On 18th January, Microsoft, the global software and cloud computing giant, announced its intention to buy US videogame company Activision Blizzard. The deal, valued at almost $70bn, is set to be the largest seen in the games industry, and for Microsoft.1 A week later, Neil Young, the seventy-six year old musician behind hits like Southern Man and Rockin’ in the Free World, threatened to withdraw his material from the popular music streaming site Spotify in protest against the company’s hosting of a popular but controversial podcast accused of spreading Covid vaccine disinformation.2
What connects these two news stories, and what on earth do they have to do with the Japanese equity market? The answer is that these events are both evidence of the perceived power of content – the media which grabs our attention for monetisation.
The competition for consumer’s eyeballs, time and ultimately money is white-hot. So too is the battle for the content that feeds it. This battle will have meaningful implications for some major Japanese companies; owners and creators of content, as well as platforms upon which it is enjoyed.
The main Japanese belligerent in the war for attention is Sony, once famous only for its hardware, the conglomerate has revolutionised its business in recent years and now generates well over half of its profits from games, movies and music (in that order). In other words, from content.34
The Microsoft-Activision deal was taken by the market as bad news for Sony, with its shares down 13% on the day after the announcement. Investors worry that the key Activision games such as Call of Duty might not be fully available on the Sony Playstation, reserved instead for Microsoft’s Xbox console, which has been outsold by its Sony equivalent in recent generations. This is not a trivial concern.
The commercial appeal of videogaming is clear – it is large, fast-growing and profitable. Analysts estimate that the market is worth around $180bn annually, and that it grew by more than 20% in 2020.5 Despite fears of a post-lockdown “attention recession”, it seems sensible to assume that the videogaming industry will continue to grow not least as a function of rising internet connectivity in emerging markets.6 The games industry has become more profitable as physical copies have given way to digital downloads. Subscription services such as the Microsoft Xbox Games Pass and Sony’s PS Plus are even more appealing as their profits are recurring rather than one off. The motivation to snare and retain users and subscribers with unique content is easy to see.
If this is a war, will Sony be out-gunned? The simple arithmetic here is not reassuring. The company’s mid-term management plan calls for ¥2tn (c.$20bn) of “strategic investments” by March 2024, of which it has already made around 40%, including on the US game studio Bungee, also announced in January.7
Fortunately for Sony, the outcome of this competition for attention is unlikely to be determined by purchasing power alone. The attention economy extends far beyond gaming. When Netflix CEO Reed Hastings described sleep as the company’s biggest competitor, he highlighted that every waking consumer minute is up for grabs.8 Mr. Hastings’ company has been better than most at retaining consumer attention. 9Subscribers are rarely monogamous to their provider of ‘boxsets’ and are willing to rotate between services depending on the suite of unwatched material. None of this suggests that the competition for content is going to go away.
The ability to combine content, not just buy it in, could be key and here Sony is much better – perhaps uniquely – positioned. As well as being a leading videogame company, Sony is the world’s number one music publisher and one of the dominant motion picture studios.10 To this end, the company has established PlayStation Productions to convert games titles into movies and TV shows to “maximise value of IP (intellectual property)”.
This notion of maximising the value of IP will chime with Japanese equity investors. Japanese companies are notorious for failing to exploit their numerous virtues; financial firepower, technology and brands for example. Add intellectual property in the form of media content to that list and the number of Japanese companies which could benefit from the battle for content expands well beyond Sony.
Will Nintendo finally make the most of Mario and Luigi? Could Capcom wring more money from Ken, Ryu and their friends from the Street Fighter stable? Might Sanrio’s Hello Kitty finally catch Disney’s Mickey Mouse? In the case of Sanrio, the company’s youthful CEO certainly seems to understand the new terms of the attention economy, calling for 300 billion “Sanrio hours” over the next ten years.11 Even if corporate Japan itself struggles to maximise the financial value of its cultural weight, might it attract the global companies with fat wallets seeking ammo in the battle for content? This is possible, but either way it could be good news for Japan.
The idea of the attention economy is nothing new – the Nobel Prize winning Economist Herbert Simon was writing about it in the 1970s.12 For years it has been applied by advertising executives to try to maximise the effectiveness of their campaigns. But with the proliferation of videogaming, music, podcast and video-streaming – all facilitated by fast, reliable broadband connections – and the increasing dominance of the subscription model, the struggle for our attention is heating up. This is a multi-year theme with implications for companies around the world, not least in Japan, to which we will be paying more and more attention.
3Bloomberg, February 2022
Notes from the Investment Floor: Why’s Japan’s inflation still so low?
Japan after Abe: the political impact of a shocking tragedy
The gears of Japan’s labour market have seized up
Japan’s growth cyclicals: opportunity or trap?
Notes from the Investment Floor: Quality can thrive through volatility
The value of active minds: independent thinking