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Five Strategic Questions Sony Needs to Answer at Its Investor Presentation

·9 min read

Sony Pictures Entertainment chief Tony Vinciquerra, one of the architects of the studio’s “arms dealer in an arms race” streaming strategy, will be a keynote speaker Thursday morning Japanese time as part of parent company Sony Group’s annual strategy presentation to staff and investors.

Vinciquerra, SPE motion picture group chairman Tom Rothman, and the corporation will have much to crow about. SPE’s recently-inked, twin output deals with Netflix and Disney have been widely admired. One commentator described them as “smart moves that help Sony become a streaming giant without paying to become a streaming giant.”

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The moves, licensing rights to SPE’s studio titles in different pay-windows, come at a time when other studio conglomerates are pushing into the direct-to-consumer segment and are discovering the gargantuan cost of building a global premium streaming service. The multi-year deals also come at a moment when the deep pockets of tech giant Amazon may sweep another storied movie studio, MGM, into its Prime portfolio.

Sony, these days, has other reasons for cheer. It has successfully put behind it the Howard Stringer days of perpetual crisis, jettisoned some of its electronics businesses such as cell phones and laptop computers and emerged as a large and profitable conglomerate stretching across hardware and software in a fashion beloved by Asian businessmen.

It had a strong COVID year, launched a PlayStation 5 console where demand still outstrips supply, and over the past eight years has twice seen off corporate assaults from activist shareholder Dan Loeb and his Third Point Capital.

In 2013, Loeb wanted the entertainment business hived off, and then returned in 2019-20 with the suggestion that Sony should sell off its world-leading image sensors unit. Both moves were rebuffed.

Before their recent retreat to JPY10,755, Sony’s shares reached a 20-year high of JPY12,450 in February, levels not seen since the days of the Walkman.

But with the pace and scale of media consolidation now faster than ever, and the impact of streaming making theatrical a releasing option, rather than a necessity, peering far over the horizon is becoming trickier.

The presentations on Thursday and Friday are unlikely to see the corporation offering itself for break-up. But short of that, other strategy questions remain.

Has Sony picked the right streaming strategy?

“They are big enough to compete, but there are real concerns that they don’t have their own streaming service,” says Jason Squire, who wrote “The Movie Business Book” and is a professor at the University of Southern California’s School of Cinematic Arts. “[Sony Pictures] decided not to compete directly when other studios were spending billions on new content to service and launch their new streaming services. That’s an issue they have countered by making these deals [with Netflix and Disney].”

While the deals have been presented as a master stroke, there has been years of build-up. Vinciquerra did an assessment of SPE’s content and distribution businesses and started selling off some of the linear TV businesses in Asia and the U.K.

That’s a pattern that Disney is matching as it gets out of some of the legacy TV brands that came with the Fox acquisition, and prioritizes streaming over channels operation. Only Sony does not have a direct-to-consumer outlet with the same reach – its hardware-dependent PlayStation Network has 47.6 million adherents, up 30% in two years – which leaves the studio as a content developer and licensor, with brands including “Jumanji,” “Spider-Man,” “Bad Boys” and “Men in Black.”

Near-term this has merit. For one, Sony is expected to see substantial cash from the licensing deals when rival studios are incurring losses trying to chase Netflix, Disney and Amazon in the streaming race. Details have not been disclosed, but estimates point to perhaps $3 billion over five years.

How much of that shows up as profit may depend on theatrical business, whether SPE has the right franchise movies and whether global cinema-going rebounds back to pre-COVID levels.

“Maybe them not [operating as] a streamer is really good in the end. Sony makes good content,” says Ross Gerber, CEO of Gerber Kawasaki, a wealth and investment management firm that specializes in entertainment. “If they can make money at the movies and sell off the content later, they’ll be fine. They can have a billion-dollar movie, then drop it on Netflix and get paid again.”

Peter Newman, a film producer and the head of Tisch School of the Arts’ MBA/MFA program, also sees the current approach as smart.

“Their short-term strategy is two-fold. They are saying to filmmakers ‘We’re a theatrical film company, you’re going to get treated better than you would at Warner Bros., because we’re not going to stream your film the same day. [Sony] have the ability to attract projects and creatives. They’re saying they are old- fashioned,” says Newman.

Meanwhile, he adds, “What they’re saying to Wall Street is, ‘We’re one of the last few theatrical distribution models. And we’re not bleeding money’.”

But is Sony’s content supply big enough?

Whether Sony miscalculated and let MGM slip away, and whether it is preparing a takeover bid for Lionsgate are common questions from some in the industry who believe that Sony needs more munitions if it is to keep playing the arms dealer role.

