Sony’s Future to Blend Content and Electronics

Nov 10, 2003  •  Post A Comment

Sir Howard Stringer sheepishly conceded that his Sony Corp. of America is to blame for the mysterious disappearance this fall of males age 18 to 34 from network television, his old stomping ground.
“They are playing on my devices. They are taking their content in different forms and in different ways, and we’ve got it,” he proclaimed. “Who needs a network?”
Indeed, the former CBS chief executive, who was recently named vice chairman of Japan-based Sony Corp., a rare honor for a Westerner, has endured years of criticism for not buying ABC or CBS and because he did not merge with NBC when he had the chance several years ago.
Today he’s providing content for Sony’s VAIO laptop, wireless PlayStations and other branded devices.
“Whatever dwindling attention spans [older generations] have are more than matched by this generation. They have a lot more options-video games and digital downloads and the Internet. All of those alternatives are connected to this company,” Mr. Stringer told TelevisionWeek. “We have what is going to take entertainment into this next century.”
As far as acquiring a broadcast network is concerned, “there was always a good reason why something didn’t happen,” Mr. Stringer said. It appears now that patience and autonomy have paid off. Sony stands a better chance today of emerging the victor by relying on its own content, electronic devices and wits, he said.
“Having been there, [having a broadcast] network is the 800-pound gorilla in the room. It has dwarfed all the other assets you have out of all proportion to its value. I don’t want to do that. Their audience is diminishing,” he said. Instead, Sony has become a content supplier for all outlets, negotiating with telephone, computer, cable and broadcast companies. It competes with Viacom, Microsoft and Dell.
“We can support anyone’s network. We are an equal opportunity supplier, provided the costs are not too high and the profits are not too far away. We are insulated from the anxieties of mass media. We don’t have to care about the networks’ demographic or ratings decline,” Mr. Stringer said.
“Our network is the networked game-like EverQuest-where the average player spends 20 hours a week online playing-that’s what’s hurting the broadcast and cable networks.”
The convergence vision that has carried Mr. Stringer and his boss, Sony Corp. Chairman Nobuyuki Idei, for the past eight years is the driving force behind the company’s new Transformation 60 plan to downsize and reposition its content and electronics for a wireless, interactive broadband world.
Although its U.S.-based music, film and television operations have been streamlined and restructured enough to yield $1 billion in annual cash flow under the year-old Project USA initiative, Sony Pictures is hunkering down again, this time to shed roughly 1,700 jobs and another $240 million in annual costs.
But that pales by comparison with the 20,000 jobs, or about 10 percent of its work force, Sony Corp. plans to cut (along with $3 billion in costs) over the next three years.
Sony Corp.’s deep-set financial problems became evident earlier this year when the company reported a fiscal first-quarter loss of $1 billion off of a base of $68 billion in annual revenues. A goal of more than doubling its operating margins to 10 percent by 2006 will require Sony Pictures Entertainment to bring its more than 4,000 films and more than 80,000 hours of TV programs to a new generation of devices in new ways.
“We cut over 1,000 jobs in music this year,” Mr. Stringer said. “We’ve been doing it for two years under Project USA. So we have done a lot of cost-cutting and we’re doing a lot of cost-cutting. We’ve done a lot of what Sony is now doing in Tokyo, which is cutting across a lot of shared services and eliminating redundancies across all three of the operating companies.”
“We are not cutting anything at the creative level. We’re just tightening up fixed costs and addressing reality at the television and pictures companies,” Mr. Stringer said.
Mr. Stringer’s most immediate challenge last week was convincing investors and analysts in New York, just as he had done in Japan the week before, that Sony’s U.S.-based media and entertainment assets are part of the solution, not the problem.
Analysts in the United States and Japan, who are in “show-me” mode, are generally skeptical about whether such massive streamlining will jeopardize creativity and whether it goes far enough. UBS analyst Kazushige Hata said that while he is “encouraged by the sizable addition to the firm’s fixed cost-cutting target,” he is concerned about the absence of new, clear growth strategies.
No sooner was the Transformation 60 pitch made in meetings Nov. 4 than Mr. Stringer was announcing tentative plans to merge his vastly streamlined Sony Music with Bertelsmann AG’s music unit, beating out other powerful suitors such as Time Warner. Mr. Stringer admits working out the fine points could be rough. For instance, Sony insists it remain in control of the surviving entity.
