Sony's Boogie Knight Sir Howard Stringer is on a quest. To battle the media giants, he must connect Sony's content to its magical electronics devices.
(FORTUNE Magazine) – You could argue that Sony blew it by sitting out the entertainment industry consolidation of the 1990s. Slow-moving, cautious, and traumatized by its early failures in Hollywood, the Japanese electronics giant watched from the sidelines as rivals like Time Warner, Disney, Viacom, News Corp., and Bertelsmann made multibillion-dollar deals for TV networks, online services, cable outlets, satellite distribution, film studios, publishing firms, and sports teams. Sony's entertainment businesses--a Hollywood TV and movie studio, a music company, and a couple of second-rank cable networks--are now dwarfed by these vertically integrated monsters, which can distribute their own content and exploit cross-promotional opportunities. Without networks to deliver its programming, Sony could become a fringe player in the entertainment world.
Then again, you could make the case that Sony's prudence and patience and willingness to go it alone have served the company well. Take the Internet: What other media company can say it hasn't lost a fortune online? Partly because its strategy is set in Tokyo, Sony never got swept up by the Internet frenzy that gripped American business. It did not hire hundreds of people to build an online unit in a hip downtown locale. It did not invest money or advertising time in new-media startups with far-fetched business plans. It did not suffer flops like Disney's Go.com, Time Warner's Pathfinder, and General Electric's NBCi. Now Sony is again watching from the sidelines, this time as competitors lay off staff, take big write-offs, and bury plans for Internet-driven IPOs.
So if Sony passed on vertical integration and the Internet, the two great media trends of the 1990s, what has the company been doing? Not just biding its time and conserving resources, it turns out. Without fanfare, Sony has devised a unique strategy that is designed for the broadband Internet. It believes that only the advent of high-speed, ubiquitous access will turn the Internet into a true entertainment medium--and a profitable one. Sony's plan, in essence, is to play catch-up by using broadband to connect Sony's movies, music, and TV shows with Sony devices such as digital TVs, VAIO computers, PlayStation consoles, and wireless products. In practical terms, that means Sony is ready to take the wraps off an intriguing array of digital media offerings: an Internet-based video store, a suite of pay-for-play online games, digital music services, the most advanced set-top box in the cable industry, an alliance with TiVo to make personal video recorders, and nifty new gadgets like the "airboard," a wireless flat screen that can be used to view TV, DVDs, or Internet content. If all goes according to plan, Sony will sell more music, more movies, more devices, and entirely new products and services.
This plan, it must be said, is untested and dependent on outside forces, notably the deployment of broadband. But as the global leader in home electronics, Sony, with its 180,000 employees and $63 billion in revenues last year, can't be counted out; for all its fiscal conservatism, Sony remains a marvelously inventive company, and it stands to reason that the people who brought the world the Walkman and the PlayStation will show us how to consume broadband. "It is precisely at this time, as broadband starts taking hold, that Sony is best positioned to leverage its strengths," declares Nobuyuki Idei, the firm's brainy chairman and CEO. Describing what he calls the "Sony Dream World," in which a vast array of content is available on a variety of devices, all networked together, Idei says, "Our goal is to provide new forms of entertainment lifestyles for the broadband age."
