Sony Corporation of America CEO Howard Stringer handed his Tokyo bosses a brash proposal last fall. Sony Pictures could merge with Kirk Kerkorian's Metro-Goldwyn-Mayer studio, and Sony Corp. would hang on to a minority stake. It wasn't the first time Chairman Nobuyuki Idei had heard such a proposal--and his rejection was swift and unequivocal. A chastened Stringer now sticks to the party line: Sony (SNE) doesn't need more girth, he contends: "When you put all our parts together, we are as big as anybody."
The problem is, the parts aren't together. Few world-class companies need a thorough shakeup more than Sony, which is mired in a four-year funk due to razor-thin margins in its electronics business. What's more, its media operations look puny in a fast-consolidating industry. "An American management probably wouldn't have waited this long to change things," says University of California at Los Angeles business professor George T. Geis.
Sony's core business can probably be fixed. Its brand in TVs, camcorders, DVDs, and games is second to none. Still, from an American business perspective, Sony has a lot of work to do. To hike profit margins, it should shutter or sell one-third of its 56 manufacturing plants and get out of ultracompetitive businesses such as computer peripherals, chips, and other components. To reduce overhead, it needs to cut headcount by at least another 10%.
In the U.S., Sony should either build up its entertainment business or sell it off, and give up once and for all the myth of "synergy." Over the years, Sony has stamped its music into mini disks and its movies into 8mm cassettes--all with hopes of selling more disk and cassette players. But this tactic never boosted hardware sales. With a market share of less than 20% for its music or film units, Sony simply isn't big enough in content to shove consumers into one or another hardware format, be it Vaio computers or newfangled "airboard" tablet devices.
With or without synergy, the entertainment business is inherently risky. Movies often flop--end of story. And there aren't a lot of places where Sony can generate additional cash flow. It's prohibited by U.S. law from owning a TV network.
As a dealmaker, on the other hand, Sony has some real assets. Its library of more than 3,500 movies and 35,000 episodes of TV shows and its music catalog of 500,000 recordings stocked with vintage Michael Jackson and other stars make it a sexy merger candidate. A merger with MGM would give Sony heft, along with a U.S. partner that isn't restricted from broadcast.
A long-contemplated spin-off would be just as good, especially with Sony about to release such potential blockbusters as Spider-Man and sequels to Men in Black and Stuart Little. Sony could preserve a minority stake to keep a toehold in entertainment. And the deal could net Sony at least three times the $5.6 billion it spent in the 1980s to buy the music and film units.
After years of losses, Sony's U.S. entertainment unit is finally profitable. That's because its U.S. executives have slashed overhead on film and TV production. They also hit it big with Crouching Tiger, Hidden Dragon and again with this season's blockbuster, Black Hawk Down. Margins are up. But that still doesn't make Sony a media player. By Ronald Grover and Tom Lowry
With Irene M. Kunii in Tokyo