Bothered And Bewildered At Sony

Bewitched and other movies haven't done the trick at the box office. Can Stealth?

Editor's note: Since this story appeared in the Aug. 8 edition of BusinessWeek, Sony reported a $64.6 million first-quarter loss and slashed its net profit outlook by 88% for the year. On July 29, its eagerly anticipated big budget film Stealth bombed -- the $110 million picture grossed just $13 million at the box office. It will likely saddle the company with a large write-down for its hefty production and marketing costs.

Since a certain web-crawling character swung into movie theaters in 2002, few studios have flexed their muscles more than Sony Pictures. Riding Spider-Man's heroics, Sony Pictures topped studios in both market share and profitability. Last year, Sony Pictures unit earned a nifty $597 million, roughly half the operating earnings of its struggling electronics parent company. But now the studio that Spidey built seems to have crashed to earth. In recent months, Sony has churned out such mediocre, money-losing fare as

and Lords of Dogtown. Even Nicole Kidman's star power hasn't been enough to charm Bewitched. Sony's market share this summer has fallen to 3.4%, way down from last year's 15.6%. That leaves it last among the top eight studios, says Nielsen EDI, down from No. 4 last summer. For the whole year, Sony comes in fourth, its lowest in four years.

Maybe it's just Sony's time in bombsville. But new Sony Corp. (SNE ) CEO Howard Stringer can hardly afford a stumbling studio just now. He faces plenty of other big problems in Japan, not least curbing a slide in consumer electronics, partly brought on by warring hardware and software units. "Howard needs a misfiring studio like a hole in the head," says a top studio executive.

That's why so much is riding on Sony's next batch of movies. It's newest entry, the special-effects flick Stealth, opens on July 29. Coming later this year is a sequel to the 1998 The Mask of Zorro, starring Antonio Banderas, followed next year by The Da Vinci Code, starring Tom Hanks. But the next Spider-Man won't swing by till 2007.

Sony executives aren't professing worry, at least not yet. Indeed, results for the fiscal first quarter, ended in June and scheduled for release on July 28, were expected to show a nice jump. "I'm very comfortable where we are for the full fiscal year based on our first quarter and what we have coming up in the fall," says Sony Pictures Entertainment Chairman Michael Lynton.

The problem for Sony is that most of the first-quarter strength came from strong comedies like Hitch and Guess Who. That was before the current string of summer flops. Indeed, full-year numbers could be off substantially, figures Standard & Poor's. On July 16, S&P's equity unit urged a "strong sell" on the company's shares, based on "expectations of weak profitability in the electronics and movie businesses."

Oddly enough, some of Sony studio's current problems may stem from the cost-cutting measures that Stringer put in place back in 2001 and that helped propel him to the top corporate job. In a money-saving move, Sony cut a deal to share production expenses with former Fox studio chief Joe Roth's Revolution Studios. But the move backfired when Sony got stuck with xXx: State of the Union, a sequel to xXx, but without the original star, Vin Diesel. Sony nevertheless paid $40 million in marketing costs and will probably take a writedown after the $85 million film grossed a mere $25.6 million.

Sony's TV production unit has also suffered from ill-timed cost-cutting. After scaling back on pilots, it has few hot TV shows to syndicate, as was the case earlier with Seinfeld and The King of Queens reruns. It managed to place only one of seven pilots on networks this year: Emily's Reasons Why Not on ABC. "It was a lousy year for them," says Horizon Media Senior Vice-President Brad Adgate. He says that Sony cut back just as the networks were scrambling for new and unusual products.

To attempt to boost profits, the company rushed out Seinfeld TV shows on DVD and has also shipped DVDs of its gritty cable crime drama The Shield. But recycling hits will only get you so far. That's why Sony is banking on future hits from its September purchase, in consortium, of the old MGM studio. That has given it a potential gold mine -- the James Bond franchise. Now, if only a new crop of 007 flicks can just sell like Spidey.

By Ronald Grover in Los Angeles

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