Sony Corp. (6758) will cut $250 million in costs at its entertainment units over two years, part of Chief Executive Officer Kazuo Hirai’s plan to boost profit and keep full ownership of the movie, TV and music businesses.
The company is reducing the number of films from Columbia Pictures, shifting investment to television production and media networks, and identifying more cuts, Sony told investors and analysts today at its Culver City, California, film studio.
Hirai is under pressure to prove his One Sony plan tying entertainment to electronics can work, following a disastrous second quarter that included a $181 million operating loss at Sony Pictures Entertainment. He outlined priorities for cutting costs while investing in higher-growth areas such as television production, and stressing ways entertainment can dovetail with the Tokyo-based company’s electronics business.
“I know that the whole of Sony is greater than the sum of its parts,” the 52-year-old Hirai said. “Sony Entertainment is a core part of Sony and is crucial to our future growth.”
Invoking Sony co-founder Akio Morita, who acquired the film studio in 1989, Hirai said the company is poised to make good on the benefits of owning software and hardware together.
Content can help sell TV sets, tablets and mobile phones, Hirai said, citing Sony’s leadership in the development of ultra high-definition video called 4K, made possible by owning a movie studio.
PlayStation Content
Hirai offered other examples where the studio has helped Sony’s electronics businesses: Blu-ray technology became a standard for home-video and video games; Xperia phone buyers can gain easy access to Sony’s movies, music and TV shows, and the PlayStation 4 video-game player will have exclusive Sony content.
Sony’s film and television business will have operating profit next year of $630 million on sales of $8.4 billion, David Hendler, the division’s chief financial officer, said at the conference.
To improve profit margins, the company has identified $150 million of overhead and operational efficiencies, and $100 million in procurement savings, Hendler said. The division is also working with “experts” to find additional cuts, Michael Lynton, CEO of the entertainment unit, said from the stage.
“No cost is too sacred to cut,” Lynton said.
Sony Pictures is shifting investments to television, where profit margins are higher, Lynton said, and buying out partners in its media networks outside the U.S.
Fewer Films
Columbia Pictures will release 18 films, down from 23 in past years, said Amy Pascal, co-chairman of the film studio. She announced a third “Spider-Man” film for 2016 and a fourth for 2018. The studio is also raising profit targets for new movie projects, cutting marketing costs and negotiating talent deals that provide financial rewards only in success, she said.
“If we don’t make money, they don’t make money,” Pascal said at the conference.
Sony hired Bain & Co. to identify more than $100 million in entertainment expense reductions, a person with knowledge of the matter said this week.
International Channels
Sony’s 127 TV channels reach 950 TV subscribers in more than 150 countries, said Steve Mosko, president of the television division. The company is buying out partners in India and other countries and will sell stakes in channels where growth is less robust, Mosko said.
“My takeaway so far is that Sony entertainment has tremendous unrecognized depth from TV production of hits like ‘Breaking Bad’ and leadership in the growth of networks in India,” said Daniel Ernst, an analyst at Hudson Square Research who’s attending the meeting. “But that depth only reinforces my view that those businesses would get better recognition and unlock more value if they listed a stake of the business separately.”
Sony American depositary receipts gained 0.7 percent to $18.65 at the New York close. In Tokyo, Sony rose 1.4 percent to 1,894 yen. The stock, which has almost doubled this year, is 17 percent off its 2013 peak on July 23.
Third Point LLC, run by billionaire Daniel Loeb, proposed a partial sale of the entertainment assets to improve management discipline, capture higher valuations and free the unit from Sony’s struggling electronics manufacturing -- a plan Hirai rejected in August.
More Transparency
Loeb, 51, isn’t attending. He was scheduled to appear at the Robin Hood Investors Conference today in New York. Speaking this month at an event sponsored by the New York Times, he said he was impressed with Hirai’s response to his concerns.
“We wanted transparency, we wanted to highlight the values. We wanted to focus on profitability and accountability,” Loeb said. “They’ve basically said they’re going to do all those things.”
Sony has started disclosing more financial results for its entertainment operation. Film and TV operations posted $1.82 billion in second-quarter sales. Revenue jumped more than 20 percent in recorded music, the business of releasing albums, and music publishing, which collects royalties. In music, operating profit rose to $99 million on sales of $1.17 billion.
Hirai sees content growing in value, and said in an Aug. 6 letter that shareholders will benefit from full ownership as more entertainment gets distributed to mobile devices.
The new PlayStation 4 console is part of Sony’s plan to deliver its own content to consumers’ living rooms. Sony sold more than 1 million consoles in North America during the first 24 hours of sales beginning Nov. 15, topping initial results for the PlayStation 3 in 2006.
‘No Leverage’
Tying together content with electronic equipment isn’t easy, said Peter Guber, who was chairman of Sony Pictures Entertainment from 1989 to 1995.
“There’s not a lot of leverage,” Guber said. “Just because a Sony movie is good doesn’t mean you’re going out the next day to buy a Sony TV or camcorder.”
There are few examples of Sony using content to sell electronics and even fewer of devices resulting in sales of films or TV shows, Hudson Square’s Ernst said this week in an interview. To gain traction, Sony needs to show it can compete against Apple Inc. and Samsung Electronics Co. (005930) in mobile phones and tablets, he said.
“They could close the businesses that are losing money, like television sets,” Ernst said. Sony could also sell a bigger stake in its insurance arm, he said. “Splitting out a portion of entertainment the same way would be equally positive.”
To contact the reporter on this story: Andy Fixmer in Los Angeles at afixmer@bloomberg.net
To contact the editor responsible for this story: Anthony Palazzo at apalazzo@bloomberg.net
Sony CEO Kazuo Hirai
Tomohiro Ohsumi/Bloomberg
Sony Corp. Chief Executive Officer Kazuo Hirai is under pressure to prove his One Sony plan tying entertainment to electronics can work, following a disastrous second quarter that included a $181 million operating loss at Sony Pictures Entertainment.
Sony Corp. Chief Executive Officer Kazuo Hirai is under pressure to prove his One Sony plan tying entertainment to electronics can work, following a disastrous second quarter that included a $181 million operating loss at Sony Pictures Entertainment. Photographer: Tomohiro Ohsumi/Bloomberg
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