(Bloomberg) -- At first glance, Sony Group Corp.’s $1.2 billion acquisition of the anime streaming site Crunchyroll in 2021 looks like a success. Subscribers to the $8-a-month service have tripled to 15 million since then, and the number of new shows has doubled to more than 50 every quarter.
But the rising popularity of anime — Japanese cartoons featuring complex plots and colorful characters — has attracted competition. Netflix Inc., Walt Disney Co. and Amazon.com Inc. are all digging into their deep pockets to license shows, making it more expensive for Crunchyroll to compete and giving fans less reason to subscribe to the niche service.
Internally, employee support for management and its vision has trailed downward in recent months. Expensive forays into video games and e-commerce aren’t going well. And the company’s ambitious goals for new subscriber additions seem unlikely to be met.
“There’s growth in casual anime viewers, but not core anime fans,” said Orina Zhao, research manager at Ampere Analysis, which follows the media and entertainment businesses. “Those people will tend to watch it on Netflix or Amazon Prime, which are more mainstream.”
Crunchyroll declined to make any of its executives available for this story, which is based on interviews with 18 current and former employees, all of whom asked not to be identified discussing internal matters. In an emailed statement, Crunchyroll said its exclusive titles, theatrical releases, events, merchandise and games offer everything an anime enthusiast could want.
“There’s never been a more exciting time to be an anime fan, and we are strategically feeding a pipeline of anime content and experiences that fuels that fandom, deepens the love of anime, and exposes more audiences to the medium,” the company said. “The Crunchyroll business is outperforming our financial expectations, and the company is well positioned to continue to grow alongside the rising global demand for anime.”
Since its founding in 2006, Crunchyroll has been the go-to destination for Western anime viewers. Originally a site for pirated content, the company over time licensed almost all of the major anime programs from Japanese studios.
Along the way, it also became a special place to work for anime lovers. Crunchyroll employees cut deals for new shows and monitored viewer data out of offices themed with characters from the programs. They enjoyed a culture where they felt heard by their bosses. In bad moments, employees joked, “At least we don’t work at Funimation,” their main rival, which was owned by Sony. Then Sony bought Crunchyroll.
Tension between the camps arose almost immediately. In a Zoom meeting announcing the decision, Funimation workers accused Crunchyroll of being pirates, alluding to the site’s history, according to two people who were present. Crunchyroll Chief Executive Officer Colin Decker and General Manager Joanne Waage left in the ensuing months. "I decided the time was right for me to focus on my family and pursue my own company which is in a very different industry,'' Decker told Bloomberg.
Current or former employees describe Crunchyroll’s new management–primarily from Funimation–as out-of-touch with employees and the anime fans the company once prioritized. Some executives write off anime as “kids’ cartoons,” they said, and resist hiring job candidates who describe themselves as fans. Customers weren’t too happy either. Some were furious when Crunchyroll announced that digital copies of anime they had purchased through Funimation wouldn’t survive the transition to the new platform.
Since the acquisition, the company has undergone at least three rounds of layoffs. Current employees said Crunchyroll’s strategy is unclear, resulting in a climate of uncertainty and confusion. Just 39% of its workers surveyed recently said management has communicated a strategy that motivates them, according to internal poll data seen by Bloomberg. That was down from 51% in the previous poll. Another reorganization is planned for early 2025, according to two people who heard it is coming.
In response, Crunchyroll said its staff has grown by 27%, but wouldn’t clarify since when or whether Funimation staff were counted toward that increase. The company said it has over 100 open positions at offices around the world.
Crunchyroll’s internal growth plan includes an initiative called “25 by 25,” meaning 25 million subscribers by the end of 2025. The goal, the company has said in internal documents, is to give it a large enough base of subscribers to compete for new shows with more mainstream streaming services such as Netflix and Warner Bros. Discovery Inc.’s Max.
The company isn’t likely to meet that target, according to insiders who spoke with Bloomberg. The goal wasn’t based on rigorous analysis of the markets, but instead designed to project a big, catchy number, they said. The projections call for tripling subscribers in India and Southeast Asia, for example. Yet in the second half of fiscal 2024, only one of the six major regional markets that Crunchyroll set targets for was on pace to meet its goal, according to data reviewed by Bloomberg. That market was Latin America.
Crunchyroll is expanding into new markets, including India, to draw in potential long-term subscribers. The service is available there for about $1 a month, a price that’s likely too low to be profitable, according to five current and former employees.
Crunchyroll is also increasing the percentage of anime it dubs in Hindi, according to data analyzed by Bloomberg. The company said it subtitles or dubs shows in 12 languages including Hindi, Telugu and Tamil for India.
Yet Crunchyroll is struggling to hang on to subscribers, with insiders saying its 2025 target has been pushed to year-end. According to an internal document seen by Bloomberg, the company aims to cap monthly churn, or customer turnover, at 8.5%. That suggests the actual rate could be higher and well above the 5% churn rate that’s typical at streaming services, according to analytics companies.
Current and former employees are concerned that mainstream streamers are closing in on Crunchyroll’s territory. Shortly after the Sony acquisition, Netflix licensed Jojo’s Bizarre Adventure. Suddenly one of Crunchyroll’s most popular series was also available on the world’s largest streaming service, and its next season was exclusively on Netflix.
