What's missing from Sony’s turnaround plan

Sony's dual tech and media model is antiquated.

By InvestorPlace Apr 18, 2012 9:58AM

By Jonathan Berr

 

Newly appointed Sony (SNE) CEO Kazuo Hirai has a tough decision to make about whether to keep the company's content businesses as he tries to restore the Japanese company to its former glory.

 

Sony's film studio and music business, which unlike the rest of Sony are reliable money-makers, don't seem to fit with Hirai's plans -- including the herculean task he assigned himself of turning around Sony's money-losing TV business.


In a recent press release, the company said it expects to "introduce products tailored to local needs and leverage the Sony Group's entertainment assets, including pictures, music and television networks, to further enhance its market presence" -- without explaining what that means.

 

Indeed, were Sony -- which expects to lose $2.9 billion in the current fiscal year, more than double its earlier forecast -- being built today, it seems highly unlikely that anyone would pair a maker of consumer electronics with a producer of movies, television and music. That business model dates back to the early days of recorded music when phonograph makers also sold records to encourage sales of the machines. Companies just don't do that anymore.

 

The company's technological blunders are so vast that business school professors will be dissecting them for decades. My colleague Brad Moon recently did a good job in summarizing them. Sony, though, has to figure out what kind of company it wants to be. Investors have little patience these days for companies that are jacks-of-all-trades but masters of none.

 

It seems to think that it can both develop hit movies, songs and TV shows as well as develop the technology to consume this content. That's a tough road that even Apple (AAPL) has not tried to master. In Sony's case, there is an argument to be made that it has a better shot at a turnaround if tries to focus on technology or content.

 

Sony, which was founded in 1946, bought its way into Hollywood fairly late in its corporate history under then-CEO Norio Ohga, who helped invent the compact disc. The former opera singer spearheaded the $2 billion acquisition of CBS Records in 1987. In 1989, the Tokyo-based company spent $3.4 billion to acquire Columbia Pictures Entertainment. Since then, Sony has developed a top-shelf media business.

 

Sony Pictures Entertainment is the home of the critically acclaimed TV drama Breaking Bad, Jeopardy and Wheel of Fortune. Its recent film lineup includes 21 Jump Street, Men in Black 3 and The Amazing Spider-Man. The Sony/Columbia film studio ranks third this year among Hollywood studios in terms of box-office market share, according to Box Office Mojo.

 

On the music side, Sony Music Entertainment's roster of artists includes everyone from the boy band One Direction to Paul Simon. The business was the only one of the major record labels to gain market share last year in sales of both digital music and physical record sales, according to Nielsen SoundScan.


Their recent performance, however, has not been great. Operating income at Sony's films business fell to $9 million, hurt by the box-office bomb Arthur Christmas. Revenue rose to $2.06 billion. The music business did better, earning $196 million on revenue of $1.58 billion. But given the sorry state of Sony's technology businesses, these divisions are gems.

 

Investors, though, understand that sometimes the hits come and sometimes they don't. If Sony were willing to unload its media assets, there would be no shortage of buyers including Time Warner (TWX), Viacom (VIAB) and News Corp. (NWSA).

 

It's time for Sony to realize that it can't be all things to all people.

 

And Apple could learn a few lessons from Sony's mistakes.

 

As of this writing, Jonathan Berr did not hold a position in any of the aforementioned securities.

 

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