BIS 332 AAssignmentsReaction Paper 2

14 SONY CORPORATION

William Kunz

Sony Corporation assumes a unique place in the assemblage of global media giants. It owns one of the six major motion picture studios and is one of the three dominant corporations in the music industry, and it is the lone corporation that belongs to both of those groups. Unlike some other media giants, Sony is also a diversified conglomerate, with holdings in the manufacturing of media devices, from televisions to disc players to game consoles to smartphones, and the production and distribution of media content. It has also delved into financial services. The other difference is that Sony is a Japanese corporation, the only conglomerate based outside the United States to own one of the major studios, one that was built on start-up capital of just 190,000 yen in the aftermath of World War II with a stated goal to help rebuild Japan.1

Sony presents other contradictions. In terms of total revenue—approximately $75 million in revenue in 2014 based on end of fiscal year exchange rates—it is larger than the other global media giants, although its approximately $13 million in revenue from its pictures and music divisions over the same period pales in comparison to some other conglomerates in terms of core media production and distribution.2 There was also a time when Sony was viewed as one of the world’s most iconic brands, but such perceptions are now more mixed. It ranked fifth in the Global RepTrak 100 for 2014 for the best corporate reputation, behind only Disney, Google, BMW, and Rolex, but it was also ranked among most the hated companies in the United States around the same period, between General Motors and Dish Network.3 The reputational hit in the United States was related to the hacking of Sony Pictures Entertainment and the online PlayStation Plus system, as well as ongoing struggles with other products. Unlike other media giants that distribute products under various brands, Sony focuses on a single monolithic brand, so “a threat to one is a threat to all.”4

Sony is also a corporation in search of an identity. The acquisition of CBS Records and Columbia Pictures in the late 1980s was based on a desire to control the production and distribution of content for its electronics devices, but one must ask whether these strategic initiatives have been successful. In 2013, an activist investor called on Sony to break the corporation in two, dividing its electronics and content businesses, which indicates that such questions are no doubt swirling around its headquarters in Tokyo. To answer these and other questions, one must understand the evolution of Sony in post-war Japan, the move into content production and distribution on a global scale, and the challenges it now faces in its core businesses. It is also important to understand the different cultures in which Sony functions, for while the hacking of Sony Pictures Entertainment in 2014 made headlines in the United States, it was little noticed in Japan.

Historical Background

The launch of the Sony Corporation can be traced back to post-war Japan, but the relationship on which it was built was formed during the bombing of Tokyo in March 1945. It was at a meeting of the Imperial Navy Wartime Research Committee that month that Masaru Ibuka met Akio Morita, and 14 months later they co-founded the Tokyo Tsushin Kogyo Corporation (Totsuko) in May 1946. Prior to the war, Ibuka engaged in research on sound recordings and on the development and production of home sound movie equipment. That proved to be valuable experience, as the first product Totsuko produced was a reel-to-reel tape recorder. Ibuka came to the United States in 1952 to learn how Americans were using tape recorders and it was during that trip that he visited Bell Telephone Laboratories, which had announced the sale of manu - facturing licenses for transistors. Ibuka received permission from MITI, the Ministry of Inter- national Trade and Industry in Japan, to obtain the license for $25,000 and the corporation released its first transistor radio in 1955. The TR-55 required a large battery, which limited its commercial success, but Sony soon after designed the TR-63, a “shirt-pocket” radio that used miniaturized components and ran on a 9V battery. The TR-63 was the smallest portable transistor radio in the world at that time and became the first Sony export model when it was released in 1957.

From the formation of Totsuko in 1946, Ibuka took the lead in product development while Morita focused on marketing. In the late 1950s, it was Morita who took the lead in debates over the name of the corporation. While Totsuko became well known in Japan, the name was not easy to pronounce outside of Asia, which undermined the desires of Ibuka and Morita to expand to foreign markets. Sony became the brand name for Totsuko products starting in 1955 and Morita argued for the adoption of Sony as the corporate name as well. Some argued against the plan, including Totsuko’s primary Japanese bank, Mitsui, while still others suggested keeping electronics in its name, such as Sony Electronic Industries. Morita, however, was adamant, arguing that Sony would allow it to expand worldwide and in new directions, even those outside of electronics. Sony replaced Totsuko as the official corporate name in January 1958, and it established the Sony Corporation of America in 1960.

