningfully across all age groups, but” it’s exploding in the 13-17 and 18-25 age segments.”
A recent interview with Tony Vinciquerra, Chairman and CEO of Sony Pictures Entertainment, revealed a little more about how its flywheel works in this market:
“Crunchyroll, you know, that audience is so, so loyal and so enthusiastic. Obsessed is a good word for it. And doing really, really well. We put out a film last weekend, which was not really a film, it was two episodes from last season of the TV series. And one from the new season. It did $10 million.”
Vinciquerra was describing the recent release of the movie “Demon Slayer: Kimetsu No Yaiba - To the Swordsmith Village”. Some back-of-the-napkin math with $11.75 as an average ticket price means there were 851,000 ticket buyers, or 8.5% of its 10 million paying subscribers. To rephrase Vinciquerra, Crunchyroll repackaged three episodes of a television series — Japanese manga artist Koyoharu Gotouge's anime series “Demon Slayer: Kimetsu no Yaiba”— into a movie. Now, it is reasonable to assume not every one of those ticket buyers is a subscriber: there are 2.5 residents per U.S. home on average, so perhaps it is more like 350,000 ticket buyers or 3.5% of subscribers.
Either estimate suggests an extraordinary conversion rate: 1% to 2% are the rule of thumb conversion rates for direct-to-consumer conversion funnels. Crunchyroll’s conversion rate is 1.75x to 3.5x higher. Moreover, nearly 1 million moviegoers paid to watch content previously distributed as TV episodes, or a sunk cost. So all theatrical revenues are marginal upside for content distributed at minimal marginal cost.
Vinciquerra’s example of “Demon Slayer… Swordsmith Village” ultimately implies the theatrical distribution of their favorite streaming content is a reward for their fandom across the flywheel.
The missing details
In this light, it is worth revisiting the question I asked in January: “Why Don't We See More Crunchyrolls?” There are compelling economics here:
Inelastic demand for content across streaming and theatrical
The streaming service as a key cornerstone of a broader fan engagement “flywheel” ecosystem, and
Evidence of good conversion rates across that ecosystem.
But as Raquel “Rocky” Harris wrote in The Wrap this week, there are other, less obvious factors at play to consider:
“Crunchyroll also has one thing the others don’t: a seat at the table in the Japanese production committee system. Production committees are groups of company-based investors who pitch in money or resources to produce a series or film, and reap the benefits if it’s successful. If a project does poorly, no one takes the full brunt of the financial blow. Committees are typically made up of four to six different companies, like licensors, toy manufacturing companies, a TV network or a manga publisher.
Sevakis called it a “boys club” which makes it “really hard for an outside company to come in and participate in that system.” Crunchyroll and Funimation both broke into the system after years of trying, while Netflix has been rebuffed.”
Crunchyroll’s true advantages in anime lie less in its streaming model and more in its supply side relationships. These are not easy-to-replicate advantages as Harris writes: “The downfall of U.S. companies trying to enter the anime market is typically their lack of understanding the intricacies of anime production, he said, like not getting the difference between a dub and closed captioning.” Also, as a recent Hollywood Reporter piece highlighted, Crunchyroll’s deals with anime creators “also entail back-end revenue and data-sharing agreements, ensuring that the biggest hits on the Crunchyroll service are shared wins.”
So Netflix, Warner Bros. Discovery, Disney and Amazon have all invested in supply side relationships, but none have had the same success securing a steady supply of anime content as Crunchyroll. Netflix does not share on back-end revenue, and Disney has had a rocky relationship with anime powerhouse Studio Ghibli, to date.
But, Hollywood
The Hollywood Reporter piece has a great quote: “a 360-degree flywheel approach is how the anime community actually wants to be served”. So if that’s how they want to be served why don’t other fan communities want to be served this way? Why can’t Hollywood figure that out?
We have witnessed two failed attempts at flywheels in the past two years: former WarnerMedia CEO Jason Kilar’s “For the fans” day-and-date release strategy across both streaming and theatrical, and former Disney CEO Bob Chapek’s “Disney Prime” initiative to drive Disney+ as a foundation of the Disney ecosystem.
Kilar’s “Project Popcorn” saw “an opportunity to do something firmly focused on the fans: give them the power to choose between going to their local cinema or opening HBO Max. Super-fans will likely choose both.” Two months after Kilar wrote that memo, AT&T and Discovery began negotiating a merger without his knowledge.
Chapek foresaw “Disney Prime” as a means of driving deeper engagement within the Disney ecosystem, and on the Q3 2022 earnings call he offered the example of Marvel fans:
For example, in addition to driving engagement among tens of millions of existing Marvel fans, we have seen each new Disney+ original Marvel series attract incremental viewership and new subscribers that hadn't previously engaged with Marvel content on the service, thanks to the episodic format that enables us to explore new characters and genres. The value of expanding the fan base is tremendous, and this new audience can then experience Marvel across our other offerings from consumer products to games to theme parks.
Three months later he was out of a job, replaced by his predecessor and successor Robert Iger, who is openly criticizing the prioritizing of marketing the Disney+ platform over Disney programming on those platforms.
Lesson
The lesson from both Kilar and Chapek may be that like Japan’s anime business, both Disney and Warner Bros. studios each have their own “production committees” for IP that has obsessed fans (DC and Harry Potter at Warner Bros., and Marvel, Pixar and Star Wars at Disney). That CEOs like Chapek and Kilar (and now Iger and Warner Bros. Discovery CEO David Zaslav) face a political challenge within their own companies — and the broader Hollywood ecosystem, as both learned in their tête-à-têtes with top agents top agents, Bryan Lourd at Creative Artists Agency and Ari Emanuel at WME — in pursuing streaming flywheels more than they do a technological challenge.
That, ultimately, the politics of owning a lot of IP in the streaming era is a core strategic disadvantage. It results in organizational inertia at a time when fans increasingly want to be served with flywheels, and when agility is necessary for survival in a rapidly changing marketplace. And both technological progress and compelling economics are not enough to conquer inertia at a time when legacy media companies face decreasing odds of survival. Any attempts to challenge that inertia by a sitting CEO have led to their sudden ousters.
If more Crunchyroll flywheels are to emerge in legacy media, Crunchyroll’s road to success points to supply side politics as the key variable, and not streaming technology.