June 21, 2012 Leave a comment
Sony Pictures Entertainment is a subsidiary of Sony Corporation that operates the movie/tv shows production and distribution business. Here are some samples of recent movies that they produced:
- 21 Jump Street
- Ghost Rider: Spirit Of Vengeance
- Men In Black 3
I am writing about Sony because I want to know why they are in the movie production and distribution business. So I ran into this NYT article from 1989 that explains the Sony/Columbia Pictures deal. Sony’s stock was trading at $24 in 1989 from Yahoo Finance. Assuming the same number of outstanding shares, Sony was valued at $24B and paid $3.4B for Columbia.
At the time of the acquisition, Sony was the number one brand for consumer electronics products. Sony’s success in the consumer electronics business started in the late 50’s when they commercialized portable transistor based radio. The killer app is portable as most radios at that time were bulky because the electronics were made up of vacuum tubes that were much bigger and consume more power than transistors. From this initial success, Sony went on to become the dominant consumer electronics empire and produced many new successful product categories including color television, VCR, CD player, gaming console and walkman. Sony was the Apple of that era.
In the 70’s, Sony introduced their own proprietary Betamax video cassette format to store/record movie contents. Their strategy is to keep it proprietary and they were initially unwilling to license the technology to other OEMs while VHS (originally developed by JVC) was license free. If Betamax was the winner of the format war, Sony will not only be king of VCR category in terms of sales and profit but they could (if they chose to) also make money from licensing fee from competitors that want to produce Betamax VCRs and cassettes.
There were 2 main use cases for VCR, play rented or purchased cassettes and record TV shows. Although Sony touted Betamax’s superior audio and video quality, recording time is limited to only 1 hour while VHS tapes can record longer. Somehow the VHS camp was able to exploit Sony’s weakness in recording time and position their strength successfully in consumers’ mind. VHS had over 90% adoption in the late 80’s and emerged as the clear winner. Here is a link to more detailed story.
Even though they lost the VCR format war, Sony was still a large and dominant consumer electronics company in the late 80’s. They were probably not happy with the results and so they thought that if they can control the content then they can certainly force the format. Imagine if some of the great movies like Star Wars video cassettes were only available in Betamax, Sony will have more control over how consumers will choose the types of VCR they bought. In order to ensure they do not lose the next new media format war, they bought Columbia. Although they won the BlueRay format war against HD-DVD recently but the ground underneath them is already shifting to a new internet distribution channel.
Fast forward to 2012 today, we all want similar home entertainment with movies and TV shows that stars the latest Hollywood actors/actresses. To enjoy the contents in the home, we will need some kind of consumer electronics devices (tablets, TVs, set top boxes) that are the main distribution point of the contents. The question is which device (Apple/Microsoft/Amazon/Cable STB) will I buy/lease and whose service (Netflix/HuluPlus/Cable TV) will I hire?
The giants of consumer electronics industry are moving toward vertical integration (Amazon Kindle Fire, Microsoft Surface, Google/Asus Nexus) following Apple. They will have control over the distribution points of contents on their respective devices. To make things even more complicated, the distribution lane of where the contents flow are owned by another set of operators such as Verizon, AT&T, Comcast. The network operators also want control over which services or contents flow through their network. Sony did not have the latter problem with VCR and Betamax.
Here is my overall take :
Consumers will always want Hollywood contents with the latest and greatest stars. Contents will always have a large pull in consumers’ mind. Consumers want to own devices that are easy to use and allow them to consume *all* the content they want. Some segment of consumers will only want to buy beautiful branded products that reflect their self image and status. Consumers do not really care whether they get their content on Verizon or AT&T network as long as the network is good enough to do what they are hired to do.
So to me, it is clear that network providers need to own content to differentiate themselves. Device makers need to own content as a competitive weapon if they fail to compete on product attributes. Content is always the winner. However, major movie studios are already owned by larger companies (Comcast owns Universal, Sony owns Sony pictures, Time Warner Group owns Time Warner and HBO, Liberty group owns etc). If Microsoft failed to carve a good market share for their tablet, maybe they should buy the smaller ones like Sony which is valued at $14B today and secure Sony’s exclusive contents.
In the long run, independent services company such as Netflix and HuluPlus do not have a chance to survive alone – they will be bought because of their large subscribers base. They were already trying to control their own destiny by producing their own original TV series and becoming movie/content producers.
Amazon is experimenting with Amazon studios. They are trying to disrupt the movie production value chain by sourcing creative talents and content producers to do a movie directly with them. The content will get guarantee showing time on Amazon video service. The effectiveness of this experiment is yet to be determined.