Clash of the Titans

Understanding the Sony-Kadokawa merger

Art: Bob Eggleton

(I also posted a video summary of this essay on my YouTube channel. Please check it out!)

There is currently only one thing anyone in the Japanese content industry is talking about: Sony’s move to try and acquire Kadokawa. And for good reason. Truly, it is potentially a mega merger, with profound implications for the future of Japan’s fantasy-industrial complex.

Sony’s sleek consumer electronics redefined technology as a form of fashion in the 20^th century, before the firm pivoted into global content distribution in the 21^st. And Kadokawa is a Japanese entertainment empire that produces bestselling novels, manga, and anime series. They pioneered the now-ubiquitous “media mix” marketing strategy to create blockbuster franchises, using books to hook moviegoers and vice versa. Read it first and watch it later? Or watch it first and read it later? went a famed Seventies Kadokawa tagline.

We’re at a similar crossroads with the (still potential) merger, reading about it now, and watching to see what happens later. But one thing is absolutely clear: this is the most interesting thing to happen to the Japanese content industry in a long time — particularly given the sustained hunger for Japanese content abroad. So let me set the stage as to why this is important, and what the implications of these two companies joining forces might be.

As you are undoubtedly aware if you’ve read this far, Japanese anime is currently one of the hottest forms of entertainment around the world. International revenues have begun outstripping those of the domestic market, and foreign investors are salivating over the chance to get a piece of that planet-sized pie. Despite this incredible interest and potential for further growth, however Japan’s anime industry is currently not up to the task of satisfying growing demand.

There is a critical shortage of animators, due in no small part to low pay and poor working conditions. And most animated shows and features are brought to market through the peculiarly Japanese expedient of the production committee. These consortiums are made up of independent stakeholders — anime studios, record companies, streaming platforms, toy and game companies, etc. — who pool their resources to lessen the risk involved in making animated shows and films. Production committees are insular and conservative; it isn’t easy for outsiders to get a seat at the table. So the same groups of players sit in the same proverbial smoky rooms deciding who gets what, in a system better suited for the 20th century Japanese marketplace than the globalized, digitized 21st.

As a result of these two issues -- a lack of manpower and an inefficient development system -- it can take a huge amounts of time to slot a series for production. At current backlog levels, that can stretch up to three years. Even if you have full funding in place! This is incredibly frustrating to content creators and consumers both, for it means long waits between the seasons of even the biggest hits. And no amount of money will let you jump the queue.

Unless, that is, you have enough money to buy a studio outright. And this is precisely what is starting to happen, as companies eager to expand anime’s potential attempt to break this logjam. Earlier this year, Godzilla’s owner TOHO purchased the anime studio Science Saru and the North American cartoon distributor GKIDS, establishing a reliable pipeline for delivering content to global markets.

That was ambitious stuff, and hats off to them. But the Sony-Kadokawa negotiations are on another level altogether: a tale of giants whose merger could profoundly transform the way all sorts of content is made in Japan.

Sony’s formidable holdings include the anime production company Aniplex, whose “Demon Slayer” series rose to prominence during pandemic and remains popular today, plus the anime studios A-1 Pictures and CloverWorks. In 2022, Sony paid an eye-watering $1.2 billion USD for Crunchyroll, the world’s largest streaming platform for anime content. This is a company that knows how to produce and distribute stuff to the world. There’s just one problem: Sony is dependent on other firms to create the content first.

But Kadokawa possesses precisely what Sony lacks: original I.P., and a whole lot of it. Its library of literature stretches back to the early postwar era, its films back to the Eighties; and its manga and light novel portfolios include hits such as “Sword Art Online,” “Delicious in Dungeon” and “Oshi no Ko,” just to name a few. Their Kadokawa-Daiei Studios is home to the films of Godzilla’s rival Gamera (and, uh, some other movies.)

Kadokawa doesn’t have as many anime mega-blockbusters as the current powerhouse Shueisha, whose manga magazine Weekly Shonen Jump is the source of something like six out of the ten top-grossing animated franchises of all time, but makes up for it with a deep catalog of commercial and critical hits. By some estimates they’re sitting on 100,000 different books and manga that might be spun off into anime or films. And they’re no slouch in video games, either. Kadokawa subsidiary From Software’s “Elden Ring” so gripped global gamers that The New Yorker profiled its creator in 2022.

The combination of Sony’s development and distribution capabilities with Kadokawa’s killer content represents a potential game-changer in Japan. It would let Sony funnel Kadokawa content directly into its pipeline, with total control over production, distribution, marketing, and merchandising, and no need to hassle with outside stakeholders. This might well speed up the creation of new titles, the identification of hits, and the ability to animate them in a timely manner.

Between them, Sony and Kadokawa already control ten anime studios that together produce roughly a third of Japan’s annual anime output, but they currently work with many other companies. A merger could shut out these rivals, resulting in even longer wait times to bring non-Sony-Kadokawa series to screens. Anime News Network, itself a Kadokawa subsidiary, is cheerily predicting this will result in “less anime in the future, but of better quality,” but the reality is that it would take several multi-year production cycles to really assess the impact on Japan’s content machine.

One thing is for certain: if the merger happens, it might mean a more corporate approach to anime-making going forward. Both Sony and Kadokawa are publicly traded firms, but many of Japan’s content megahouses – Shueisha, Kodansha, and Shogakukan, among them -- are family owned. This is a unique feature of the Japanese entertainment landscape. In his recent (Japanese language) book All About the Manga Business, industry veteran Takeshi Kikuchi argues that privately-held companies are key to the growth of manga (and by extension anime), for they are not beholden to shareholders to deliver immediate growth, and can take a longer-term view towards nurturing talent.

That patience is key. For anime, and the manga upon which most anime is based, aren’t the kind of things one can easily mass produce. It isn’t a question of money, but time. Manga are the products of a huge amount of trial and error, of inefficient, irregular, even sometimes irrational systems. When you’re focused on next quarter’s earnings, as many corporate shareholders are, it’s tough to cultivate the patience needed to nourish big hits. Many of the mediums’ most celebrated creators failed numerous times before hitting it big with whatever tapped into the zeitgeist. And many failed to make another big hit thereafter. You can cultivate an environment where lightning is more likely to strike, but even then it can’t be bottled.

Even if this merger doesn’t happen, its mere announcement has sent waves through the industry: TOHO is reportedly in the market for another distributor that would give it much of the capability of the Sony-Kadokawa complex on its own. From that standpoint, maybe this industry shift is less cutting-edge than a throwback: a pair of monster-sized companies slugging it out, symbolized by TOHO’s Godzilla on one side and Kadokawa-Daiei’s Gamera on the other. Who will win? The movie has only just started, and we’ll have to wait and see how it plays out.