The daunting job of making Idei's dreams come true falls on the broad shoulders of Howard Stringer, the charming, curly-haired 59-year-old chairman and CEO of Sony Corp. of America. How Stringer--a Welsh-born documentary producer who spent most of his career in journalism--wound up as Sony's point man in America is an unlikely story. For one thing, Stringer had never even visited Japan until he was recruited by Sony, although he'd been almost everywhere else in the world as a CBS News producer, before he rose in the ranks to run all of CBS for Larry Tisch. For another, Stringer had left CBS to run Tele-TV, a joint venture of three telephone companies that failed miserably. Finally, Stringer knew next to nothing about making and selling electronics, which is Sony's core business, after all. But Stringer won the job because he's a gifted leader of people, particularly of creative types; at CBS he won over stars such as Dan Rather, Angela Lansbury, and David Letterman, no easy task. What's more, Stringer knows how to thrive in alien environments. Born into a working-class family in Cardiff, he won scholarships to a British boarding school and to Oxford. He emigrated to New York at age 22 to become a reporter, but was promptly drafted into the U.S. Army. Surely he's the world's only media baron who has both fought in Vietnam and kneeled before Queen Elizabeth II to receive the title of Knight Bachelor. "Adapting to cultural phenomena has actually become intrinsic to my personality," Sir Howard says. "You either adapt or go under." (At Sony, a company with a number of accomplished musicians in high places, it may help that Stringer is a classically trained trumpeter.) When he's not shuttling off to Hollywood or to Tokyo or elsewhere--he's on the road about half the time--Stringer has adapted comfortably to his new home at the top of the gleaming Sony tower on Madison Avenue in New York. There, Stringer, an unusually irreverent and unpretentious CEO, hosts cocktail parties and film screenings that attract the Manhattan media glitterati--executives like Barry Diller and NBC's Bob Wright, journalists Ken Auletta and Jeff Greenfield, or his old friends the writers Nora Ephron and Nick Pileggi. At lunch he can often be found enjoying the sushi in the sleek, black executive dining room on the 36th floor, where the vistas are breathtaking. If only taking all of Sony to such heights were quite so easy.
To grasp the delicacy of the task facing Stringer, it's necessary to revisit an ugly episode from Sony's past. The company ventured into the entertainment business in the late 1980s by buying CBS Records, which worked out well, and Columbia Pictures, which did not. Things began badly at the studio, with alarums in the press about Japan invading Hollywood, and then they got worse: Sony turned the business over to a pair of hotshot, spendthrift producers, Peter Guber and Jon Peters, who were responsible for the biggest Hollywood disaster epic of all time, running through so much money that Sony had to take a $3.2 billion writedown in 1994. "Everyone was writing these articles about how they were taken for a ride by Hollywood," Stringer recalls. "It's still traumatic, in the sense that no one wants repetition." The Sony culture was scarred: Neither the music nor the electronics unit wanted anything to do with the studio, which itself was politicized by the failures. Can you blame Idei for falling out of love with the entertainment business--and for wanting to keep a tight handle on all the goings-on in the U.S. for a while? "My ten-year-old struggle of babysitting these artists has been a nightmare," Idei says, wincing and only half in jest.
Seen in this light, Stringer--whose role at Sony has always been something of a mystery--has accomplished a lot in four years at Sony without seeming to do much at all. He has won the trust of Idei and his people in Tokyo, if not the authority to make big moves on his own. With Sony Pictures' chief, John Calley, and his deputy, Mel Harris, Stringer has brought peace to the long-troubled studio lot. He has also begun to get Sony's creative, technical, and business people in the U.S. and Japan--who, literally and figuratively, speak many different languages--to work together, which they must do if the broadband strategy is to work. "The walls have got to come down," Stringer says. "If I have to have the right code to get the right answer, then you can't work here." It's hard enough attending 12-hour meetings in Tokyo, where every word is simultaneously translated from Japanese to English, and vice versa.
Think of Stringer as the hub of Sony's network strategy. The vision is Idei's. The execution will be carried out by others. But Stringer must make sure that all the right connections are made. That's work for which Stringer, a world-class networker, is ideally suited: One reason he got hired at Sony was that his friend Diane Sawyer and her husband, the director Mike Nichols, are friends with Peter G. Peterson, the New York investment banker, and his wife, Joan Ganz Cooney, founder of the Children's Television Network. (They got chummy in the Hamptons on Long Island, before Stringer and his wife, British dermatologist Jennifer A.K. Patterson, sold their home there and bought one near Oxford.) In any case, Peterson, a Sony board member since 1991, recommended Stringer to Idei, not just because of his media savvy but because he gets along with people so well. "He's got the kind of personality that lubricates human relationships," Peterson says. "He's easygoing, and he laughs a lot, and he's not confrontational. That approach is much more likely to get things done in a consensual environment." The fact is, Stringer is neither a technologist nor a numbers guy. His charm, character, and good taste are what set him apart, but they shouldn't be discounted in a business populated by famously difficult bosses.