With their greater reach and higher licensing budgets, Netflix and Disney are vacuuming up hit anime programs like Delicious in Dungeon and Little Witch Academia from key Crunchyroll suppliers. Disney purchased the exclusive rights to the second season of Tokyo Revengers: Tenjiku Arc, another popular show, last year.
According to a survey of over 4,000 Americans earlier this year by the online gaming and entertainment site Polygon, 76% of Gen Z anime fans watch shows on Netflix, compared with 58% on Crunchyroll.
Crunchyroll argues that sharing shows with Netflix and Disney’s Hulu broadens consumer interest in anime and will bring more subscribers to its service. The company has also created free, ad-supported channels for its programming on Roku Inc. and Pluto TV.
Producing anime normally costs around $200,000 to $300,000 per episode on average, a sum anime studios easily cover through deals with Western distributors, according to anime industry workers in Japan. Due to the new competition, license fees for popular Japanese programs are “going through the roof,” one of those workers said. Rising fees may impact the profitability of Crunchyroll.
Toho Co. and Toei Animation Co, two big anime producers, are interested in licensing to competitors with more potential to reach general audiences, according to the industry staffers in Japan. Netflix is streaming Toho’s Beastars, for example. Toho is now distributing films on its own in the US, and recently bought the animation distributor GKIDS. Toho didn’t respond to requests for comment.
Toei announced last year that it will team up with Netflix to produce and distribute a new anime series of the popular franchise One Piece after the pair collaborated on a successful live-action series that ran on Netflix. Toei declined to comment for this story.
Crunchyroll management figured they could hook Crunchyroll subscribers on mobile games based on their favorite anime shows, like One-Punch Man, according to three people familiar with the strategy. But that initiative has struggled.
Over the past two years, three games have shut down, including one based on Princess Connect! Re: Dive, while the company has launched four others. Last month, all of the games, except one, brought in sales of less than $5,000 each on the iOS or Android platforms, according to data from Sensor Tower. Although Crunchyroll invested a large sum developing its One Punch Man: World game, the US license for the show was snagged by Hulu. The game hasn’t received an update in months, spurring fans to complain online. The company has added more than 30 titles to its Game Vault offering, which is included in some Crunchyroll subscriptions.
Executives also hoped merchandising would help retain subscribers and boost revenue, current and former employees said. Viewers could binge on manga comic books between anime seasons instead of pausing their monthly fee or purchase collectible figures of their favorite anime characters. After taking over the anime merchandise retailer Right Stuf for an undisclosed sum in 2022, Crunchyroll’s online store was poised to offer manga, DVDs and toys.
The business has shrunk since the acquisition, according to three former employees. Among the reasons, Sony asked Crunchyroll to pull the racier adult manga and toys that formed about 5% of Right Stuf’s revenue.
Over the summer, Crunchyroll laid off employees working on its video games and e-commerce initiatives.
One concern among Crunchyroll employees and licensors is the marketing, overseen by Markus Gerdemann, a senior vice president. He was hired by Funimation after marketing several popular Netflix shows, like Unorthodox, but had little experience with anime. Gerdemann brought in a cadre of former advertising agency colleagues whom Crunchyroll employees came to refer to as the “boys’ club.”
Seven current and former employees said Gerdemann isn’t experienced enough for the role, overseeing changes in strategy that cost the company money.
In the past year, he has angered both Toei and Toho, according to current and former employees. In July, for example, Toei representatives were underwhelmed at a Crunchyroll concert for the anime hit One Piece held on the San Diego Bay during Comic-Con. The signature ship from the program sailed by, but wasn’t lit up, so many of those in attendance couldn’t see it. Gerdemann oversaw the event. Then in October, Gerdemann sent an email to staff, seen by Bloomberg, asking them not to promote the important Toho title Dandadan.
“Due to ongoing acquisition discussions, we decided not to further lean into the promotion of Dandadan,” the email read. The show was also streaming on Netflix, where it debuted as the second-most-viewed non-English show.
At least two people who worked for Gerdemann filed complaints to human resources about his management, one of them alleging sexist behavior, and the other accusing him of creating a hostile work environment. Sony investigated the allegations of sexism and Gerdemann was cleared. Seven people speaking with Bloomberg said Gerdemann has negatively impacted employee morale. He didn’t respond to requests for comment. Sony didn’t comment on the allegations.
Japanese manga publishers such as Shogakkan Inc., Shueisha Inc. and Kodansha Ltd. are also unhappy with how Crunchyroll manages merchandise rights. The company often makes and sells merchandise or collectibles, such as figures or posters, in ways that the publishers don’t approve, according to both Crunchyroll employees and staffers in the Japanese publishing industry. Crunchyroll didn’t respond to a request for comment on the issue.
Reports from Crunchyroll detailing sales for revenue-sharing purposes aren’t considered trustworthy, three Japanese anime industry employees said. The US company’s attitude made some heavyweight manga authors upset as their characters were used in ways that they didn’t want, the people said.
Meanwhile, Sony just announced that it increased its stake in Kadokawa Corp., one of the major Japanese anime creators, to 10% as part of a broader business relationship with the company. Sony has long had a strong position distributing anime outside of Japan, but doesn’t own much of the content. The companies said they plan to invest in properties jointly and market them globally through Sony’s distribution network. Their strengthened alliance could also give other Japanese studios more incentive to find different distribution partners, industry insiders said. Sony shares rose 2% on Friday.
(Adds quote from former CEO in ninth paragraph. Previous versions inaccurately described his departure and misspelled company name.)
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