The timeline for Sony through the 1960s, 1970s, and 1980s is dotted with the creation of new consumer electronics, including the first Trinitron color television in 1968, the Walkman personal stereo in 1979, the first CD player in 1982, and the Handycam video camera in 1989. It was also in this period that Sony Corporation became a diversified conglomerate, with Sony moving into the insurance business in 1979 with the creation of Sony Prudential Life Insurance, a 50–50 joint venture with the Prudential Insurance Co. of America. The diversification and creation of new products continued over time, with Sony at the forefront in the development of DVD and Blu- ray discs and players and the launch of its own line of video games consoles, the PlayStation and PlayStation Portable, as well as a move into computers and phones.

Not all Sony initiatives were without challenges or even successful. The launch of the Betamax videotape recording system in 1975 provides an important chapter in its story that influenced later decision making. A short time after the release of the Betamax, JVC and RCA released a different home video system, the VHS, in Japan and the United States, respectively, and the format wars were born. The Betamax provided superior recordings than the VHS, but the original model was limited to 60 minutes of recording time, compared to 120 minutes for the JVC version of the VHS and 240 minutes for the RCA version. The sale price for the Betamax was also higher. Both of these differences became issues as Sony competed with JVC and others for market share. The longer record time on VHS tapes became a significant factor once the home video market began to develop in the late 1970s when Hollywood studios embraced the rental model. JVC also followed a more open policy with partners, and in 1984 more than 40 companies were producing VHS

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machines worldwide compared to just a dozen for Betamax. As the difference in market share between VHS and Betamax grew, it became less cost effective for motion picture studios to release films on Betamax and the Sony format became starved for content; it released a VHS machine of its own in 1988.

The scars from the format wars had a lingering effect on Sony. In November 1987, Sony announced the intent to acquire CBS Records for $2 billion, with that sale coming two months after Michael Jackson’s Bad album reached number one on the Billboard charts under the CBS label. Less than two years later, in September 1989, Sony completed the acquisition of Columbia Pictures Entertainment for $3.4 billion. Sony was convinced that the future course was to combine Japan’s thirst for consumer electronics with America’s lead in entertainment software. A Japanese financial analyst at the time said: “Sony may be the only company with a corporate culture that is Americanized enough to pull it off . . . Everyone talks about the importance of getting into software. Sony really feels it.”5

The move into software had additional short- and long-term costs for Sony. After the purchase of Columbia was complete, Sony reached agreement with Peter Guber and Jon Peters to head the studio, a deal that included $200 million to acquire Guber-Peters Entertainment Co. as well as contracts with the two that paid them $14 million each over five years in addition to a percentage of the profits.6 At the time, Guber and Peters were under contract with Warner Bros., and it required an estimated $500 million in penalties and concessions to free them from their contract.7

The duo also proved to be lavish in the running of the studio, spending millions to redesign office suites and studios, including $100 million for the old Metro-Goldwyn-Mayer lot. Guber became the sole chairman in 1991 as Columbia adopted the Sony Pictures Entertainment name, but he was ousted three years later, a short time before Sony announced a $3.2 billion write-off from the acquisition of the studio in November 1994.

The Sony discomfort with the studio was evident once again two decades later in November 2014. Late that month, when employees at the Sony Pictures Entertainment studios logged onto their computers they were greeted with an image of a skeleton and an acronym of an organization called the Guardians of Peace, which authorities later argued was linked to the North Korean government. Over the ensuing days and weeks, scores of sensitive emails and digital files containing confidential information were released. The hacking of Sony was linked to the release of The Interview, a comedy starring James Franco and Seth Rogen about a fictional attempt to assassinate North Korean leader Kim Jong-un. Leaked emails also showed the discomfort the film caused in Sony headquarters in Japan. In the months leading up to the release of the film, Sony chairman and chief executive officer Kazuo Hirai broke with precedent and became involved in the production process, asking for changes in the film. There was a focus on a particular scene in which the head of the fictional leader exploded, which was later toned down with “no face melting, less fire in the hair, fewer embers on the face and the head explosion has been considerably obscured by the fire.”8

Economic Profile

The examination of the financial profile of Sony reveals the complexity of the corporation and establishes its unique position among media firms. An obvious focus in the analysis of Sony is on its dual role as a producer of media content as well as media devices. The relative strength and importance of those activities becomes evident in the financial data. That combination distinguishes Sony from other media giants, as does the existence of both motion picture studios and music labels under the same corporate umbrella. What is perhaps most significant, however, is the degree to which Sony has become a diversified conglomerate, defined as corporations that produce many products and services that may be unrelated. This is most evident with the prominence of the

Financial Services division of the corporation, but its entry into phones, computers, and cameras represent an approach that is unlike other media giants.

