Assessing the Viability of Sony's Bid for Kadokawa

The prolonged process of Microsoft acquiring Activision Blizzard has sparked concerns about an impending arms race among industry rivals. Companies like Sony may feel compelled to respond with major acquisitions, focusing on securing studios and content for future subscription and streaming services rather than current console exclusivity. Although Microsoft has the deepest pockets in the industry, numerous potential acquisition targets exist with significantly lower price tags than Activision Blizzard. The recent announcement of Sony's discussions to acquire Kadokawa, a Japanese publishing group, may signal the beginning of this trend. However, it is inaccurate to attribute this move solely as a response to Microsoft's spending spree. Kadokawa is a large, diversified company with various subsidiaries that could significantly contribute to Sony's ambitions. Nevertheless, this acquisition also poses long-term challenges and costs, which is a concern given Sony's recent track record with acquisitions. Western media reports have primarily focused on Kadokawa as the parent company of FromSoftware, the renowned developer of Dark Souls and Elden Ring. FromSoftware is indeed the crown jewel of Kadokawa, with Elden Ring alone making a substantial contribution to the company's revenue since its launch. The gaming division, buoyed by Elden Ring sales, accounted for a significant portion of Kadokawa's operating profit despite representing only a fraction of the company's overall sales. Acquiring FromSoftware would undoubtedly be a strategic move for Sony, considering their existing close working relationship and the potential for smooth integration into Sony's studio system. However, Sony is proposing to acquire Kadokawa, a company with a complex structure and diverse holdings, including print publishing, movie and TV production, magazines, web services, and real estate. The potential value of Kadokawa lies in its rich library of IP, primarily in the anime and manga sector. Sony, with its ownership of the US anime streaming service Crunchyroll, is keen to expand its presence in this field and may find synergies between Kadokawa's holdings and its own goals. This acquisition could also connect to the games business, as some IPs may be suitable for game adaptations, and relatively low-cost games based on popular manga and anime series can be profitable. One advantage for Sony is that Kadokawa is relatively affordable despite its significant IP library. The Japanese stock market tends to undervalue IP, and Kadokawa's share price is currently depressed due to a recent data breach. This could be an opportune time for Sony to acquire a competitively priced library of IP and creative studios. However, there are challenges to consider. Kadokawa is a large company with many low-margin businesses, some of which are labor-intensive and in decline. A significant portion of Kadokawa's business may not align with Sony's strategic goals, and integrating these subsidiaries could be difficult due to strong employee protections in Japanese law. Sony's recent acquisition history has been marked by difficulties, including the $3.6 billion purchase of Bungie, which has not yielded the expected results. The acquisition of Firewalk Studios, which was subsequently shut down, also raises concerns about Sony's ability to manage complex acquisitions. Despite these challenges, the core rationale for the deal is strong, and Sony's decision-makers likely find it persuasive. The company needs to expand to remain competitive, and Microsoft has demonstrated that acquisitions can be an effective means to achieve this goal. Nevertheless, the difficulty of making this acquisition work should not be underestimated, as it involves a complex media and publishing conglomerate rather than a straightforward game developer or publisher.