Crunchyroll CEO Kun Gao

Japanese anime content service Crunchyroll was recently included by Parks Associates in a top 10 list of OTT services by number of subscribers. It started in 2008—when the term OTT wasn’t even talked about—and is now on track to have approximately 750,000 paid subscribers by the end of the year. That’s some journey. We spoke with Crunchyroll CEO Kun Gao about the company’s rapid growth, its unique business model and super-serving a niche audience.

How does your premium service differ from the free one?

Free viewers can watch pretty much all of our shows, but they can’t get access to the latest and greatest. Usually they have to wait a week for that episode to be available. And there are ads. But there are some shows only available to premium subscribers. Premium members have additional perks. The way we see our service is that it’s not just an SVOD or content experience. It’s about creating and super-serving this particular audience. Premium subscribers not only get the full access on the video side—they also can buy merchandise at our ecommerce store at a lower price.

How that works is, let’s say you have a favorite show, and there’s a character or figure from the show you really like, premium subscribers get a discount in our store and we work with partners and vendors to source many different kinds of goods related to the show. They get access to comics, or manga. A lot of anime originate from comics. So they can not only watch the show, but they can go really deep and access the entire story line. Also, there’s a huge offline component. A lot of our subscribers attend conventions, or cons. And at these cons we have premiere events just for them, they get first in line, first peek. They get autographs. They get free schwag whenever they show up. It’s a complete 360 experience.

How much revenue do you get from merchandizing?

It’s very important. Today, video and SVOD is still the majority of our business but I think we see that, at least for this particular audience, merchandizing is a piece of that experience. It’s like an offline, tangible collectable that’s very closely tied to the show and what they enjoy watching.

Parks Associates ranks you in the top 10 OTT services by number of subscribers. But there aren’t any other digital pure plays on that list. To what do you attribute your massive growth?

That’s a great point you make. I think what you see in the top 10, there are certainly very broad plays. For example, Netflix and Hulu are trying to do a little bit for everyone. And then there is sports, and other, more traditional content brands. But to your point, those businesses and brands have stood up for the last 40 or 50 or more years. So online it’s really for them it’s about capturing and shifting that audience from existing channels. For Crunchyroll, it’s about… how to build engagement around community. How do we really cater and give to our passionate audience all the content that they want. And build a brand that they can trust that is curating and bringing this online experience to them. And through that we’ve been able to help create and grow a pure digital brand over the last six years.

Have there been any challenges while achieving such rapid growth?

I think that generally people recognize that the barrier to entry for starting up your own SVOD service has decreased over time. But I think the devil’s in the details. From where we stand, starting from zero subscribers and now approaching 750,000 paid subscribers this year, even though you can start up a service, what is really difficult is making sure your content and product experience and the metrics and the data and the leverage that you have on the business side have to all be world class. What I mean by that is this: We invest very heavily in video… which means that we can deliver our content ubiquitously across every single device’s platform, in multiple languages, in many countries. And doing that with a robust-quality service is actually quite difficult.

Another example would be subscription management. There’s a science and an art to capturing an audience, being able to just build audience, doing it efficiently, being able to minimize the amount of churn—voluntary and involuntary you see with a subscription management layer. We have some of the best and brightest folks in the video subscription business focused on that. You have to continue to innovate in the business to actually get to scale.

Do you think there are too many SVOD services out there? Will they start to level off?

In my personal opinion, there’s a fine balance between finding a dedicated and passionate audience and finding one that’s large enough to get to scale. If you have more scale, it implies that you’re potentially not super-serving—you’re becoming less meaningful to the core audience. And if you really super-serve, you need to make sure that whatever category has enough volume of interest. So I think there will be a lot of services that definitely address niche audiences.

But the question is, is that audience big enough to reach a few hundred thousand subscribers or more? The barrier to getting to scale and being able to make the investments you need to make on the product, on the engineering, on the technology—as well as the community, the content of the business, to be able to support that business, you can only do with sufficient scale.

80% of Crunchyroll’s subscribers are from the U.S. Did you ever doubt that Western audiences would be willing to read subtitles?

Where we’ve been pleasantly surprised is how well people have embraced subtitle content. For example, if you want dubbed content—and we do offer it, and we do dub some of our most popular shows later for release as well—the dubbing process takes many months to get a quality product. You have to make sure that you have a baseline script, you have to edit the script to make sure that, for example, the animation of the mouth flaps sync for whatever they’re saying. You can’t go back and reanimate that. You have to actually get actors to record the segments, and they you do editing, post-production, and then you release. So when it’s done it’s 6-12 months. Users demand a fresh-quality product as quickly as possible. We’ve seen that subtitles is an incredible way to do that.

And when we’ve done surveys, the overwhelming majority prefer subtitles, because they can hear the audio track. Even though they don’t understand it, they can get the nuance of the conversation and the emotions and feelings… (or so they say). We invest a lot of resources into making sure our subtitles are the best in the industry. Anime is really just an art form. And within anime there’s a ton of different genres and each show is different. Some shows are sports, some for young adults…Some are about a cultural reference. We make sure to pair the best subtitlers who have that cultural understanding and can carry their nuances into English, French, German, Spanish, Portuguese… and every language we use.

You recently landed a $22 million investment from Otter Media. What will you use the funds for?

We’re incredibly happy to be backed by such a strong supporter and partner and the investment will be to continue to grow our capabilities…Original content is incredibly important. A month or so ago we announced a joint content fund with Sumitomo, one of the biggest Japanese trading companies and partners in the media space to co-produce Japanese animation.

What’s the revenue share for content creators?

There are two different models. On the ad-supported side, every CPM that comes in, we share a majority of that with the content provider or creator, based on views x CPMs. On the subscription side we do something really interesting. If you’re a subscriber you’re paying $7 a month. We take the total time that you spend watching the shows and we give to each publisher the slice of time that they watch a particular show, as a prorate of the whole thing. If you just watch one show, your $7 goes to that one content creator. If you watch two shows, those two content creators get $3.50 of your $7. And then from that gross amount that we allocate based on your total subscription fee, then we have a revenue share, where we pay the majority to the content provider. It’s very fair in that if you watch a show and you like it a lot, then [the creator] is getting access to a lot more subscription dollars from every user that’s watching your show.

It’s becoming a virtuous cycle, where we’re seeing more revenue online, to help drive the creation of more content for our fans. And they are happier and invest more in the content… It’s enabling a new wave of creativity. For the traditional model, at least for us, you have a show made in Japan, a distributor picks it up, they maybe only pick up 10 or 20% of the shows that are coming out, they dub it, they put it in the store, sell the DVD… three years later maybe some fans buy it. But today we’re seeing fans directly contribute to the creation and monetization of existing and new content, at a much faster clip. And they’re doing that for every single show.

That creates a relationship between the subscriber and the content creator.

That’s right. It’s something that we’re incredibly proud of. In a sense we are connecting creators very directly with fans. And fans and viewers are directly devoted their dollars, and that goes to the creation of new anime content going forward.

Can you share the percentage?

It really depends on a case-by-case basis, but it’s a majority.

You have a very active forum community on your website. Does that help with the creative process?

We’re getting broad data, analytics and insight into the content. For example, when we’re in the development process, we can go put up concepts to our audience, get their feedback, and quickly iterate and figure out if this is something people really want and if we should invest in it. So having that data and feedback is incredibly important in the content creation process.

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