Financial Data

There were persistent concerns about the product competitiveness and financial well-being of Sony Corporation long before the hacking of Sony Pictures Entertainment made headlines. For decades the growth of Sony Corp. was impressive, with increases in total sales from $4.231 billion in 1980 to $18.343 billion in 1990 to $65.090 billion in 2000, but growth has been modest at best since the dawn of the new millennium (see Table 14.1). Between 2010 and 2014, Sony experienced a slight increase in sales from $77.193 billion to $77.556 billion, but it suffered a net loss in five of the six fiscal years (see Table 14.2). In 2009, Sony announced its first annual loss in 14 years, but that was attributable in large part to the prolonged economic recession and a strong Japanese yen.9 What was harder to stomach were the continued losses as the global economy rebounded. In September 2014, Hirai announced that the corporation expected to lose over 230 billion yen, an estimated $2.15 billion, in the 2015 fiscal year, almost five times what it forecasted four months earlier. At the same time, he announced that Sony would not pay a dividend in that fiscal year, the first time it had not done so since its stock was first listed in 1958. In keeping with Japanese tradition, Hirai bowed to journalists and photographers at a shareholder meeting and apologized, stating his desire to see through changes: “I am deeply sorry for shareholders . . . I’d like to take responsibility for finishing implementing structure reform efforts in this fiscal year and returning the company to profitability in the next fiscal year.”10

The evolution of Sony Corp. from an electronics manufacturer into a diversified corporation is evident in the organization of its business segments. In the mid-1980s, before Sony acquired CBS Records and then Columbia Pictures, its sales were reported in four product groups: video equipment, televisions, audio equipment, and other products. In 1984, for example, video

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TABLE 14.1 Sony Corp. Total Sales and Operating Revenue, 1980–201011

Sony Corp. Total (in billions) Sony Pictures (in billions) Sony Music (in billions)

Japanese U.S. Japanese U.S. Percent Japanese U.S. Percent Yen Dollars Yen Dollars of Total Yen Dollars of Total

2010 7,209.849 77.193 705.2 7.55 9.8 522.6 5.60 7.2 2005 7,191.325 67.071 733.7 6.84 10.2 N/A N/A N/A 2000 6,686.661 65.090 494.3 4.81 7.4 655.0 6.47 9.9 1995 3,990.583 45.948 281.7 3.24 7.1 494.9 5.70 12.4 1990 2,879.856 18.343 92.5 0.59 3.2 445.2 2.90 15.8 1985 1,420.785 6.702 — — — — 1980 892.763 4.231 — — — —

TABLE 14.2 Sony Corp. total sales and operating revenue, 2010-2014 (End of Year Exchange Rate)12

Sony Corp. Total (in billions) Sony Pictures (in billions) Sony Music (in billions)

Japanese U.S. Japanese U.S. Percent Japanese U.S. Percent Yen Dollars Yen Dollars of Total Yen Dollars of Total

2014 7,767,266 75.425 829.6 8.06 10.1 503.3 4.89 6.1 2013 6,795,504 72.170 732.7 7.78 10.0 441.7 4.69 6.0 2012 6,493,083 78.790 657.7 7.98 9.6 442.8 5.37 6.4 2011 7,177,589 86.728 600.0 7.25 8.0 470.7 5.69 6.3 2010 7,209.849 77.193 705.2 7.55 9.2 522.6 5.60 6.8

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equipment accounted for 40.6% of net sales, followed by televisions (23.6%) and audio equipment (21.5%).13 A decade later, Sony reported revenue from its entertainment business, which included its music group and pictures group as well as insurance and financing, but the electronics business still accounted for 75.9% of total sales in 1994.14 The transformation of Sony was most evident in 2014, when the electronics products identified in 1984 were combined into a single segment, Home Entertainment & Sound, and that group accounted for just 14.2% of total Sony sales. That year, Sony was divided into nine business segments: Mobile Products & Communications, Games & Network Services, Imaging Products and Solutions, Home Entertainment & Sound, Devices, Pictures, Music, Financial Services, and All Other (see Table 14.3).

