Does a Sony bid for Kadokawa make sense? | Opinion

Buying Elden Ring developer From Software would be a coup for Sony – but buying one of Japan’s biggest media groups would be a complex and potentially difficult acquisition

During the drawn-out process of Microsoft acquiring Activision Blizzard, one regularly voiced concern was that this purchase would spark an arms race.

Rivals like Sony would feel that they had little choice but to respond in kind with major acquisitions, locking up studios and content not so much for console exclusivity today, but to build out the portfolio that would be needed for hypothetical subscription and streaming services to be competitive in the future.

No other company in the industry has pockets as deep as Microsoft’s, but there are a lot of potential acquisition targets out there in the industry whose price tag is only a fraction of Activision Blizzard’s.

The announcement this week that Sony is in discussions to buy publishing group Kadokawa is arguably a sign of that concern becoming a reality, but it’s not accurate to describe this as being entirely a response to Microsoft’s spending spree.

Kadokawa is a big, sprawling group company which houses a number of different subsidiaries that could be of significant value to Sony’s stated ambitions and goals for the coming years. It’s also an acquisition that has the potential to be very tricky and costly in the long-term – a serious concern given Sony’s poor track record with acquisitions in recent years.

Reporting about the potential deal in the western media has largely focused on Kadokawa being the parent company of FromSoftware, creators of Dark Souls and Elden Ring, and that’s an entirely reasonably framing.

FromSoftware is the jewel in Kadokawa’s crown, with Elden Ring alone making an absolutely enormous contribution to the company’s bottom line in the years since its launch. It’s the most profitable part of Kadokawa’s business by far – in the most recent financials for the company, the gaming division was buoyed massively by sales of Elden Ring and its DLC, Shadow of the Erdtree, and while it accounted for only around 12% of the company’s sales, it contributed almost a third of the overall operating profit.

Buying FromSoftware would undoubtedly be a coup for Sony. It’s had a pretty close working relationship with the studio for some time, including developing PlayStation-exclusive titles like Bloodborne (an IP that might finally see some stirrings of life if this deal goes through), and it’s pretty easy to see a Sony acquisition here running along the well-oiled tracks of its successful acquisitions of studios such as Naughty Dog, Sucker Punch, and Guerrilla Games.

It would still be valid to express concern about such a beloved, high-profile developer being bought by a platform holder, but the deal itself would seem straightforward and the integration of FromSoftware into Sony’s studio system would likely go pretty smoothly.

Sony isn’t proposing to buy FromSoftware, though; it is proposing to buy Kadokawa, a company which isn’t terribly well-known outside Japan, but which one of the country’s most well-established media businesses and has, over the years, become a sprawling, tentacled horror of a holding companies with subsidiaries spanning all manner of fields from print publishing, to movie and TV production, to magazines, web services, real estate, and all manner of international partnerships and tie-ups.

In some senses, that explains the potential value of Kadokawa. Across its various holdings there’s an incredibly rich library of IP, mostly in the realm of anime and manga. Sony, which owns US anime streaming service Crunchyroll, is very keen to build up that side of its business, and there’s some clear synergy between Kadokawa’s various holdings and Sony’s desire to become an increasingly major player in this field.

Sony isn’t proposing to buy FromSoftware, though; it is proposing to buy Kadokawa, one of Japan’s most well-established media businesses that has become a sprawling, tentacled horror of a holding companies with subsidiaries spanning all manner of fields
This could also potentially connect to the games business, of course – some of these IPs are probably well-suited to game adaptations, and relatively cheaply developed games based on popular manga and anime series are a surprisingly profitable corner of the industry (indeed, one of the other studios Sony would acquire if it bought Kadokawa is Spike Chunsoft, which has essentially specialised in this type of game over the past decade or so).

An advantage to Sony in considering this acquisition is that Kadokawa is pretty cheap despite that major IP library. It’s received wisdom that the Japanese stock market habitually undervalues IP, and that does seem to be the case here; the group’s share price is depressed even further at the moment due to a damaging data breach problem earlier this year.

I’m not sure that there’s a more competitively priced library of IP and creative studios on the M&A market anywhere in the world right now, and at least part of Sony’s thinking may be that they should snap that up before anyone else notices (especially anyone in, oh, the broad Seattle metro area).

One of the other studios Sony would acquire if it bought Kadokawa is Danganronpa creator Spike Chunsoft

Nonetheless, there are some aspects of this potential deal that would be tricky to get right. For a start, the figure cited earlier – that games accounted for 12% of sales, but a third of operating profit – is actually a bit of a problem in many regards. Kadokawa is huge, and most of the company isn’t very profitable.

It’s got a lot of low-margin businesses, some of which are pretty labour intensive, and some of which – like its magazine publishing subsidiaries, Enterbrain and ASCII (peculiarly, Sony would end up being the actual parent company of Dengeki PlayStation magazine, among others, through this deal) are still ticking over but generally seen to be in long-term decline.

A lot of Kadokawa’s business looks “legacy” from the perspective of a company like Sony – not least that a core part of its business, and indispensable from an IP generation perspective, is selling printed books. It’s not clear where that kind of business would fit in Sony’s structure, or how it aligns with the company’s strategic goals.

Just slashing and burning through ill-fitting subsidiaries post-acquisition, however, would probably be extremely difficult in many ways, not least of them being the strong employee protections of Japanese law.

Kadokawa could be something of an albatross for Sony if it can’t make those parts of the business work somehow. Having streamlined its own corporate structure through spinning off various aspects like financial services and insurance over the years, Sony could find itself lumbered with all sorts of unusual cruft under its umbrella, from Japanese video sharing website NicoNico, to a host of magazine publishing companies, and some truly unusual things like a giant art gallery and culture museum just north of Tokyo.

Slashing through ill-fitting subsidiaries post-acquisition would probably be extremely difficult, not least of them being the strong employee protections of Japanese law
This would be happening, it has to be added, against a backdrop of Sony having had a particularly rough time with acquisitions recently. After years of doing incredibly smooth, well-integrated acquisitions of studios – as mentioned above – the company went on a bit of a spending spree a few years ago, and thus far it’s been a disaster.

It spent $3.6 billion buying Bungie (similar to the market cap of Kadokawa, as it happens), only to discover that far from being in a position to help the rest of Sony’s studios shift to a live-service model, Bungie itself seemed to be a complete basket case.

Just last year it acquired Firewalk Studios, which it then shut down after its first game, Concord, flopped hard at launch earlier this year.

Each of those was a more straightforward acquisition, by an order of magnitude, than Kadokawa would be; in light of recent events it’s not unfair to question whether Sony will actually be able to manage an acquisition of this scale and complexity.

Even if there are questions about execution, though, the core rationale for the deal is strong, and likely seems pretty persuasive to Sony’s decision-makers. The company needs to get bigger to stay competitive, and Microsoft has made a persuasive case that acquisitions are the fastest way to do that.

Microsoft, however, bought game developers and publishers; it didn’t try anything as tricky as buying a huge media and publishing conglomerate just for the sake of a single key studio and some valuable IP rights. This deal has great potential for Sony – but the difficulty of making it work shouldn’t be underestimated.