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John Engle
John Engle
Articles (332) 

Can Anime Save Netflix?

Japanese animation may offer a way forward as competition heats up in the streaming market

May 21, 2019 | About:

Netflix Inc. (NASDAQ:NFLX), the original streaming platform, is now coming to terms with the reality that it is no longer the only game in town. With more than $15 billion in its 2019 content budget, however, Netflix is clearly gearing up to take on all comers. But the question of what sort content it should be investing in remains a subject of heated debate.

One possible answer: anime.

Investing in anime

Anime offers a type of content that Disney and other American media giants currently do not own. By dominating anime, Netflix can conceivably establish a winning and defensible niche in an increasingly competitive streaming market.

Since 2011, Netflix has been expanding its anime portfolio in earnest. This has accelerated since 2017, with Netflix reporting ever-larger investments in both existing anime titles and entirely new content and series. 2017 saw the release of 12 original Netflix anime series, while more than 30 new shows are expected to debut this year, with more than a dozen titles already announced.

Netflix’s big investments in anime have caused a stir across the industry. While anime is produced by Japanese studios, it is consumed globally. But the anime industry has been constrained for years by a restrictive business culture. Many top artists are flocking to Netflix and the freedom it offers, according to Business Insider:

“Normally, several different companies negotiate together to produce, fund, and distribute a show. That way, the risk is distributed across all the companies. Netflix, on the other hand, is willing to take on more of the risk on its own. In March, Netflix announced partnerships with three Japanese production houses, adding to the two partnerships it already had. These production houses will create five new anime series for Netflix. Working conditions in the anime industry can be strenuous with long hours and slim margins. Many are hoping that direct deals with Netflix could allow for greater creative freedom and larger profits for production houses, and because Netflix is available in over 190 countries, it's possible that having these anime series on Netflix could bring in a broader audience.”

The need for differentiated content

Major new streaming contenders have entered the field this year, such as the Walt Disney Co.’s (NYSE:DIS) splashy debut of Disney+. At the same time, existing streaming players have upped their games. Amazon Inc. (NASDAQ:AMZN), for example, has invested a whopping $1.7 billion in video and music content during the first quarter of 2019 alone.

These companies have more than money on their side. Disney, for example, has a vast IP library, which includes some of the greatest icons of pop culture like Star Wars and Marvel, in addition to the Pixar and Disney film libraries. Time Warner Inc., which also has a new streaming service in the works, claims another rich content library, including everything from still-popular sitcoms like “Friends” to HBO’s blockbuster television empire.

With this content set to migrate from the Netflix platform in the coming years, the streaming giant will need to find new bingeable content to keep subscribers onboard. Anime is one option for differentiation. However, it is not a clear-cut winner. Indeed, Netflix still has a lot of work to do if it wants to match the vast content library of Crunchyroll, the specialized anime content website that currently boasts more than 2 million subscribers in addition to its 45 million free users. Owned by AT&T Inc. (NYSE:T), Crunchyroll has been expanding its footprint through a host of media deals, including one recent inked with Cartoon Network’s Adult Swim.

Additionally, while Disney may seem indifferent toward anime, this is not entirely the case. Hulu, which has now been fully acquired by Disney, has long boasted an extensive anime library. Thus, Netflix may find itself still competing head-to-head with Disney even here.

Verdict

It is still unclear how Netflix can transform its content offerings to accommodate the emerging competitive reality. The lion’s share of its most watched series comes from studios and companies that have launched, or are preparing to launch, their own rival platforms.

Netflix is poised to lose a lot of important content. Anime may offer one avenue by which it can rebuild its library. But it seems insufficient to the task of justifying Netflix’s still-massive valuation.

Disclosure: No positions.

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About the author:

John Engle
John Engle is president of Almington Capital - Merchant Bankers. John specializes in value and special situation strategies. He holds a bachelor's degree in economics from Trinity College Dublin and an MBA from the University of Oxford.

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