Some of the issues outlined above become evident in the segment results for 2014. The mobile segment reported sales and operating revenue of $15.83 billion, but suffered a net loss of $748.9 million. The games division generated $9.51 billion in sales, with a loss of $80.8 million. Home entertainment experienced an increase in sales and operating revenue, but suffered a net loss of $254.6 million on $11.35 billion in revenue. That deficit, once again, decreased from a $1.016 billion loss in 2013, but it is still representative of Sony’s struggles in the consumer television marketplace. Five of the nine business segments within Sony suffered losses in fiscal year 2014, an increase from two in 2013. What is most striking is that the most profitable segment in all of Sony was financial services, with a net income of $1.7 billion. That segment includes Sony Life Insurance, Sony Bank, and Sony Assurance, with the lattermost selling various products including auto, medical, fire, and even pet insurance. While many Sony products rely on the disposable income of consumers around the world, the financial services division focuses on more basic needs, although pet insurance could be debated. This also paints a richer picture of Sony Corporations and establishes a difference from other giants that increasingly focus on related products with clear synergies.

TABLE 14.3 Sony Corp. total sales and operating revenue by segment, FY 2014 (in billions)15

Japanese U.S. Percent Largest Shares of Segment Totals Yen Dollars of Total

Mobile Products & 1,630.1 15.83 19.8 Mobile Communications (73.1%) Communication Personal and Mobile Products

(26.5%)

Games 979.2 9.51 11.9

Imaging Products & Solutions 741.2 7.20 9.0 Digital Imaging Products (56.0%) Professional Solutions (41.6%)

Home Entertainment & Sound 1,168.6 11.35 14.2 Televisions (64.7%) Audio & Video (34.4%)

Devices 794.2 7.71 9.6 Semiconductors (57.2%) Components (42.4%)

Pictures 829.6 8.06 10.1 Motion Pictures (50.9%) Television Productions (29.9%) Media Networks (19.2%)

Music 503.3 4.89 6.1 Recorded Music (70.7%) Music Publishing (13.6%)

Financial Services 993.8 9.65 12.1

All Others 594.6 5.77 7.2

Corporate and Elimination (467.3) (4.54)

The relative strength of Sony’s content businesses must be framed within that context. Those segments combined to account for 16.2% of total sales and operating revenue in fiscal year 2014, 10.1% for pictures and 6.1% for music. Both divisions increased sales in 2014, with pictures up 13.2% to $8.06 billion and music up 13.9% to $4.89 billion, although those increases resulted from the favorable impact of the depreciation of the Japanese yen against the U.S. dollar. On a constant currency basis, sales in the music division were more or less flat, while those in the pictures division were down about 6%.16 Both divisions, however, were profitable, with pictures showing net income of $515.2 million for the fiscal year compared to $501.2 million for music. That made them the second and third most profitable divisions within the corporation behind financial services.

Corporate Structure

True to its Japanese origins, Sony Corporation is based in Tokyo, but it has deep roots in the United States. In 1985, even before it acquired CBS Records and Columbia Pictures, 33.6% of Sony’s total sales were in the United States, higher than even Japan (25.8%).17 The share of sales to customers in the United States declined over time and was half that in 2014, accounting for 16.8% of total sales compared with 28.3% in Japan and 22.6% in Europe.18 Sony’s operations in the United States fall under its subsidiary, Sony Corporation of America, with Sony Electronics Inc., Sony Mobile Communications (USA) Inc., Sony Computer Entertainment America LLC, Sony Network Entertainment International LLC, Sony Pictures Entertainment Inc., and Sony Music Entertainment its principal businesses.

Electronics Divisions

Sony remains an electronics business at its core, but those same segments have been an area of concern over the past decade. That was most evident in the television business, which brought Sony an Emmy Award in 1973 for the Trinitron receiver, but lost more than $7 billion from the mid-2000s through the mid-2010s.19 The television unit was forecast to post a modest profit in the fiscal year ending in 2015, but the days of dominance are over. The Sony market share for televisions was down to just 8% in the third quarter of 2014, compared with 27% for Samsung Electronics and 15% for LG Electronics, and there was little hope that it could compete for market share after lagging behind in the development of plasma screens and liquid crystal displays.20 The focus for Sony, instead, was on high-end televisions, including the so-called 4K sets that offer four times the resolution of conventional high-definition television sets. This is consistent with the focus in its mobile division, where Sony had suffered significant financial losses and decided in 2014 to focus on the high-end market with the Xperia smartphones. Sony sold is devices segment, which focused on the Vaio personal computer, in 2014.

