The protracted negotiations surrounding Microsoft’s acquisition of Activision Blizzard have raised a recurrent worry that this significant purchase could ignite an industry-wide arms race.
In response, competitors such as Sony may feel compelled to embark on their own major acquisitions, not merely for immediate console exclusivity but to amass a robust portfolio that could be crucial for future subscription and streaming services to remain competitive.
While no other entity in the gaming sector can match Microsoft’s financial clout, the industry is teeming with potential acquisition candidates whose valuations are merely a fraction of Activision Blizzard’s hefty price tag.
This week, the news that Sony is actively engaging in talks to acquire the publishing group Kadokawa could well be a tangible manifestation of this concern, yet it would be misleading to label this move solely as a reaction to Microsoft’s aggressive spending.
Kadokawa stands out as a massive, intricate conglomerate encompassing diverse subsidiaries that hold substantial value in line with Sony’s ambitions for the upcoming years. However, the acquisition could prove complicated and expensive over the long haul—an important consideration given Sony’s recent history with acquisitions.
Much of the Western media coverage regarding this prospective deal has concentrated on Kadokawa’s status as the parent company of FromSoftware, the celebrated creators behind iconic games like Dark Souls and Elden Ring, and this framing is undoubtedly valid.
Securing FromSoftware would represent a significant victory for Sony, as the two companies have shared a productive partnership, collaborating on acclaimed PlayStation-exclusive titles like Bloodborne. Should this acquisition proceed, there is potential for revitalizing this IP, reminiscent of Sony’s successful integrations of studios such as Naughty Dog, Sucker Punch, and Guerrilla Games.
Although it’s reasonable to express apprehension about the acquisition of such a revered and high-profile developer by a platform owner, the transaction appears straightforward, and the integration of FromSoftware into Sony’s studio framework would likely unfold smoothly.
However, it’s crucial to note that Sony’s proposal revolves around acquiring Kadokawa itself, a corporation not especially recognized outside of Japan. Kadokawa stands as one of the nation’s premier media enterprises, yet has evolved into a sprawling conglomerate with subsidiaries operating across numerous sectors including print publishing, television and film production, web services, real estate, and various international collaborations.
This situation highlights Kadokawa’s potential value. Through its diverse holdings, Kadokawa boasts an extensive library of intellectual property, particularly within the realms of anime and manga. Sony, which already owns the popular anime streaming service Crunchyroll, is eager to bolster its presence in this area, creating clear synergies with Kadokawa’s portfolio and Sony’s ambition to become a more dominant force in the anime and manga sectors.
Kadokawa isn’t merely a name; it’s one of Japan’s most well-established media businesses that has morphed into a complex web of subsidiaries across various industries.
This acquisition could also open doors for Sony in the gaming arena, as several of Kadokawa’s IPs may lend themselves well to game adaptations. Relatively inexpensive adaptations based on popular manga and anime series have emerged as a surprisingly lucrative segment of the gaming industry. Notably, one of the studios under Kadokawa that could come under Sony’s wing is Spike Chunsoft, which specializes in this realm.
One of the advantages for Sony in pursuing this acquisition is that Kadokawa is comparatively affordable, especially given its extensive IP library. Industry analysts often claim that the Japanese stock market tends to undervalue intellectual property, a notion substantiated by Kadokawa’s current depressed share price, exacerbated by a significant data breach earlier this year.
It appears there may not be a more attractively priced repository of intellectual property and creative studios available in the global mergers and acquisitions landscape at this moment, leading Sony to consider swiftly securing these assets before rival companies, particularly those in the competitive Seattle tech hub, notice.
However, the potential complications surrounding this deal cannot be overlooked. For instance, the statistic indicating that games constitute 12% of Kadokawa’s sales while generating a third of its operating profit highlights potential challenges, as the company is vast and much of its operations are not particularly lucrative.
Some of Kadokawa’s business interests consist of low-margin enterprises, including several labor-intensive sectors. Additionally, subsidiaries like Enterbrain and ASCII, which are involved in magazine publishing, continue operations but are widely regarded as being in long-term decline.
A considerable portion of Kadokawa’s revenue model reflects “legacy” aspects, especially as a central part of its IP generation strategy involves the sale of printed books. It remains uncertain how such a business aligns with, or fits into, Sony’s broader strategic vision.
Moreover, simply conducting a drastic overhaul of misaligned subsidiaries post-acquisition could prove to be an arduous task, particularly against the backdrop of stringent Japanese employee protections.
Post-acquisition restructuring could present significant challenges, especially considering Japan’s robust employee protection laws.
This proposed acquisition unfolds in the context of Sony’s somewhat tumultuous recent acquisition track record. After a phase of notably successful and well-integrated studio acquisitions, the company embarked on a spending spree that has since been characterized by difficulties.
After investing $3.6 billion in the purchase of Bungie—approximately equivalent to Kadokawa’s market capitalization—Sony confronted the stark realization that Bungie, rather than facilitating successful integration across other Sony studios, was grappling with its own operational crises.
Last year, Sony acquired Firewalk Studios, only to shutter its doors following the dismal launch of its inaugural game, Concord. Each of these prior acquisitions was significantly more straightforward in nature compared to the complex landscape surrounding Kadokawa; therefore, it is only reasonable to wonder whether Sony can effectively manage an acquisition of this magnitude.
Despite existing concerns regarding execution, the fundamental rationale for this deal remains robust and likely compelling to Sony’s leadership. To maintain competitiveness, the company recognizes the necessity of expansion, particularly in light of Microsoft’s persuasive demonstration that acquisitions can be an expedient route to growth.
However, it is worth noting that while Microsoft’s acquisitions focused primarily on game developers and publishers, Sony’s approach appears riskier, as it involves an attempt to integrate a vast media and publishing conglomerate to access a select studio and valuable intellectual property. This undertaking holds remarkable potential for Sony, but the challenges of orchestrating a successful acquisition of this scale should not be underestimated.