Former NBC President Andrew Lack, who also was a deputy of Mr. Stringer’s at CBS, has been doing the heavy lifting as Sony Music chief executive, and would be CEO of the joint venture.
Mr. Stringer said there could be other mergers and acquisitions, although he preferred instead to allow his disparate businesses and personnel to fluidly converse and collaborate not just across creative content and electronic hardware, but across U.S. and Japanese cultures.
“It has taken me all of six years to get everyone talking and working together. I don’t want to be distracted by a different shareholder and a different board of governors. I want to get on with this,” he said.
“There is an enormous advantage of doing it together. Our electronics and the content companies are designing software together. And the software engines work for pictures, music and television to design devices that will distribute this content in ways that will be appealing to the customer,” he said.
Five years ago, Sony considered selling, spinning off or partnering its U.S.-based entertainment assets, sources said. “Nobody believes that would be a good idea anymore. Everyone sees the content and electronics being integrated, with each of them fostering the other’s growth,” Mr. Stringer said.
The frenzied bidding for Vivendi Universal Entertainment’s U.S.-based assets, and its announced merger with NBC, has heightened interest in SPE film and television operations and libraries.
But the fact that Sony is willing to negotiate a merger of its core music unit while articulating its new integration and growth strategy to Wall Street signals just how much things are changing at the company.
Mr. Stringer also is pragmatic about Sony’s place in a rapidly consolidating media world.
“Every network needs television shows. No matter how big, they aren’t automatically more efficient. You still have to cast a wide net to get television shows. The fact that we have turned out to be one of the last independents is seemingly helpful. We have to take greater risks and we have to cut smarter deals because the advantage these companies have is a size they can use to beat you down. We’ve done pretty well with CBS and we will continue to do it this way,” Mr. Stringer said, referring to Columbia TriStar Television’s hit CBS series, “Joan of Arcadia,” which is virtually ensured brisk international sales and a four-season pickup that is a ticket to lucrative off-network syndication.
Two years ago, Mr. Stringer virtually swore off the network prime-time television series business, vowing to be more selective about which and how many series Sony produces and for how much. What appeared like a blasphemous bet at the time has since paid off.
“We have changed the nature of the television business, and we took some flak for that. Now it appears everyone else is doing the same thing,” he said.
“We don’t have any fancy production deals. We’re doing a handful of network shows. We only concentrate on the ones we think have the best shot,” he s
aid. For instance, all of the cable shows are done for a license fee that is more than the cost of production, Mr. Stringer said. “That’s never true of network shows. The problem with network shows is that if you do lots of pilots that are quite expensive, and then they get picked up for six episodes and then get canceled, you’ve lost a lot of money. We’re no longer doing that.”
Not so coincidentally, Sony’s television operations generate $300 million-plus in annual cash flow as a result of selectively and carefully producing prime-time series, and of having a golden syndication stable that includes “Seinfeld,” game shows such as “Wheel of Fortune” and “Jeopardy!” and such top daytime soap operas as “Days of Our Lives.” Original production also includes “The Shield” and “Ripley’s Believe It or Not” for cable, a Stephen King miniseries for ABC and TV series based on recent films “Spider-Man” and “Charlie’s Angels.”
International distribution extends to 37 channels in 60 countries, telephone companies and other wireless platforms, home servers and high-definition adoption using the new Blu-ray optical disc video recording format Sony developed with nine other consumer electronics companies to enable recording, rewriting and playback of high-definition video. A new Sony downloading service next spring will embrace both video and audio content.
Sony’s PSX machine-a combination CD and DVD player, television set, computer and PlayStation, all wrapped up in broadband connectivity-promises to be the video and audio be-all and end-all. The portable wireless PlayStation will provide downloading, storage and transfer of audio and video content and online access. “It is a serious device that will give us a stunning advantage,” Mr. Stringer said.
“If all the new devices, functionality and content converge at the same time, Sony will leapfrog many of its media competitors,” he said.
“We’re as big as anyone else. It’s very hard to get anyone to understand, because everyone here is so focused on American assets and on measuring network against network and media company against media company. But we are much more than that. We are an electronic digital media company that can hold its own against anybody. In the next two years it will become obvious,” he said.