While most of the electronics and content divisions are separated, in terms of structure, location, and culture, there is one segment in which Sony blends hardware and software, product manufacturing and content creation. That is the games division. Sony introduced the first PlayStation in 1994 and it became the first video game console to ship over 100 million units. The PlayStation 2 ranked as the best-selling console of all time with over 150 million units sold. Sony released the PlayStation 4 in November 2013 and it had sold over 18 million console units prior to the start of 2015. At that time, PlayStation had sold over 80 million game units. Another dimension of the Sony games model is PlayStation Plus, an online network that had 10.9 million subscribers at the start of 2015. This is also an area in which Sony has wrestled market share from Microsoft, with estimates that shipments of PS4 close to doubled those of the Xbox One through September 2014 after PlayStation consoles had lagged behind in previous years.21

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Pictures Division

Sony Pictures Entertainment was the focus of the so-called Sony hack, and the headlines in late 2014 focused on the release of The Interview and the inner workings of a major Hollywood studio. In normal times, Sony Pictures Entertainment (SPE) is broken into three sub-units—motion pictures, television productions, and media networks. The motion pictures group is the most prominent of the three, featuring Columbia Pictures, Screen Gems, and Sony Pictures Classics. This collection represents the horizontal integration that is a trademark of the major studios, with Columbia focusing on big-budget, wide-release films on one end of the spectrum and Sony Pictures Classics acquiring and distributing independent and art films at the other. In 1999, Sony revived Screen Gems to produce and distribute films that fall in the middle of the other two. SPE also owns Destination Films, Stage 6 Films, and Affirm Films for various niche markets as well as TriStar Pictures. Affirm Films, for example, “acquires faith-based and inspirational content across a wide range of genres and budgets for the various global distribution platforms at SPE including theatrical, television, and home entertainment.”22

Sony Pictures ranks among the six major studios, but in most years it resides in the middle of that group at the box office in the United States. From 2005 through 2014, Sony ranked third through fifth in eight of ten years, with its number one rankings in 2006 and 2012 the exceptions.23

Sony Pictures Classics, on the other hand, was consistently ranked between 14th and 16th, with its highest market share since 2010 being 0.9% in 2011 (see Table 14.4). In 2006, an odd collection of films fueled the Sony box office at the domestic box office: The Da Vinci Code ($217.5 million), Casino Royale ($153.5 million), and Talladega Nights: The Ballad of Ricky Bobby ($148.2 million). In 2012, two franchise films were dominant at the domestic box office, with Skyfall ($304.4 million), the latest in the James Bond franchise, and The Amazing Spider-Man ($262.0 million) both ranking among the top seven films.

The television productions and media networks groups remain outside of the spotlight within SPE, although the two combined for just under 50% of total sales for the segment in 2014.24

Television productions accounted for 29.9% of the segment total, a significant turn-around from the previous decade when Sony had announced that it would phase out Columbia TriStar Television. Back then there was little new in the Sony pipeline, but SPE has since put additional resources into television production. In 2014, the Jeopardy and Wheel of Fortune programs remained significant contributors to the bottom line, but Sony Pictures Television had experienced other successes, including basic cable sensation Breaking Bad, and had a significant number of shows on broadcast and cable networks in 2014-15.

TABLE 14.4 SPE Domestic Gross & Market Share (in millions)25

Films Total Gross Market Share Top Grossing Film Tracked ($) (%)

2014 Sony/Columbia 22 1,261.5 12.2 (4th) The Amazing Spider-Man 2 ($202.9) Sony Classics 22 41.8 0.8 (14th) Magic in the Moonlight ($10.5)

