Rumors began circulating the airwaves in the past week alleging that AT&T (T) was seeking to sell off its Crunchyroll anime streaming service to Sony Corp. (SNE). The asking price appears to be $1.5 billion, a number that Sony has balked at, but that AT&T seems to think represents appropriate value. While I appreciate that AT&T is seeking to streamline its operations and allocate cash from divestitures toward debt reduction, a decision by the firm to sell Crunchyroll at any price even close to $1.5 billion would be a disservice to the company’s shareholders. It would be, however, a boon for Sony.
Crunchyroll represents a compelling opportunity
Allegedly, AT&T wants $1.5 billion in order to part with Crunchyroll, a service its subsidiary, Otter Media, acquired years ago. For Sony, a deal of this nature would be a boon. After all, Sony already owns another anime streaming service called Funimation. Much smaller than Crunchyroll, Funimation has some attractive content on it, but the service is slow and the website outdated compared to what Crunchyroll offers. Acquiring Crunchyroll would quite literally grant Sony the leading player in the anime streaming market.
In recent years, Crunchyroll has done well to grow itself. Back in February of 2017, the platform reached 1 million paid subscribers and had a total of 20 million registered users. This was up from about 735 thousand paid subscribers one year earlier. In the 21 months after that, it grew to 2 million paid subscribers and 50 million registered users. As of July of this year, 20 months after hitting its 2 million paid subscriber mark, the platform hit 3 million paid subscribers and it has 70 million registered users on its platform.
Paid subscriptions for the service vary in pricing, but the general premium plan is priced at $7.99 per month or $79.99 annually ($6.66 per month). It also offers a premium+ plan priced at $11.95 per month or $99.95 annually ($8.32 per month). In the worst case, the platform’s premium subscribers generate for it annual run-rate revenue of around $240 million. But more likely than not, the actual number is probably closer to $300 million.
To put into perspective the $1.5 billion price tag, let’s look at it from the angle of cost per paid subscriber. This works out to $500. This is higher than the $300 to $400 per paid subscriber that other niche streaming services are generally worth. However, I would make the case that Crunchyroll is worth far more than the premium allegedly being pushed by management. For starters, consider a platform like Netflix (NFLX). The effective EV (enterprise value) of Netflix today works out to $1,147 per paid subscriber. Though far larger by comparison with 192.9 million paid subscribers as of the end of its latest quarter, Netflix and Crunchyroll have more in common than you would think.
Instead of just acting as a streaming service, Crunchyroll has turned itself into a well-diversified ecosystem. Its monthly active user count, excluding paid subscribers, likely numbers in the tens of millions. Though they do not generate subscription revenue for the platform, they do generate advertising revenue for it whenever they watch an episode. This also serves as a funnel for other lines of business like Crunchyroll’s online store. The company has also launched no fewer than seven games to date, with total monthly players now exceeding 500,000.
Another attractive thing about the service is the fact that, like Netflix, it has embarked on its own original programming. This year, for instance, the company plans to launch 12 original series. These include names like Tower of God, The God of High School, and In/Spectre. Unlike Netflix, which has to worry about licensing significant amounts of content from just a few major players, Crunchyroll has the benefit of playing in a market where its content providers are mostly small, independent studios. There is no equivalent of a Disney+ coming along to take away the bulk of the content streaming on Crunchyroll. Even so, taking control of its content should lead to more revenue streams and stronger margins in the long run.
In addition to these attributes, Crunchyroll also benefits from low production costs. The typical anime generally costs between $100,000 and $300,000 per episode to film. By comparison, the average American cartoon, despite having far lower animation quality, generally costs between $1 million and $2 million to create. Major, long-running hits like The Simpsons are rumored to cost up to $5 million per episode. Original programming outside of the animation space can cost far more. Netflix-original content, for instance, is pricey. Orange Is The New Black cost about $4 million per episode. Stranger Things is estimated to have cost about $8 million per episode, and The Crown supposedly cost $10 million for each episode.
For the cost of one of these episodes, anime producers can create seasons worth of content. They can also create feature-length films. Most anime films cost $10 million or less to produce, but some of them can run north of that. Kimi no Na wa is rumored to have cost up to $35 million to produce. Its story and animation quality propelled the film to achieve an impressive $358.34 million at the global box office. This opens up significant opportunities for Crunchyroll.
Many people might view the anime industry as a small, niche market, but that’s becoming less true every year. From 2012 through 2018, the industry exploded higher, growing 61.8% from $12.76 billion to $20.65 billion (using current exchange rates). This covers solely the content coming from Japan. Other nations, like South Korea and China, are coming out with their own content. Though the COVID-19 pandemic caused a slowdown in the market just like it did to film and television releases, the slowdown should prove temporary and the industry’s growth is likely to continue.
This is not to say that Crunchyroll and, by extension, AT&T, has nothing to worry about. At the end of the day, delivering high-quality, in-demand content is what will push the service to grow over time. Back in 2018, Funimation decided to end a content partnership with Crunchyroll. This resulted in a number of popular series, ranging from older ones like Code Geass, Steins;Gate, and Spice and Wolf, to newer ones like Noragami, leaving the platform. Earlier this year, Crunchyroll also dealt with a costly blow when Funimation landed an exclusive deal for the second season of the critically-popular Kaguya-Sama: Love Is War series.
Fortunately, the rest of 2020 is looking good for the platform. Hit series like Re:ZERO – Starting Life in Another World, Sword Art Online: Alicization, and the second season of Fire Force all recently launched. Earlier in 2020, the platform had other quality content like Somali and the Forest Spirit. This comes off a strong 2019 when the platform featured hit-series like the first season of Fire Force, as well as Demon Slayer: Kimetsu no Yaiba and the first season of The Promised Neverland. Whether management will be able to keep up the content acquisition heading into next year remains to be seen, but one of its first big tests will be whether it can land the second season of The Promised Neverland as well.
Takeaway
Right now, it looks an awful lot like AT&T is trying to sell Crunchyroll. If the firm does get the $1.5 billion it wants for the service, it would help toward debt reduction and allow management to refocus its efforts. However, it would, at the end of the day, be a disservice to the company’s shareholders. Though the price per paid subscriber being asked by management in a deal of that size is considered high, the price will also include the tens of millions of registered users that are generating advertising revenue for the business. It will also include other high-quality content, including a library of original programming that management has just started to build up. While I would make the case that the service is not as valuable as Netflix on a cost per paid subscriber basis, its value is probably closer to that point than what Sony recently balked at. With its other streaming services, particularly HBO Max, AT&T would be better off finding ways to create synergies between them than it would be selling off Crunchyroll.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
The Link LonkAugust 19, 2020 at 10:01AM
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