Interestingly, Idei was impressed by Stringer's CBS News pedigree. "Howard is a born journalist," Idei tells FORTUNE. "He has great curiosity, and he likes other people enormously, and this is his power." Even so, Idei initially gave Stringer a nice title--president of Sony Corp. of America--but almost no power; most of Sony's U.S. operating divisions still reported to Tokyo. "It was a soft landing," Idei jokes. Only gradually has Stringer been given real authority, first over Sony Canada, so that he could learn electronics, and then over Sony Music and Sony Pictures as he won the trust of Calley and longtime music boss Tommy Mottola. Two years ago, Sony's U.S. electronics unit was added to his portfolio and he joined the Sony board.
On paper, this gives Stringer authority over all of Sony's U.S. businesses except PlayStation, potentially another broadband platform, but one that operates independently and reports to Japan. "They're a little reluctant even to share information with me," Stringer admits. Once-booming PlayStation faces competition from Microsoft, which will introduce its X-Box console this fall.
Stringer's role in electronics is also limited. Happily for Sony, that business is clicking. For the first nine months of Sony's 2001 fiscal year, ending March 31, its global electronics business generated $32.4 billion in revenue, up 12%, and $2.3 billion in operating income, up 98% from a year ago. No, Stringer's challenge will be to link all that nonpareil gadgetry with Sony's content businesses, music and entertainment. Skeptics say Sony should never have gotten into content in the first place, but the notion of linking software and hardware predates the Internet by nearly a century. The Radio Corp. of America started NBC to sell radios. Akio Morita, Sony's founder, thought that if Sony had owned a movie studio in the early 1980s, its technically superior Betamax VCRs might not have lost out to VHS machines made by its competitors. That's one reason he bought Columbia and, in a sense, Sony is still trying to prove that Morita's vision can bear fruit.
To that end, Stringer has created a vehicle called Sony Broadband Entertainment (SBE), a holding company for Sony Music, Sony Pictures, and new digital ventures. This unit could issue stock to be used in dealmaking and, ultimately, generate shareholder value through a public offering. (One reason Sony hasn't done any big entertainment deals is that it's unwilling to use the corporation's stock for acquisitions.) Robert S. Wiesenthal, a former investment banker who is now SBE's executive vice president, explains, "SBE gives Sony's entertainment operations a parent currency that can be used for alliances, acquisitions, or to sell stock to the public when our digital businesses have greater scale." Sony would love to dress up and repackage its entertainment assets as new-economy businesses for sale to the public at a generous multiple.
Right now, you'd find few takers if you tried to peddle SBE shares. That's because Sony Music and Sony Pictures remain old-economy, low-margin, hit-driven businesses with uneven cash flow. Revenues and operating income at the music company, after years of healthy growth, have gone flat. For the first nine months of fiscal year 2001, music's sales were $3.9 billion, down 17% from a year ago, and operating profits were $131 million, down 47%. With such artists as Ricky Martin, Celine Dion, Destiny's Child, and Offspring, the music company should be able to generate hits even as it struggles with digital distribution.
Sony Pictures, the movie and TV studio, remains volatile, despite efforts to cut overhead and expand into more predictable businesses like cable. For the first nine months of fiscal year 2001, revenues were $3.2 billion, up 4.9% from a year ago, but the studio lost $131 million because of an accounting change that forced all the studios to expense their film-marketing costs more quickly. (Without the change, Sony Pictures would have earned $91 million for the nine months--nothing to boast about.) This year, Sony's off to a great start with hits like The Wedding Planner and Crouching Tiger, Hidden Dragon; it also hopes to profit from a partnership with Revolution Studios, the new production studio run by former Disney studio chief Joe Roth.