2013 Sony/Columbia 20 1,144.6 10.5 (4th) Grown Ups 2 ($133.7) Sony Classics 21 70.2 0.6 (15th) Blue Jasmine ($33.0)

2012 Sony/Columbia 25 1,792.2 16.6 (1st) Skyfall ($290.9) Sony Classics 24 50.0 0.5 (15th) To Rome with Love ($16.7)

2011 Sony/Columbia 28 1,273.7 12.5 (3rd) The Smurfs ($142.6) Sony Classics 25 90.2 0.9 (14th) Midnight in Paris ($56.4)

2010 Sony/Columbia 23 1,282.9 12.1 (5th) The Karate Kid ($176.6) Sony Classics 26 62.9 0.6 (14th) Get Low ($9.1)

For American audiences, properties within media networks are the least known in this group. Sony is the one parent corporation of a major motion picture studio that does not own a share of a broadcast network in the United States, where its ownership of cable networks was limited to a small collection of investments in 2014, including Game Show Network, 3net, and Sony Movie Channel. The picture was far different outside the United States, however. In corporate documents, Sony stated that it owned or had investments in 78 channels with 148 feeds in 178 countries worldwide in the first quarter of 2015, with 1.28 billion subscribers.26 This includes Animax, the first and largest network in the world dedicated to anime, which is carried via satellite throughout Asia, Europe, and North America. There are also networks focused on a particular region, such as Canal Sony, which is transmitted across Latin America, and Sony Channel Asia, available in 17 countries in the Asia-Pacific region. In India alone, Sony operates a large collection of channels, starting with Sony Entertainment Television, a Hindu-language version of the general entertainment channel that debuted in 1995. In addition to the networks designed for broad audiences, Sony developed a number of channels for the Indian marketplace alone, including Sony MAX, a Hindi movie channel, Sony PIX, a Hollywood movie channel, and Sony AATH, a Bengali movie channel.

Music Division

Sony Music Entertainment, at least as an official name, dates back to 1991, which was two years after Sony acquired CBS Records. The roots of music within Sony run much deeper, however, as the corporation formed a 50–50 joint venture with CBS in 1968 known as CBS/Sony Records, which focused on the distribution of CBS labels in Japan. The relationship between CBS and Sony would change with the acquisition of CBS Records, and Sony has ranked among the leaders in the music industry since that date. Sony expanded the scope of its music operations in 2004 when it formed a 50–50 joint venture with Bertelsmann known as Sony BMG. Prior to that merger, Sony ranked third among distributors, behind Universal and Warner, but the combination of Sony and BMG moved it into second place. Sony acquired Bertelsmann’s interest in Sony BMG in 2008 and brought it under Sony Music Entertainment.

Sony Music features some of the most influential labels the recording industry has ever seen. The foundation of CBS Records was built on the Columbia label, which traces its roots back to Columbia Phonographic in the late 1800s. Bertelsmann Music Group, on the other hand, included RCA Records, which adopted that name in 1929 when the Radio Corporation of America acquired the Victor Talking Machine Company. Sony Music Entertainment is also home to Epic Records. In 2014, Sony Music Entertainment labels accounted for four of the top ten in terms of market share: Columbia (2nd), RCA (6th), Sony Nashville (9th), and Epic (10th).27 Sony units also distributed 10 of the top 33 albums in the final Billboard charts, a group that ranged from Miley Cyrus to Barbra Streisand and included Beyoncé, John Legend, Pharrell Williams, Justin Timberlake, and Kelly Clarkson.28

The music industry is highly concentrated, with the horizontal integration evident in the combination of Columbia and RCA under the umbrella of Sony—a common pattern. It became even more so with the Universal Music Group acquisition of EMI for $1.9 billion in 2012, which included the sale of the EMI music publishing operation to a Sony-led consortium for $2.2 billion. In approving the acquisition, the European Commission mandated that UMG sell one-third of its operations to companies with “proven track record” in the music industry.29 The impact of those deals was evident in 2014, when the big three accounted for an 86.0% market share in the distribution of albums and track-equivalent albums. Sony was second behind Universal Music Group with a 28.5% market share, which was consistent with its market share the previous half-decade (See Table 14.5). The EMI deal gave Sony control over the largest music publishing operation in the world,

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with Sony/ATV Music Publishing, a joint venture that Sony created with Michael Jackson in 1995, moving under the same management as EMI Music Publishing. In 2013, that combination accounted for a 29.4% market share, ahead of Universal Music Publishing Group (22.6%) and Warner/ Chappell Music (13.2%), and an increase from 21.7% in 2012 and 11.7% in 2011.31

Political Profile

The political reach and influence of Sony is once again complicated, with its Tokyo base and the absence of a broadcast network in the United States, and in turn a network news division, making it less prominent in American politics. That does not mean it has been apolitical. In the late 1960s and 1970s, Sony was the focus of illegal dumping charges made against Japanese manufacturers, and a Time magazine cover in 1971 featured Akio Morito under the headline “How to Cope with Japan’s Business Invasion.” It was under Morita the corporation designated Sadami “Chris” Wada as Sony’s in-house lobbyist in the United States in 1977. There were also clear connections between Sony and Japanese political parties, as well as corporate policies that reflect the political and social context of its Japanese base. And it was the corporate headquarters in Tokyo that grew uncomfortable with the political dimensions of The Interview, concerns that were revealed in emails released through the Sony hack.

