Sony America's Next Action Hero?

From Mulholland to Melrose, Hollywood has been abuzz with speculation that Sony Corp. of America was about to become The Mickey and Jeffrey Show. The only question was, which Mickey and Jeffrey? Rumor No.1 had Jeffrey Katzenberg, chairman of Walt Disney Studios, leaving the House of Mickey to take over Sony's troubled entertainment operations. Rumor No.2 had Mickey Schulhof, the chief executive of Sony U.S., bringing in former CBS programming whiz Jeffrey F. Sagansky as head troubleshooter.

The second rumor turns out to be true. Executives at Sony said on Aug. 30 that Michael P. Schulhof was close to naming Sagansky president of Sony Software, umbrella company for Sony's movie, music, and electronic-publishing divisions. As president of CBS's entertainment division, Sagansky helped vault the network from last to first place in the Nielsen ratings. Now he faces an even tougher task.

Few of the synergies Sony sought between its entertainment and electronics businesses have materialized. Sony Pictures Entertainment, which consists of the Columbia and TriStar studios, is mired in a two-year slump that has dragged down the earnings of the Japanese parent company. And even Sony Music Entertainment, a reliable cash-spinner since Sony bought it from CBS Inc. in 1986, is in a fallow period, with eroding market share and few new artists (table).

Sony's woes are finally forcing Schulhof to take action. Insiders say the low-key and precise executive, who led Sony's drive into Hollywood, has become increasingly alarmed about the studio's tarnished image. And outsiders are starting to ask how he allowed it to get that way: "To the extent they have problems," says one leading investment banker, "you've got to start at the top."

Media watchers trace Schulhof's difficulties back to 1989, when Sony bought Columbia Pictures for a lofty $3.4 billion. Trained as a physicist, Schulhof came up through Sony's electronics business. Lacking experience in films himself, he followed the advice of then-Sony Music CEO Walter Yetnikoff to hire Peter Guber for the studio. Schulhof allowed Guber, a producer whose credits include Batman, to spend money like millionaire Bruce Wayne. Among other things, Guber poured upwards of $100 million into refurbishing Columbia's Culver City lot. All told, Sony has invested $5 billion in its Hollywood outpost.

BLAMING THE YEN. To his credit, insiders say Schulhof decided to seek additional help nine months ago--informing his Japanese bosses that he wanted an executive for strategic planning. Sagansky comes with strong credentials: He revitalized creaky CBS with classy shows such as Northern Exposure. And he has a Harvard MBA, which could be useful to Schulhof's effort to sell 25% of Sony's entertainment unit. Says Schulhof: "If Jeff comes, I wanted to make it clear to him that he'd have a broad playing field."

Still, Sony insists that Sagansky won't be a hands-on manager. Guber and Thomas D. Mottola, president of Sony Music, will continue to report to Schulhof. But given the studio's problems, most Hollywood executives believe that Sagansky will concentrate most of his energies there. Indeed, some say Schulhof is orchestrating Guber's departure. Guber, who recently signed a new five-year contract, declined to comment.

Whoever ends up fixing the studio faces a daunting challenge. With 24 films so far this year, Sony has only an 11% share of the U.S. box office; it had 17.5% in 1993. Paramount Pictures Corp. has 14%, with half as many films. While Sony has avoided the losses of 1993's Last Action Hero, it has gotten tepid results from films such as Wolf.

These disappointments didn't help first-quarter revenue at Sony Pictures, which fell 4.3%, to $649 million. Overall, Sony's pretax income dropped 39%, to $238 million, on revenues of $8.7 billion. Sony blames the high yen. Hitoshi Kuriyama, an analyst at CS First Boston (Japan) Ltd., predicts that Sony's full-year entertainment earnings will actually rise 79.5%. But the rosy comparison is possible mainly because of Sony's $200 million write-down in 1993 to make up for Last Action Hero.

A bigger question is whether Schulhof will ever be able to propel consumer-electronics growth with his movies or music. True, some of Sony's gizmos are outpacing the competition. The company has sold 38,000 MiniDiscs so far this year, for example, while Philips Electronics has sold only 5,000 units of its rival Digital Compact Cassette. But experts doubt that's because the MiniDisc appeared in Last Action Hero: "I'm at a loss to provide any example of how video has boosted its sales," says Robert Alexander, an entertainment consultant.

WRONG NOTES. With those kinds of worries, Schulhof must be grateful for Sony Music, which has been a pillar of strength. Revenues rose 12% in the first quarter, with hits such as Mariah Carey's Music Box. And Schulhof has a solid CEO in Mottola: "From the day he came in," says Mottola, "Mickey has allowed me to be captain of this ship."

Yet even here, Sony is hitting some wrong notes. Insiders say Mottola is miffed because he doesn't understand Sagansky's role. Meanwhile, Sony hasn't broken as many new acts lately as rival Time Warner. Its U.S. market share has dropped from 17.2% in 1993 to 15.7% this year, according to market researcher SoundScan. Mottola says Sony will come back with new albums from Pearl Jam and Barbra Streisand.

That may be. But Sagansky's arrival signals that after 18 months of lousy news, Schulhof no longer wants to do it all alone. When it comes to running an entertainment giant, even a physicist can use a hand.

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