Understanding the Intricacies of Sony’s Acquisition of Kadokawa

Amid the prolonged saga of Microsoft acquiring Activision Blizzard, there has been a persistent concern that this transaction could trigger an arms race.

Competitors like Sony might genuinely feel compelled to respond similarly with substantial acquisitions, securing studios and content not just for current console exclusivity but also to build portfolios necessary for future subscription and streaming services to remain competitive.

No other entity in the industry possesses as deep pockets as Microsoft; however, there are numerous potential acquisition targets available whose price tags are just a fraction of Activision Blizzard’s.

This week’s announcement that Sony is in talks to acquire publishing group Kadokawa could indeed indicate that this concern is becoming a reality, although it would be misleading to frame this as merely a reaction to Microsoft’s spending spree.

Kadokawa is a large, diverse company that encompasses various subsidiaries, many of which could be of significant value to Sony’s stated goals and ambitions in the coming years. This acquisition could also prove to be quite challenging and costly in the long term – a considerable undertaking given Sony’s mixed record with acquisitions in recent years.

Coverage in western media regarding this possible deal has largely focused on Kadokawa being the parent company of FromSoftware, the creators of Dark Souls and Elden Ring, presenting a somewhat narrow perspective.

FromSoftware is indeed the crown jewel of Kadokawa, with Elden Ring alone contributing significantly to the company’s bottom line since its release. It’s by far the most profitable segment of Kadokawa’s business – in the most recent financial reports, the gaming division was notably bolstered by the sales of Elden Ring and its DLC, Shadow of the Erdtree, which, despite accounting for only about 12% of the company’s sales, contributed nearly a third of its total operating income.

Acquiring FromSoftware would undoubtedly be a major accomplishment for Sony. The two have maintained a close working relationship for some time, creating PlayStation-exclusive titles like Bloodborne (an intellectual property that might see a revival if this deal proceeds), and it is quite easy to imagine a Sony acquisition here flowing smoothly alongside its successful acquisitions of studios like Naughty Dog, Sucker Punch, and Guerrilla Games.

While it is valid to express concern over such a beloved, high-profile developer being sold by a platform owner, the deal appears straightforward, and integrating FromSoftware into Sony’s studio framework would likely proceed relatively seamlessly.

However, Sony is not looking to acquire FromSoftware by itself; it aims to acquire Kadokawa, a company that is not particularly well-known outside Japan but is one of the country’s most established media entities. Over time, it has evolved into a sprawling, tentacled network of holding companies with subsidiaries covering a wide array of sectors from print publishing to film and television production, including magazines, internet services, real estate, and numerous global partnerships and collaborations.

This broad structure clarifies the potential value of Kadokawa. Its diverse holdings include a rich library of intellectual property, predominantly in the sphere of anime and manga. Sony, which owns the US anime streaming service Crunchyroll, is very keen to advance this aspect of its business. There is considerable synergy between Kadokawa’s various holdings and Sony’s ambition to emerge as an increasingly vital player in this field.

Sony is not proposing to acquire FromSoftware by itself; it aims to acquire Kadokawa, one of Japan’s most established media firms that has turned into a sprawling, tentacled network of holding companies with subsidiaries spanning a wide range of fields.

This could also have potential implications for the gaming industry, as many of these intellectual properties are likely suitable for game adaptations. Additionally, relatively inexpensive games based on popular manga and anime series are a lucrative niche in the industry (indeed, one of the studios Sony might acquire if it purchases Kadokawa is Spike Chunsoft, which has specialized in this type of gaming versatility over the last decade).

A significant advantage for Sony in pursuing this acquisition is that Kadokawa is comparatively low-cost despite its vast intellectual property library. It is generally accepted that the Japanese stock market often undervalues intellectual property, and this seems to be the case here; the company’s share price is even lower at this time due to a negative data breach incident earlier this year.

I am not entirely convinced there is a more competitively priced library of intellectual property and creative studios available on the M&A market anywhere in the world right now, and at least part of Sony’s rationale could also be that they may quite easily secure this opportunity.