Anime is hot again
Online streaming services are creating new demand for anime. Estimated reading time: 15 minutes
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One of the strangest side effects of COVID-19 is that anime has become hot again. I was astounded when I looked up the Google search query chart for the keyword “anime” the other day and saw this massive bump since 2019:
I’ve now spent a few days trying to understand what’s going on. This is what I’ve found.
1. Japan-style animation
“Anime” refers to a distinctive style of animation originating in Japan. It’s characterised by blazing graphics, energetic characters and supernatural themes. The art style is also special, with brightly coloured environments and eyes so large they seem almost childlike.
The style has developed over a century, starting with Japanese comic books (“manga”) in the late 19th century and moving on to animated movies in the 1940s. Examples of such early movies include Momotaro, Secret Sailors in 1945 and Hakujaden in 1958.
But the distinctive style of modern anime only took shape with the 1963 release of the TV series Astro Boy. What made Astro Boy special is that it was only recorded in 8 frames per second compared to Disney’s 24. That helped save cost in production and also created a style that would be copied for decades to come.
Another major shift in the history of anime was Mobile Suit Gundam in 1979. With Gundam, anime started to be produced not only for small children but also for adult audiences.
As the Japanese economy entered its boom era of the 1980s, the production budget swelled, and major works such as Hayao Miyazaki’s Nausicaä of the Valley of the Wind and the 1988 cyberpunk hit movie Akira received great acclaim.
Technological innovations such as the VCR and Betamax helped create a sub-culture of anime fans that traded tapes with each other. It opened a market for anime, even outside theatrical releases.
The next growth stage came in the 1990s when production studios started syndicating anime to TV channels in and outside Japan. A key selling point was the low cost of anime compared to, say, Disney productions. The 1990s was when major TV franchises such as Dragon Ball Z, Sailor Moon and Pokémon became popular.
It was also in the 1990s when Japanese video game consoles became sought after. And intellectual property started to be cross-sold across manga, anime, video games and toys. Anime became a big business.
A seminal moment for the industry was in 2003 when Studio Ghibli’s Spirited Away won the Oscars for Best Animated Feature. It was the first time a Japanese animation won an Oscar. And it helped anime become accepted as a legitimate genre.
2. The rise of online streaming services
Since the heydays of the 1990s and early 2000s, it seemed like anime became less popular in Western markets. A turning point might have been Makoto Shinkai’s 2016 blockbuster Your Name, which became a huge hit across most of Asia. And the weakness of the Japanese yen from 2013 onwards helped the industry grow - at least in yen terms.
But what’s changed the market more recently is the rise of online streaming. Subscription services such as Netflix and Sony’s Crunchyroll have suddenly opened the market to millions of new eyeballs. These apps and websites are accessible by anyone with a phone, computer or smart TV and enable mass distribution in a way that videotapes or DVD never could.
The massive bump in the popularity of anime since 2019 is most definitely related to COVID-19. As people were cooped up at home without much to do, they turned to anime.
Meanwhile, Netflix has greatly expanded its investments in anime, causing the supply of shows to go up. For example, when the anime movie Demon Slayer was released on Netflix and other streaming services, it became a phenomenon - the single highest-grossing Japanese movie of all time.
The rise of online streaming services is best demonstrated through the following chart. Streaming revenue has gone completely parabolic, causing the industry to grow +13% in 2021 and +60% over the past decade.
Some are now questioning whether the COVID-19 boost in popularity is anime temporary. Netflix’s subscriber base is plateauing, and credit card data suggests that consumers are increasingly spending more time outside the home. In industry researcher Hiromichi Masuda's own words:
“The anime market is steady, but that doesn't necessarily mean its future is bright."
3. The anime industry in 2023
The heart of the anime industry revolves around creating intellectual property (IP). In the old days, since Astro Boy came out in 1963, studios such as Toei Animation were all-powerful, licensing out their IP for snacks, stationery, clothing, toys and other products.
Since the late 1970s, the industry adopted a so-called “window model”, whereby movies were first premiered in theatres, then on video, followed by paid cable broadcasts and finally on television. Thanks to video tapes, anime became a lot more profitable than before.
Today, anime is often financed by so-called “production partnerships” formed on a case-by-case basis. Companies involved in such partnerships include studios, streaming services, music companies, DVD publishers, license holders and so on. No longer is the production company the sole holder of intellectual property.
The use of such production partnerships means that anime studios in Japan don’t have as much bargaining power as, say, Disney or Dreamworks do in the United States. The fact that animators are often freelancers - paid by the frame - has commoditised the sector further.
Key frames are typically drawn by hand in Japan, while the so-called in-between frames tend to be done by low-paid workers in countries like South Korea, China and Vietnam. The scenery and the characters are often drawn separately and later combined through computer software, which is also used to adjust the atmosphere, lighting and colours so that it all fits together.
A hurdle for the industry is that Japanese animators are overworked and underpaid. There’s a severe lack of skilled animators to meet the higher demand for anime. In terms of numbers, the industry produces 300 titles annually, and with 200 animators needed for each title, the industry’s estimated 6,0000 animators are now fully occupied.