Sony has been trying for years to add distribution channels to its content businesses. ("You need a path to the sea" is how Barry Diller has put it to Idei.) It owns a couple of cable networks, Spanish-language Telemundo and the Game Show Network, but neither is a hit. Stringer has talked deals with everyone: CBS before it was sold to Viacom, Excite before it merged with @Home, Seagram before its deal with Vivendi, NBC, DirecTV, Comcast, and, most recently, Cablevision before it sold a stake in its cable networks to MGM. Sony and Yahoo flirted at length about a Web-and-electronics alliance. "I can't tell you how many deals we've brought to Tokyo," Stringer says. "I've been through the gamut of opportunities." Each had a reason for not going forward, he says now; as a foreign entity, for example, Sony can't own U.S. TV or radio stations.
But Sony also has tied its own hands. Idei has proved unwilling to risk billions in cash, to deploy the parent-company stock, or to cede control. Like GE-owned NBC, which also sat out the media industry consolidation, Sony has been skeptical about media and Internet valuations. "Those factors make the company unique and durable, but at the same time reluctant to get into the fashionable world of content acquisitions and portals," Stringer says. Besides, he says, "we have to maintain control, which limits the potential contenders. Sony could not have let Steve Case take over Sony."
Ah, yes, Steve Case. When you stack up Sony against AOL Time Warner, well, frankly, it seems like an unfair fight. Sony wants to build subscription businesses with steady income; those are the engines driving AOL Time Warner (parent of FORTUNE's publisher) in cable, in print, and online. Sony wants to use the wide-open Internet to distribute its content; the goal of AOL Time Warner is to keep users inside its walled garden. "They are an iceberg in the shipping lanes," Stringer says, shaking his head. "You really cannot avoid them. Whether they sink you, or you chip away at them, is another issue. They are gatekeepers on cable. And with the AOL subscriber base, they have the best business plan of anybody on the Internet. They have the movie studio and music and cable from Ted Turner. All those assets in combination are terrifying, and their appetite seems to be insatiable."
Of course, our plucky British knight isn't giving up. Stringer has assembled a cadre of bright, young executives whose job is to guide Sony through the uncharted waters of broadband, ready to make alliances with rivals like AOL Time Warner when they can, prepared to go it alone when they cannot. And they have some intriguing ventures of their own, any one of which, with luck, could help shape the largely unknown digital future:
Moviefly: Sony's Internet-based video-on-demand service is designed, in part, to prevent the "Napsterization" of movies. (Bootleg Hollywood films are already being traded online, although in small numbers.) "We want to occupy that space before the pirates do," explains Mel Harris. "We had an offensive and a defensive need to move fast." With Moviefly, which will be launched soon, customers will be able to choose from titles that are never out of stock, download them to a hard drive, and view them on a PC or through a link to a TV. Think of Moviefly as an online Blockbuster Video with an Amazon-like interface that gives movie fans the chance to watch movie trailers, read reviews, or get recommendations for titles according to their interests.
To succeed, Moviefly will need the cooperation of other studios; they'll get equity in the service if they open up their libraries. AOL-owned Warner Bros. is expected to sign up, as are others, although some, like Disney, will go their own way. Moviefly will be accessible from entertainment-related sites all over the Web. "It's a post-URL approach," says Yair Landau, the president of Sony Pictures Digital Entertainment. "You'll be able to get Moviefly at Sony.com, but you should also be able to get it at Yahoo.com or AOL.com or Bestbuy.com or Amazon.com." Moviefly will face plenty of competition, but if it takes hold, Sony will own a stake in a good business, create a new revenue stream for its movies, and stimulate sales of the devices to watch them. VAIO laptops, for example, will come loaded with Moviefly software.
Interactive games: Don't tell Sony that Internet entertainment is a bust. While others have frittered away money on sites like DEN, Entertaindom, and Pop.com, Sony has built a promising, profitable business in Everquest, a medieval role-playing game with about 330,000 paying subscribers. As many as 80,000 people simultaneously roam a complex and absorbing fictional world of heroes, quests, dragons, and monsters. "It's a costume ball, essentially," albeit one where many users spend 15 to 20 hours a week, says Kelly Flock, president and CEO of Sony Online Entertainment. "We don't like to use the word addictive," Flock says, "but it's compelling entertainment." With a compelling business model: Users pay $40 or so for the game on CD-ROM, then $9.89 a month to play.
