October 2024SPARX Japan Asia Focus Strategy Investing in Timeless IP: Why Virtual Celebrities Outshine Human Stars

As a post-90s, I grew up playing video games on PlayStation and watching Japanese anime. More than 10 years ago, I got interested in K-pop. Thanks to social network and streaming platforms, it has become much easier for high quality contents to reach global audience nowadays. I strongly believe Asia presents some of the best opportunities to invest in these entertainment Intellectual Property ("IP") businesses.

As someone who understands the language, our strategy invested in the K-pop sector before and have already taken profits from those investments. K-pop enjoyed a meteoric rise during the COVID-19 pandemic. The genre places strong emphasis on visual performance, so the popularity of K-pop idols is much higher on YouTube than on music streaming platforms like Spotify. K-pop benefitted significantly when everyone stayed at home and watched YouTube during the pandemic. However, K-pop businesses, essentially a combination of music label and artist agency, have obvious limitations in the business model.

When K-pop idols debut, they typically sign a 7-year contract with the company. This initial contract favors the company in terms of revenue sharing. After the first contract expires, if the idols become very successful and renew the contract, the revenue-sharing will naturally favour the idols as they gained bargaining power. Therefore, the idols usually generate the highest profitability for the company during the first 7 years. Of course, it cannot be a guarantee that they will renew the contract. Even the successful idols decide to renew the contract with the company, some of them may become less motivated to work as hard as before. Finally, they will eventually age and retire.

It should be much better to invest in celebrities who do not have these problems. Therefore, characters who are virtual, instead of human, are probably better celebrities to put your money in.

Ideal celebrity

A key reason why characters are usually great celebrities is that they don't get old. Take one of the most famous Japanese characters, Hello Kitty, as an example. She is going to celebrate her 50th anniversary in November this year. She has not aged and is still the little girl living in the suburbs of London. Although she is around for 50 years already, her popularity across age groups all over the world did not fade. Depending on the image of the characters, some characters can be very flexible. Hello Kitty is famous for not being picky about her job. She has great versatility and can collaborate with virtually any product, except those with unhealthy images such as alcohol and tobacco. The products range from tissue paper, biscuits, stationery, collaboration with MLB (Major League Baseball), etc. Lastly, characters obviously will not ask for a better revenue sharing like human celebrities do.

Ideal business

IP businesses generally have very simple and asset-light business model. Take Sanrio (owner of the Hello Kitty IP) as an example, it sells some products directly but mainly generates profit from licensing the character IPs to companies who want to put the IPs on their products. Sanrio then collects a royalty from those products. Take a tissue paper as an example, having Hello Kitty on the box of tissue paper has no relationship with the quality of the paper. Yet, people will buy it because of the Hello Kitty (or at least, Hello Kitty increases the visibility of the product among all other tissue papers in the store) and the manufacturers love to pay for the IP to be put on the box. Typically, a product with a character image on it can be sold at much higher price, leaving better margin to the product owner or retailer even after paying the royalty to the IP owner. These IP businesses fit our criteria of very good business:

1. They are not capital intensive, nor do they require a lot of labour. They are very cash flow generative.
2. There are minimal investments required to grow the business. It is mainly about designing a new character design to fit the licensed products.
3. IPs are highly unique assets. Arguably, Sanrio's 2-dimensional characters are among the easiest to draw. Anyone can draw a cat-like image to compete with Hello Kitty (note: Hello Kitty is not a cat) but people still love Sanrio's characters. In that sense, these IPs are irreplicable assets.

You may ask, characters like Hello Kitty, Pokémon or Gundam have been here for many years, what is different now? I started at SPARX as an analyst covering the internet sector. How internet has changed consumer behaviour is something I always think about. Thanks to internet, it is now much easier for an IP to reach global audience. In the world before internet, the main ways an IP reached consumers were newspaper, magazine, offline retailer, TV station, or radio. These channels all had limited capacity: there is just so much space on a newspaper on a certain day. Prime time on TV is limited. These channels had strong bargaining power but it was hard to promote the IP through them.

The world has changed. We are now in a world where IPs reach consumers through YouTube, Instagram, X, TikTok, Netflix and sell products on e-commerce platforms. These channels have virtually unlimited capacity. IP owners can keep releasing new contents on social media, and consumers can consume those contents anytime they want. For anime, it is much easier to distribute on streaming platforms such as Netflix or Crunchyroll, while companies needed to negotiate with many different local TV stations in the past. When I was a kid, I had to sit in front of the TV at a certain time to watch Gundam anime broadcasted by the TV station, while nowadays we can watch them on-demand. In the world of social media, IPs can keep constant engagement with consumers. It is much easier to cultivate and retain a fan base. Take Sanrio as example again, I believe the internet has helped it expand the global fan base significantly. Every year, Sanrio holds a voting of its characters called Sanrio Character Ranking. Below shows the number of votes in the past 7 years.

Source: Created SPARX Asset Management based on Sanrio website,

Characters, anime, comics (or webtoon in the mobile world), video games, are all fertile grounds of developing IPs. Asia presents a rich opportunity set to invest in these kinds of companies. Given our flexibility to invest in the whole Asia region, we can have a better grasp of these businesses by comparing the Japanese companies and those in the rest of Asia. I aim to discover these attractive opportunities with our fundamental bottom-up approach.

Important Disclaimer

This content has been prepared by SPARX Asset Management Co., Ltd. (SAM) for information purpose only. Certain information contains economic trends and performance, however, SAM does not warrant the accuracy or completeness of such information, and accept no liability whatsoever for any direct or consequential loss arising from any use of this content. The views and opinions contained herein are based on then-current beliefs of the authors and are subject to change without notice. Furthermore, it should not be assumed that past performance is an indication of future results. Reference to particular securities and their issues are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell securities. Opinions are based on current market conditions and are subject to change without prior notice.