Some also question whether anime will be commoditised in an age of deep learning software. Tokyo-based startup RADIUS5 has developed an artificial intelligence program to remaster fuzzy animations into high-definition productions. It seems that such software can help save the cost of production - especially when it comes to the in-between frames. But it might also lower the barriers to entry in the industry. Meanwhile, AI translations can help reduce the cost of internationalisation.
In recent years, we’re also seeing studios outside Japan copying the distinctive style of anime and sometimes even improving on it. Chinese studios such as Colored Pencil Animation and Facewhite are known to be adept at computer graphic-assisted animation. Disney’s Star Wars Visions and an anime adaption of the 1982 Hollywood movie Blade Runner are blurring the lines of what true anime is or should be.
4. The major anime franchises in history
Over the past 50 years, a whole library of intellectual property has been built up, now in the hands of a number of Japanese movie studios and publishers. Such intellectual property includes:
Astro Boy (1963) is a science fiction saga about a robotic boy adopted by a professor at the Ministry of Science who fights crime, evil and injustice using his special powers.
Doraemon (1979) is about a male earless robotic cat named Doraemon, who travels back in time from the 22nd century to help a boy named Nobita.
Bandai Namco’s Gundam (1979) became one of the first adult animes in 1979, and has since been adopted into video games and toys. Gundam features robots called mobile suits that are used as fighting machines.
Fist Of The North Star (1984) is set in a post-apocalyptic Earth environment after a nuclear war, centring on a warrior named Kenshiro who can strike at enemies using martial art techniques.
Toei Animation’s Dragon Ball (1986) and its successor Dragon Ball Z (1989) became widely popular in America, with not just anime products released by merchandise and video games. The anime is about a young warrior named Son Goku going on a quest to collect 7 dragon balls which grant him whatever wish he might have.
Studio Ghibli created a number of movie franchises, all of which follow the same design format. Studio Ghibli franchises such as My Neighbour Totoro (1988), Grave of the Fireflies (1988), Kiki’s Delivery Service (1989), Princess Mononoke (1997), Spirited Away (2001) and Howl’s Moving Castle (2004) have loyal fanbases.
Sega Sammy’s Anpanman (1988) is a children’s superhero character that’s been widely popular in Japan but not as much overseas. His head is made from red bean paste called “anpan”, hence his name. He fights bad guys such as Baikinman, an evil villain from the Baikin planet.
Toei Animation’s Sailor Moon (1992) is an action-adventure featuring a teenage girl who learns of her destiny of being a legendary warrior called Sailor Moon, who then teams up with other Sailor Scouts to defend the earth and the galaxy.
Neon Genesis Evangelion (1995) is a coming-of-age story about teenagers recruited to pilot special robots called Evangelions to battle mysterious monsters.
KochiKame (1996) is a comedy involving policeman Ryotsu who plots get-rich-quick schemes before ending up in awkward situations and finally losing it all.
Nintendo’s Pokémon (1997) franchise began with the Pokemon game on the Game Boy in 1996, which was later turned into an anime in 1997. The anime is about children raising a pocket monster that’s then trained to fight other monsters.
Toei Animation’s One Piece (1999) is about a young man made of rubber travelling through pirate lands to find a mythical treasure called the One Piece while hoping to become a King of Pirates.
Digimon (1999) shows a group of teenagers sent to the mysterious digital world where they are paired up with their powerful monster called Digimon.
Hamtaro (2000) revolves around a hamster named Hamtaro, owned by a 10-year-old girl. The hamster goes on adventures daily to make friends with his fellow hamster friends.
Konami’s Yu-Gi-Oh! (2000) is about a young boy who’s bullied around until his body one day becomes host to a mysterious spirit that gives him special powers.
Beyblade (2001) is the story of Tyson Granger, who assembles a team called Bladebreakers who travel the world entering Beyblade contests where they duel with other players using their Beyblade spinning tops as weapons.
Naruto (2002) is about a young ninja who seeks recognition from their peers and dreams of becoming the leader of his village.
Bleach (2004) is about teenager Ichigo Kurosaki who obtains the powers of a Soul Reaper and meets a girl from soul society, where other soul reapers live.
JoJo’s Bizarre Adventures (2012) is about the Joestar family, who possesses psychic strength, chronicling Joestar’s struggles against the forces of evil.
Demon Slayer (2019) is a recent show about teenager Tanjiro who strives to become a demon slayer after his family was slaughtered and his sister was turned into a demon.
As anime is becoming more popular, it begs the question of whether the above franchises can be monetised better, perhaps through spin-off movies or TV shows, video games, toys or other types of ancillary products.
5. The investable universe of stocks
5.1. Production studios and IP holders
As mentioned earlier, the animation studios in Japan are not the corporate behemoths you typically find in the United States. Instead, Japanese studios tend to be independently operated - small-to-medium-sized businesses at best. And they often pay their workers by the drawing rather than having full-time employees.
The best pure-play exposure to anime production is Toei Animation (4816 JP - US$4.2 billion). It was created in the 1950s and was behind the One Piece, Dragon Ball Z and Sailor Moon franchises. The stock has done wonderfully, with earnings per share up.
