TIME: Almanac 1993/TIME Almanac 1993.iso/time/100989/10098900.006

Text File | 1992-09-23 | 7.7 KB | 152 lines

                ¼O>                                                          BUSINESS, Page 70

Special Report: Foreign Owners

From Walkman To Showman


Sony pays $3.4 billion for a Hollywood studio as a crowning
touch in its strategy of combining entertainment with
electronics

By Janice Castro


    Back in the days when the only way to see a movie was to go
to a theater, a handful of Hollywood film studios shrewdly
bought cinema chains to showcase their latest hits. Last week
Japan's Sony put a new twist on this Hollywood strategy by
plunging into the movie business as a way of selling its
expanding video technology. In the largest-ever Japanese
takeover of a U.S. company, the electronics giant (fiscal 1989
sales: $16 billion) snapped up Columbia Pictures Entertainment,
agreeing to pay $3.4 billion and assume $1.2 billion in debts.
Coming less than two years after Sony's $2 billion purchase of
CBS Records, the acquisition completes the transformation of the
maker of Walkmans, televisions, stereos and videocassette
players from gadgeteer to master showman. Sony now hopes to
market American pop culture through leading-edge Japanese
technologies in film, television and music.

    The takeover may help inflame growing U.S. anxiety about
foreign investment in American companies. Last week the U.S.
Department of Transportation persuaded Alfred Checchi, who led
a $3.6 billion buyout of Northwest Airlines, to reduce the
participation by KLM Royal Dutch Airlines in the deal from $400
million to $175 million. DOT officials said they would also
scrutinize plans by British Airways to invest $750 million in
the $6.8 billion employee purchase of United Airlines.
Transportation officials said one concern is that foreign
investors might share inside knowledge about U.S. airlines with
their own governments, thus undercutting U.S. negotiations with
other countries over air routes.

    Some entertainment-industry observers suggested that
Congress should challenge the Sony deal as well. For one thing,
entertainment is the second largest U.S. export industry
(aerospace is first). Moreover, Pat Choate, an economist and
author of a forthcoming book on Japanese involvement in U.S.
politics, sees Sony as a company that zealously lobbies for its
own interests and stands to gain substantial influence over U.S.
public opinion. Just as overseas firms are barred from owning
U.S. television stations because of the potential for spreading
propaganda, Choate notes, limits should perhaps be placed on
foreign ownership of Hollywood studios.

    Yet Sony is only one of the foreign investors rushing to
claim a stake in Hollywood. In the past year, Britain's
Television South bought MTM Enterprises, Australia's Qintex
Group reached an agreement to take over MGM/UA, and Italian
financier Giancarlo Parretti acquired control of Hollywood's
struggling Cannon Group, an action-picture mill.

    Columbia represents Sony's chance to become one of the
world's largest producers of what the entertainment industry
calls "software" (movies, video and recorded music). Built on
chairman and founder Akio Morita's devotion to technical
innovation, Sony is diversifying into cultural products as the
patriarch, 68, gradually hands over control of the company to
president Norio Ohga, 59, an accomplished musician. While
electronic goods account for 84% of Sony's current sales, the
addition of Columbia will give the company a 60-40 split between
hardware and software. Says Gordon Crawford, a senior vice
president at Capital Research, a Los Angeles investment firm:
"Sony has seen that the people who own the software make more
money."

    Sony believes it can help guarantee the success of new
hardware by ensuring that potential buyers will have a plentiful
supply of entertainment software to play on their new machines.
After buying CBS Records in 1987, Sony swiftly began converting
the vast CBS library of popular albums by such artists as
Michael Jackson, Bruce Springsteen and Barbra Streisand to the
booming compact-disc format. Along with the wave of CDs from
other companies, the CBS discs helped boost sales of Sony CD
players from 2.9 million machines in 1987 to an estimated 6.5
million this year. Sony expects its musical gold mine to give
the same boost to its new digital audiotape players.

    At the same time, Sony gave free rein to CBS Records chief
Walter Yetnikoff, 56, to build the unit's creative output. "CBS
always treated us like a stepchild, a little, dirty urchin,"
says Yetnikoff, "but Sony gives us respect. The important thing
is, they like the artists and the business. They understand it's
more important for me to take Bruce Springsteen's call than
Norio Ohga's."

    As the new owner of Columbia, Sony will control a rich
library of 2,700 films, including such Best Picture Academy
Award winners as On the Waterfront (1954), Bridge on the River
Kwai (1957), Lawrence of Arabia (1962) and Gandhi (1983). The
company hopes to use that collection to boost sales of its new
8-mm videocassette equipment.

    Columbia's hot hand these days is in TV production, where
it is a leading producer of network series. The studio has
eleven such programs in production, including Who's the Boss?
and Designing Women. The division has a library of 23,000 TV
episodes from which Sony can pick candidates for syndication and
videocassette sales. Columbia also owns the 820-screen Loew's
theater chain.

    Aside from a few major hits such as Ghostbusters, The
Karate Kid and When Harry Met Sally . . ., Columbia's
movie-production unit has been floundering for years. The most
spectacular flop: Ishtar, the Dustin Hoffman-Warren Beatty
desert lark released in 1987, which lost $25 million. Three
top-management teams have come and gone since CEO David Begelman
was forced out in 1978 amid a financing scandal. Coca-Cola,
which bought the studio in 1982 and still controls 49% of its
stock, fired British producer David Puttnam (Chariots of Fire)
in 1987 after barely a year at the helm, during which he
accomplished little besides alienating Hollywood's
establishment. Dawn Steel, the current film chief, has had
mixed results during her brief tenure, and her future is
uncertain. Coke plans to plow its $1.2 billion profit on the
sale into the soft-drink business, giving up on the large screen
and moving back behind the snack counter.

    While outsiders often have trouble adapting to Hollywood's
insular ways, Sony appeared decisive and savvy last week.
Columbia CEO Victor Kaufman and chief operating officer Lewis
Korman announced that they would be leaving once the deal was
set. At the same time, Sony said it agreed to pay $200 million
to buy Guber-Peters Productions. One of the hottest producer
teams in Hollywood, Peter Guber, 47, a former Columbia
production executive, and Jon Peters, 42, who got his start as
a hairdresser to the stars, produced Rain Man for United Artists
and Batman for Warner Bros.

    Sony reportedly hopes to put the two hitmakers in top posts
at Columbia, but that courtship raises some knotty questions
about how the two would fulfill their existing obligations.
Guber and Peters recently renewed an exclusive five-year
production agreement with Warner Bros. Already in the works
under that contract are a sequel to Batman, a film adaptation
of Bonfire of the Vanities and other projects. Sony's first
creative challenge may be negotiating a deal under which rival
Warner gets its hits and Guber and Peters are given a shot at
jump-starting Columbia. Now that Sony has paid the price of
admission, the company seems eager to see lights, camera and
action.


-- Seiichi Kanise/Tokyo and Elaine Lafferty/Los Angeles