Does Sony Really Need A Partner?

A distribution arm may not be necessary if digital delivery of movies and music pans out

It was vintage Howard Stringer. At a party marking the 20th anniversary of the Sony Walkman in New York on Sept. 23, the chairman and chief executive of Sony Corp. of America stood awkwardly in the spotlight and began his speech. But in the midst of introducing colleagues from Tokyo headquarters, Stringer couldn't resist ribbing them for being in a balcony overlooking the journalists below "so they don't have to mix with you." He noted that one exec's wife was a "a lot better looking than he is," and promised a free Walkman to anyone who could spell the name of another executive.

Coming from anyone else, such barbs might seem harsh. But Stringer's cheery irreverence has served the onetime CBS Corp. executive well. Since joining Sony as president and de facto U.S. ambassador in 1997, Stringer has mended fences within Sony U.S. and helped spruce up the company's sinkhole image in Hollywood. Now, he and his boss, Sony Corp. President Nobuyuki Idei, have also begun to confront the question that has dogged the Japanese company for years: whether making TV shows, films, and music is the right fit for a company best known for its top-notch TV sets, VCRs, and stereos.

Since he was elevated to oversee all of Sony's $18-billion-a-year U.S. business last December, Stringer has begun to implement Idei's vision of a "networked home" in which Sony can bypass conventional distribution such as TV networks and music stores to sell its stuff directly and digitally to consumers. He has overseen a string of moves, including the acquisition, with Time Warner Inc., of leading online music retailer CDNOW Inc., the development of interactive versions of its hit game shows Jeopardy! and Wheel of Fortune, and a new foray into building digital set-top boxes for cable operator Cablevision Systems Corp. that will feature Sony content. There's even a new Sony Style magazine on the newsstands, from which breathless profiles of Sony stars and products can be culled for $5.95.

But is it enough? In the post CBS-Viacom world, Sony's Columbia TriStar is the biggest Hollywood studio without major links to cable or broadcast TV. And Sony's one small step into network ownership, an investment in Spanish-language network Telemundo Group Inc., has so far been a disaster. Idei's interactive vision sounds cool, but even Stringer admitted when announcing the Cablevision deal: "A lot of promises have been made over the years--many of them by me, actually--that were never quite realized."

That unfinished agenda leads rivals and analysts to believe that at least a partial sale of Sony's entertainment business is inevitable. Stringer declined to comment for this article, but Sony sources say nothing is imminent. And right now, the company has the luxury of time. Its stock has more than doubled this year, thanks to buzz on its PlayStation 2 game system, Japan's improving economic outlook, and a corporate restructuring announced in March.

What's more, in Sony's overall picture, the entertainment assets are not the drag they once were. They generated $2.6 billion in revenue and $84 million in operating income in the quarter ended on June 30, while the overall company generated operating income of $434 million on revenue of $15.2 billion, mostly from consumer electronics and PlayStation.

Still, the prospect of tying the studio to a partner was another reason behind the stock rise, says Masami Fujino of Jardine Fleming in Tokyo. Certainly, Stringer spends much of his time discussing partnerships with other media powerhouses, including periodic talks with NBC. "They need a strong alliance, but it may not be a traditional media partner," says Thomas Middlehoff, the chairman and CEO of media giant Bertelsmann. Indeed, Middlehoff sees Sony's film and TV units as a good match with Web players interested in owning their own content such as America Online Inc. Others who may be interested in Sony's studio, say other industry sources, include megabillionaire Paul Allen and cable giant Comcast Corp.

Clouding any potential alliance are rumblings--dismissed by some at Sony--that Idei and Stringer's vision is at odds with that of Ken Kutaragi, the engineer with growing clout who masterminded PlayStation. Kutaragi and Idei apparently are sparring over the direction of PlayStation 2, a powerful computer in its own right, that could develop into Sony's ultimate weapon for distributing all kinds of entertainment content after it debuts next year.

In the near term, Sony execs have high hopes for the company's moves into interactivity. In early October, WebTV users will be able to play along to Jeopardy! and Wheel of Fortune, Sony's syndicated hits. The simple goal, says Andrew J. Kaplan, executive vice-president of Columbia TriStar Television Group, is to keep viewers glued to their sets and develop new revenue sources. And, compared with the Web, getting just 10% of Wheel of Fortune's nightly 20 million viewers to participate interactively could create a much bigger community than some of the Web's most-trafficked sites now boast.

On the Net, much of Sony's early success has been in interactive games, where its Everquest--a medieval fantasy in which players from across the world join forces to battle "enemies"--attracts as many as 35,000 simultaneous users. But without a linkup to TV or a major Web portal, Sony's Web presence has not expanded far beyond promotions and extensions of existing businesses. Still, "we're not losing millions on the Internet, like most folks," Stringer said earlier this summer. "And we don't want to share our brand with somebody that didn't exist three years ago."

Pushing that brand into the crowded market for set-top boxes is another example of how Sony aims to find new ways to distribute its content. Its boxes could offer games, e-mail, and on-demand access to Sony's sizable music, film, and TV libraries. An exec close to AT&T says the cable giant is talking to Sony about using its box for some of AT&T's 11 million subscribers.

The deal to acquire CDnow with its partner in Columbia House Music Club is Sony's attempt to assure itself a seat at the table as broadband Web service takes off and digital downloading of music begins in earnest. To hedge its bets, Sony Music has also been investing in ventures including chat service Talk City Inc., e-mail companies Infobeat and Emazing, and Spanish-language portal

The week of Sept. 27, Stringer was jetting to Tokyo for strategy meetings with Idei and other top Sony officials. No doubt, the fate of the entertainment business was on the agenda again. And the more Stringer ties it to Sony's digital future, the harder it will be for the Japanese giant to part with it.

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