Another way to invest in Toei Animation is through TV Asahi (9409 JP - US$1.1 billion), which owns 20% of Toei Animation and another 17% of parent Toei Co. The value of those stakes is higher than the entire market cap of TV Asahi, not to mention the value of its cash and other businesses.
Hello Kitty’s Sanrio (8136 JP - US$3.1 billion) is a licensor of cartoon characters, but it doesn’t produce anime itself. Sanrio creates the characters, which are then used across anime, manga, merchandise and more. The first Hello Kitty movie is due for a 2024 release. I wrote about Sanrio in early 2021, with the write-up available here:
Other anime studios such as Kyoto Animation, Studio Pierrot, Production IG, WIT Studio are private entities and cannot be accessed through public markets.
5.2. The platforms
The online streaming of anime is dominated by Sony’s (6758 JP - US$103 billion) Crunchyroll, which it acquired in 2021 for US$1.2 billion. It owns the American anime streaming service Funimation. TV channel Animax - an anime-focused pay-TV channel viewable by over 8 million homes - is controlled by Sony as well. Sony has a major anime production arm called Aniplex, behind the Bleach franchise and the recent hit series Demon Slayer on Netflix. It also owns a stake in Madhouse Studios. Sony’s CEO, Kenichiro Yoshida, has said several times that he considers anime one of the future growth pillars, and the company is investing heavily to achieve this goal.
Netflix (NFLX US - US$140 billion) has become a formidable factor in the anime industry as well. Its Japanese content investment has stepped up significantly in the past five years. In 2018, Netflix formed alliances with anime studios and has close relationships with five of them, including Production IG and WIT Studio. Netflix now supports these studios with stable revenue streams. It has also started a training school with Studio Ghibli alum Hitomi Tateno to raise a new generation of animators. In 2022, Netflix doubled the number of anime releases from 20 to 40, as its anime viewership rose 50% in a single year.
In China, the online video platform Bilibili (BILI US - US$11 billion) started by focusing on Japanese content such as anime. Since then, it has branched out into games, social media features and more mass-market content. While K-Pop has more or less been banned from China since the THAAD crisis in 2017, the Chinese government still considers Japanese content acceptable, fuelling Bilibili’s growth over the past five years.
5.3. Video game developers
The king of video game adaptions of anime shows is undoubtedly Bandai Namco (7974 JP - US$14 billion). It’s almost a pure-play bet on anime. Bandai Namco has produced console games related to IP, such as Jojo’s Bizarre Adventures, One Piece, Naruto Shippuden, Dragon Ball Fighter Z, Digimon, Ni No Kuni II and Mobile Suit Gundam. The IP that controls itself includes Gundam, Dragon Ball and One Piece. The company also owns an 11% stake in Toei Animation. Since 2015, Bandai Namco has embarked on a strategy to monetise its IP, and it’s been a successful strategy.
Sega Sammy (6460 JP - US$3.5 billion) used to be a major developer for both its own console and later on for Nintendo’s and several generations of Sony Playstation. More recently, it has been developing Fist of the North Star games for Playstation. Sega subsidiary Atlus is also behind Persona 5, that’s now available on Playstation 5.
Other Japanese video game developers such as Square Enix’s (9684 JP - US$5.8 billion) with its Final Fantasy franchise, Koei Tecmo (9766 JP - US$6.5 billion) with its Attack on Titan and Konami Konami (302 HK - US$677 million) with Yu-Gi-Oh! have some exposure to anime. Still, I don’t think they should be considered pure-play bets.
In China, CMGE Technology (302 HK - US$677 million) is a major developer of anime-style mobile games, including a mobile game inspired by the One Piece franchise. Several of NetEase’s (NTES US - US$54 billion) games, such as Fantasy Westward Journey, use design cues that remind me of manga and anime.
5.4. Toy companies
Another way to bet on the anime trend is through producers of merchandise.
Japanese toy company Tomy (7867 JP - US$1.1 billion) sells a variety of toys, including so-called Beyblades inspired by the 2001 TV show of the same name.
China’s Pop Mart (9992 HK - US$4.5 billion) has cooperated with anime franchises such as Naruto to create figurines. The style of many of its other toys also reminds me of characters from Japanese animes of the past.
America’s Funko (FNKO US - US$571 million) has created a range of anime-related Funko Pops throughout the years, including for characters from Naruto Shippuden, My Hero Academia, One Piece, Dragon Ball Z and Demon Slayer.
6. Conclusion
I’m not 100% certain that the rise in the popularity of anime is long-lasting. It could be related to a COVID-19-driven shift in consumption patterns that will eventually reverse.
But if you believe that we’re in a secular bull market for anime content, then Bandai Namco could be one way to get exposure. The stock’s EV/EBIT is only 11.5x. I suspect that Bandai Namco could benefit from the new PlayStation 5 & Xbox Series X/S console cycle that’s taking place now.
I’m also intrigued by TV Asahi. The spread between itself and its stake in Toei Animation is at an all-time high. But I’d imagine an activist might be needed to unlock the value in the shares.