Actually, the fact that users get so involved in Everquest is a problem, because the game tends to reward time spent, discouraging casual visitors and thereby limiting the audience. Sony and others in the interactive pay-gaming business, including Microsoft and Electronic Arts, want to expand the audience by launching new and more accessible titles. With George Lucas, Sony is developing a massive, multiplayer, online version of Star Wars. "In five years I think there will be ten million people paying to play online games," Flock says. This will be an ideal business for SBE because of its Internet-driven growth potential and steady stream of subscription revenues. It could also be linked to Sony's PlayStation business; right now there's surprisingly little contact between the two operations.
Screenblast: Designed for Spielberg wannabes, Screenblast is a suite of multimedia tools that permit advanced fooling around with Web video. For example, Screenblast users will be able to insert themselves into TV shows or movie trailers--the prototype stars Idei as Charlie in Charlie's Angels--or move their own home video from a Sony camera easily onto the Web, for "broadcast" to family and friends. The notion is that just as people send e-mail and build home pages today, they will want to communicate using rich media in the broadband era. "Screenblast will be a connective tissue across Sony devices," says Landau. "Yes, it sounds vague, but if the software is easy to use and built in to millions of Sony devices, a community of users could develop." Already about 500,000 people have stored digital pictures and videos at Sony ImageStation, an online service that ties together devices and user-generated content.
The set-top box: If you think of Sony's strategy in terms of owning gateways to the home--the TV set, the VAIO, and mobile devices like the CLIE organizer--its entry into the cable box business two years ago is best understood as an effort to develop another gateway. In a deal with Cablevision, Sony has agreed to build boxes that will offer digital TV, Internet access, and new interactive services, such as games and video-on-demand, to all of the cable operator's three million customers in the New York market. Sony won't make a lot of money from manufacturing the boxes, because the cable industry plays its suppliers against one another. But, Stringer says, "we're going to use it as a laboratory for interactivity."
New gadgets: Here's where Sony can really play off its strengths, by offering cool new products like the airboard. That's the wireless gateway, already available in Japan for about $1,000, that allows consumers to access TV, the Internet, video content on DVDs, or still images from anywhere inside the home; it's got a base station and a lightweight touch-screen monitor that will enable you, for example, to take the TV out of a kid's hands or watch a playoff game in the john. "I think airboard's going to be a knockout," says Stringer.
Lots of other products are on the way: 50-inch flat-screen TVs, tiny Walkmans with built-in links to the PC, a low-cost Internet-access device called eVilla, VAIOs designed for creating and consuming entertainment, and the Memory Stick, a wafer-thin storage medium. Behind the gadgets is the belief that Sony has an unmatched ability to influence the way people create, consume, and store content; in time, virtually everything the company makes will be loaded with Sony software and networked to the Internet and to gadgets. As Idei says, "The era of the stand-alone audio-visual product is over." That's quite a turnabout for the company that invented the Walkman, which ushered in an era of self-contained, go-anywhere devices.
There's more to Sony's broadband strategy, particularly when it comes to music, but so much uncertainty clouds the future of digital music that it would take another story to sort out those issues. Suffice it to say that, like the other major music companies, Sony desperately needs to develop a secure and consumer-friendly way to distribute digital music. Another prong of the strategy: a venture fund called 550 Digital Media Ventures that invests in startups like MongoMusic, a music-recommendation engine recently acquired by Microsoft, and direct-marketing firms Indimi.com and Emazing.com.
Like it or not, there's a real vision here: Sony wants to transform entertainment by creating a wide-open, post-broadcast, post-cable, post-portal world of Internet distribution. This vision plays to Sony's strengths because broadband channels can't be controlled by the media giants, they don't require massive capital investment, they aren't regulated--and they can be influenced by hardware. But, along with the vision, there's a whiff of desperation. If Sony can't develop networks, old or new, it won't be able to realize the full value of its content. Building Sony's Dream World won't be easy--and it may be impossible--but playing catch-up on Internet time never is.