Ownership

Sony is a multinational conglomerate with operations around the world but, despite the fact that more of its shareholders are outside Japan than within, its Japanese home impacts on corporate governance and strategic planning. There were a total of 1.150 billion shares of Sony stock issued as of September 30, 2014, with 607,649 shareholders.32 A majority of these shares, 52.8%, were in foreign hands, either institutions or individuals. That was an increase of almost 20% from March 31, 2013 when 32.6% of the total shares were held outside of Japan. The shares controlled by Japanese financial institutions were more or less constant, accounting for 25.1% of the total as of September 2014. The biggest difference was in the number of shares held by Japanese individuals and others, which declined from 38.4% in March 2013 to 18.6% in September 2014. The ownership of Sony stock is widely dispersed, with Sumitomo Mitsui Trust Bank of Japan the only shareholder with more than 5.0% of the common stock as of April 4, 2014, and the Sumitomo Mitsui total was just 5.04%.

Board of Directors

The absence of a significant portion of Sony stock with any given group or individual has a clear impact on corporate governance and on the Board of Directors. There is also a clear connection between the Japanese foundation of Sony and the nature of governance within the corporation.

TABLE 14.5 Sony Music Entertainment Market Share—Albums & Track-Equivalent Albums by Distribution Ownership30

Year Market Share (%) Rank (Market Leader)

2014 28.5 2nd (Universal Music Group, 38.7%) 2013 29.6 2nd (Universal Music Group, 38.8%) 2012 30.3 2nd (Universal Music Group, 32.4%) 2011 29.3 2nd (Universal Music Group, 29.9%) 2010 28.0 2nd (Universal Music Group, 30.8%)

In the United States, the maximization of the wealth of shareholders is the narrow goal, whereas in Japan, firms are concerned with a broader collection of stakeholders, including employees. The concept of lifetime employment, which became prominent in Japan during the period of economic growth after World War II, is an example of this focus. Corporate boards in Japan have tended to be larger than those in the United States, with fewer outside directors who have little influence. Sony, once again, provides an interesting study since it is a rare Japanese corporation that brought in leadership from the United States, specifically the Welsh-born head of Sony Corporation of America, Howard Stringer. When Stringer was named chief executive officer in June 2005, the Board of Directors of Sony included 16 individuals, eight of whom were executives within the corporation. The chairman at that time, Nobuyuki Idei, started working at Sony in 1960 and five other board members had been Sony employees for 30 years or longer. The composition looked rather different at the start of 2015 (see Table 14.6), with the size of the group reduced from 16 to 12, only two of whom were Sony employees, the chief executive officer (Kazuo Hirai) and chief financial offer (Kenichiro Yoshida).

The Sony board was consistent with other large corporations in Japan, notably in the absence of women. One study of corporate boards in 2014 found that women held 19.2% of board seats on S&P 500 companies in the United States, compared with just 3.1% on the Topix Core 30 Index, which is composed of the 30 largest corporations in the First Section of the Tokyo Stock Exchange.34 In 2015, there was only one woman on the Sony Board of Directors, Eriko Sakurai, the chair and chief executive officer of Dow Corning Toray Co., Ltd. The board did have a connection to Sony’s largest shareholder through the Sumitomo Mitsui Financial Group president. There are members of the board who provide strategic connections with governments in Japan and the United States. One of the newest members of the board, and one of the few from outside Japan, was John V. Roos, the U.S. Ambassador to Japan from May 2009 until August 2013. Another recent addition to the board was Kazuo Matsunaga, a former high-ranking official in the Ministry of Economy, Trade, and Industry (METI) in Japan, which replaced MITI in 2001.

Labor

As of March 21, 2014, Sony had an estimated 140,900 employees around the world, with 52,200 located in Japan and 88,700 outside Japan.35 The highest percentage of employees was in the five

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TABLE 14.6 Sony Corporation Board of Directors as of January 201533

Internal Directors Country of Birth Primary Position

Kazuo Hirai Japan President and Chief Executive Officer, Sony Corp. Kenichiro Yoshida Japan Executive Vice President and Chief Financial Officer, Sony Corp.

External Directors

Kanemitsu Anraku Japan Former Vice Chairman, Nissan Motor Co., Ltd Eikoh Harada Japan Chairman, McDonald’s Holdings Japan Joichi Ito Japan Chief Executive Officer, Neoteny Co. and Director, MIT Media Lab Kazuo Matsunaga Japan Former Vice-Minister, Ministry of Economy, Trade and Industry Koichi Miyata Japan Director and President, Sumitomo Mitsui Financial Group, Inc. Osamu Nagayama Japan Chairman and Chief Executive Officer, Chugai Pharmaceutical Co., Ltd. Takaaki Nimura Japan Former Executive Board Member, Ernst & Young ShinNihon LLC John V. Roos United Chief Executive Officer, The Roos Group, LLC and Former U.S.

