Sony's Heartaches In Hollywood

Give 'em this much: The folks at Sony Pictures still know how to throw a party. On Nov. 16, the Japanese company's film executives gathered for the gala opening of their lavish Lincoln Square theater in New York City. Magic Johnson, Christie Brinkley, and other stars maneuvered past trays of caviar as they toured Sony's $40 million monument to the movies. A few hours later, Sony Corp. disclosed it was writing off $2.7 billion from its 1989 acquisition of Columbia Pictures.

With a bevy of new players heading for the coast, Sony's debacle is a case study in how not to break into show business. Here, from the School of Hollywood knocks, are the

key lessons for prospective investors.

LESSON 1: Don't put dreamers in charge of the bank account.

As a film producer, Peter Guber's credits include Batman and Rain Man. But as chairman of Sony Pictures Entertainment Inc., his profligate spending cost Sony hundreds of millions of dollars. While Guber's strategy netted the studio some high-profile projects, such as Steven Spielberg's Hook, profits lagged. And later, when big-budget projects such as Last Action Hero flopped, Sony's high costs and low grosses were a double whammy. One problem: Guber's boss, Sony U.S. CEO Michael P. Schulhof, didn't rein him in.

Viacom Inc. did it right. Although the company spent a rich $10 billion to buy Paramount Communications Inc., it chose Jonathan Dolgen, a hard-nosed cost-cutter with stints at Twentieth Century Fox Film Corp. and Sony, to run the Paramount studio. "It's ultimately a management decision," says Viacom President Frank J. Biondi Jr. "You can't just throw money at things."

LESSON 2: Don't spend a fortune on bricks and mortar.

Sony put upwards of $100 million into upgrading its Culver City lot with state-of-the-art production facilities and a lavish administration building. In an industry where talent travels and studio space is easily leased, such elaborate edifices are no longer vital.

Turner Broadcasting System Inc. had a better approach. It acquired two studios, New Line Cinema Corp. and Castle Rock Entertainment, neither of which owns a lot. The lack of facilities hasn't prevented New Line, which made the summer hit The Mask, from grabbing a bigger share of the 1994 box office than Columbia. For Turner, which needs a steady supply of films for its cable networks, that's all that matters: "We don't need to own a lot," says Turner Entertainment President Scott M. Sassa. "We need as many copyrights as possible."

LESSON 3: Don't assume you have to buy a studio to be a player.

Sure, Viacom and Turner have opted to be 100% owners. But both companies have a history in entertainment.

Other would-be players, such as telephone companies, are finding they can gain access to programming simply by making the right connections. Bell Atlantic, Nynex, and Pacific Telesis Group announced an alliance with talent agent Michael Ovitz to create a new video network. Ovitz will help develop projects, and the Baby Bells will deliver them over their telephone wires.

The partners may eventually own small stakes in specific programs or even production companies. But they will also air movies and TV shows from other producers. As a result, the three Baby Bells are on the hook for a relatively paltry $100 million each. Says Bell Atlantic President James G. Cullen: "We hope to avoid falling off a cliff, like others have on this journey."

LESSON 4: Prepare for hard times. And assume they'll get worse.

Sony is hardly the only casualty of Hollywood: Coca-Cola Co., Transamerica Corp., and other players found it tough to navigate the tricky currents of a business driven by hits and mercurial personalities.

Consider Japan's Matsushita Electric Industrial Co., which seemed to avoid most of Sony's pitfalls in its 1990 acquisition of MCA Inc. The studio rang up record profits with 1993's box-office champ, Jurassic Park. But now, Matsushita faces a rebellion from MCA's headstrong chiefs, Lew R. Wasserman and Sidney J. Sheinberg, over the parent company's refusal to finance a costly expansion. Matsushita has hired superagent Ovitz and investment banker Herbert A. Allen to recommend ways to break the impasse.

Given Sheinberg's ties to Spielberg, Matsushita can't easily afford to let MCA's bosses go. So some observers bet the company will compromise, perhaps by giving Sheinberg and Wasserman more leeway to expand. Of course, that's what got Sony into trouble. Nobody ever claimed logic was a key element in Hollywood's lesson plan.

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