“[Buying libraries] doesn’t make sense for Sony. It makes sense for Amazon and Apple, which have cash burning in their bank accounts. If you have to borrow to buy, it makes no sense at all,” says Gerber. “And with catalogue purchases, one has to really be suspect about the value. I don’t know if kids have content nostalgia.”

Other analysts warn that all the would-be global streamers are all expanding their own production of original content, which will ultimately compete with Sony’s licensed material. Wholly-owned originals give platforms flexibility and long-tail rights, and create reasons for subscribers to keep paying the monthly fees.

Still other analysts feel that Sony maybe has enough, if it can make the disparate parts of the conglomerate work together. Sony still ranks among the world’s largest games and music firms.

“The size of the established library is not large enough for [Sony] to build a streaming service from the ground up, but there’s potential coming from content collaborators, and gaming businesses, where they can utilize more unique IPs and they can turn it into reasonably budgeted [films],” says Martin Yang, senior equity research analyst at Oppenheimer & Co.

How can Sony win the battle for anime?

The Japanese cartoon genre has rarely been so popular. Sony last year estimated that the market had grown 150% in the past five years. Yet much of this is due to the heavy investments by rival Netflix.

Sony’s own anime operations are awkwardly spread across its music, games and film divisions. Global hit, “Demon Slayer The Movie: Mugen Train,” which this week became the first film ever to gross JPY40 billion ($368 million) and has additionally taken $45 million in post-COVID North America, hailed from Aniplex, managed under Sony’s Japanese music division.

Since pinpointing anime at last year’s strategic presentation Sony has made an agreed $1.18 billion bid for North American specialty streamer Crunchyroll. Anime fans tend to be sticky, buying DVDs and collectibles and keeping their subscriptions up to date, but Crunchyroll is a minnow beside Netflix. And the that deal is now being held up by U.S. regulators

Investors and fans alike would probably appreciate a detailed anime update: if the acquisition is approved, is Sony planning a merger of Crunchyroll with its existing Funimation platform? Will either platform be given a worldwide rollout? Having bought distribution capacity, will Sony also increase investment in anime creation?

Double or quits in India?

Strategy in the sub-continent may be a sore point in relations between Sony’s Tokyo HQ and SPE, with the latter thought to favor exiting linear TV there, as it has in other parts of the world, while the Tokyo bosses reportedly want to stay.

Sony’s entertainment dilemma is that it is neither market leader, nor niche — in 2019 Sony Pictures Networks India operated 29 channels. The same is also true of SonyLIV, which is second-tier in the streaming market behind Disney’s Hotstar.

For many years, it has been widely reported that flagship Sony Entertainment Television could be sold. But talks have come to naught. Instead, two years ago, Sony was a front-runner in bidding for Essel Group’s Zee Entertainment, which operates 60 channels worldwide. But Zee and SET may both be declining assets. Zee was valued at $5.6 billion. Its market capitalization today is $2.65 billion.

If Sony is to double down in Indian streaming, it would have to expand in sports, and probably try to win back rights to the IPL cricket tournament. That would mean taking on Disney – and probably Facebook and Amazon as well.

How open to takeover or breakup is Sony?

A string of acquisitions and stake purchases suggest that Sony sees itself as consolidator, rather than target. Its biggest recent acquisition was the $2.3 billion purchase of EMI Music Publishing in 2018.

Now, turmoil may be playing into Sony’s hands. Chairman and CEO Yoshida Kenichiro last year suggested that Sony had the financial means to pick up useful assets at reasonable prices. Since the beginning of the COVID pandemic, its acquisitions include Kobalt / AWAL in music for $430 million, $200 million spent on a piece of Epic Games, and $400 million on Bilibili in Chinese streaming, Evolution Championship Series in eSports, Discord in social media, and a $255 million pending deal for Brazilian music firm Som Livre.

Many investors see Sony as doing many of the right things. “We see Sony consolidating its position in almost all businesses; wherever they are weak – they are either getting leaner (exiting) or doing partnerships,” says Atul Goyal, MD of equity research, at investment firm Jefferies.

“One of the beautiful things about entertainment is all of the silos have faded. Those companies that have had movie, TV, and music entertainment pride themselves in cross pollination. Sony has a lot of that, they just don’t have a streaming service,” says Squires.

But some Wall Streeters bemoan the Japanese corporate culture, in which management, staff and partners may rank ahead of common stock-holders, something they see as preventing layoffs and rapid change. “Their ability to adapt in the business world is crippled by ideological underpinnings,” says Gerber.

Still others worry that after the near term triumphs SPE is not in the right shape for the long haul. “The entertainment division of Sony had one of the best bottom line years at a time when none of their films played theatrically,” says Newman. “You come to your own conclusions.”

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