Competing with free: anime site treats piracy as a market failure

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When lawyer Evan Stone worked as an in-house counsel for anime distributor FUNimation, the company tried all sorts of techniques to stop piracy. It sent takedown notices and DMCA complaints to anyone who would listen, like ISPs (which sometimes took action) and torrent sites (which rarely did). It hired outside firms to flood torrent sites with bogus files. It put more than 90 series online for free streaming.

Stone finally came to believe that suing file-sharers was the only approach left. "I didn't know what other options we had," he told me earlier this year. "We were at our wit's end."

But making money in anime isn't hopeless; it turns out that anime lovers will pay for content even in an age of widely available free versions. "In almost all cases, piracy is not an issue of legality," says Kun Gao, CEO of the anime streaming site Crunchyroll. It's often a market issue—and Crunchyroll turns a profit by offering anime lovers what they want: legal access to anime shows right after new episodes have aired in Japan.

Pirates can't compete with this kind of availability, since even the most dedicated fansub groups need time to do their own translations. Crunchyroll gets its content a week before first air date, giving it time to do a proper subtitling job. Piracy may never go away, but Crunchyroll is out to prove that "competing with free" is possible by treating piracy like a business problem.

A leap of faith

The site was founded in 2005 by four engineers from the University of California. It was a side project, rolled out as YouTube was taking off, that the engineers shared with their friends. Like YouTube, people could upload content to Crunchyroll; because the initial userbase was largely Asian, the site became a repository of Asian culture, especially anime—and much of this material was copyrighted and unlicensed.

Like YouTube, the site would take down specific files at the request of copyright owners, but the presence of infringing content was a constant irritant to companies who felt like user-generated content sites were building their own businesses on the back of someone else's work. After a year and a half of working nights and weekends, the Crunchyroll founders all "made a leap of faith" and quit their jobs to focus full-time on the site.

The bandwidth bill was high, and the team maxed out their private credit cards to pay for it, but they managed to attract venture capitalists who liked the passionate community involved with the site. After raising a few million dollars, Kun and his team toured Japan talking to the anime studios. The studios wanted the site to be "black or white," all pro or all user-generated, and they would only license their content to a pro site.

On New Year's Day 2009, Crunchyroll removed all the user-generated content and replaced it with licensed content. In the two years since, the site has grown into profitability, trying to take away every advantage that piracy has—including price.

Crunchyroll's "simulcast" catalog

For those who don't want to pay, the site offers free ad-supported streams, like Hulu, one week after new episodes air in Japan. But for those willing to spend $7 a month, Crunchyroll offers 720p ad-free streams available on devices from laptops to iPhones and Android tablets. And its real innovation is offering most of these streams the moment the original broadcast concludes in Japan. (Sixty percent of its current library of shows can be streamed this way.)

Under its deal with studios, Crunchyroll receives secured prerelease versions of new anime episodes a week in advance; in-house translators prepare subtitles, and the streams are ready to go one hour after new episodes air. Such immediate access isn't even available in Japan. "It's a bit of a shame that our animation for US fans is better than the animation service Japanese fans get," says Kun. And it's certainly a rarity when it comes to worldwide distribution of non-anime premium video content.

Kun claims that piracy drops "60 to 70 percent" for shows carried by Crunchyroll.

Half the money earned by Crunchyroll goes to pay the creators; the site claims to be profitable on the remaining money. Kun attributes success to his focus on giving anime lovers what they want, but also on the ways Crunchyroll has built a community involving forums, contests, coupons, merchandise, and news. In his view, piracy can't compete with a sense of community.

Creating niche communities has proven successful enough that Crunchyroll is looking to expand into other vertical media opportunities this year. But for now, it's trying to show that offering quick access to a good product and coupling that with a passionate community can fund content creation even in a BitTorrent world.

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