States Ambassador to Japan Eriko Sakurai Japan Chairman and Chief Executive Officer, Dow Corning Toray Co., Ltd Tim Schaaff United Independent Startup Adviser and Former President, Sony Network

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business segments involved in electronics, with a combined total of 101,700. By contrast, the content segments—pictures and music—accounted for just 13,900 employees combined. Sony estimated that about 20% of its employees were members of labor unions in 2014. These unions range from various manufacturing facilities in China to trade unions in Hollywood. In 2014, for example, the pictures group concluded agreements with the Directors Guild of America and the Writers Guild of America and began negotiations with the Screen Actors Guild and American Federal of Television and Radio Artists. In corporate documents, Sony states that it considers its labor relations to be good.36

Japan presents an interesting framework for the discussion of labor relations. As discussed earlier, the concept of lifelong employment was an important one in post-war Japan. Lifetime employment is not guaranteed by statute or collective bargaining agreements, but employment laws and social norms in Japan make large reductions uncommon. When the Japanese economy faltered in the 1990s, corporations began to chafe at the limitations in this area that made downsizing impractical. Sony did announce a broad initiative to eliminate 17,000 jobs in 1999, although it did not plan outright layoffs and intended to use attrition to reduce its payroll.37 There has been a reduction in Sony employees in Japan since then, from an estimated 77,000 in 1999 to 52,200 in 2014, but still it continues to struggle in this area. An article in The New York Times in 2013 focused on an employee at the Sony Sendai Technology Center outside of Tokyo who had spent his work time in what was called a “chasing-out room” for two years after refusing to take an early retirement, which was his prerogative under Japanese labor law.38 Shinzo Abe promised changes in the Japanese labor system in an effort to stimulate economic growth when he became prime minister for a second time in 2012, but such reforms had still not materialized by the end of 2014.

The location of the corporate home of Sony introduces another interesting dimension to the discussion of labor relations. In 2012, an AFL-CIO study found that the average chief executive officer of large U.S. companies received $12.260 million in compensation based on an analysis of the S&P 500.39 That was 354 times the $34,645 compensation for the average worker in the United States. An Economic Policy Institute study found a smaller but still significant ratio, 272.9- to-1, in 2012.40 In contrast, in the AFL-CIO study, the average CEO of a large Japanese company earned almost $2.355 million in total compensation in 2012, which was just 67 times what the average Japanese worker earned. The average compensation for workers in Japan and the United States was similar, $35,143 to $34,645, with the difference in the compensation for executives. These differences became a focus of information released after the hacking of Sony Entertainment in 2014. In corporate documents, Sony listed the annual compensation for corporate head Kazuo Hirai in 2014 at ¥184 million, which converted to $1.837 million with the end of fiscal year conversion rate. This was much lower than his counterparts in the United States, such as Disney chairman and chief executive Bob Iger, who earned total compensation of $43.7 million in 2014, including $25.3 million in cash from his base salary and bonuses. Hirai was also below various Sony Entertainment executives, including Michael Lynton and Amy Pascal, who were both reported to receive $3 million per year. Pascal was the only female among the 17 Sony Entertainment executives receiving $1 million or more.

Ties to the State and Lobbying Efforts

The assessment of government relations in the case of Sony Corp. is complicated, for it must be considered in the context of both Japan and the United States and framed within the dramatic changes since it was created in 1946. The role of the state was quite different in post-war Japan, with the MITI established in 1949 to coordinate international trade. MITI became the leading state actor in the economic development of Japan, and collaboration between the state and prominent corporations became a defining characteristic of the Japanese system and the foundation

for the “Japanese miracle.” In the 1950s, Sony had to receive permission from MITI to acquire the transistor from Bell Labs, and its pursuit of that license was delayed while Sony convinced MITI that a small start-up was more appropriate than some of the larger Japanese manufacturers. Over time, MITI declined in prominence and Sony became a cornerstone of Japanese trade overseas, with co-founder Akio Morita one of its most prominent ambassadors. He was also a confidant to the leaders of the Liberal Democratic Party that ruled politics in Japan for decades, and he is reported to have had a direct phone line in his home to a series of prime ministers between 1969 and 1987.41

Sony often found itself in the crosshairs of debates in the United States as well, whether it was claims of dumping products in U.S. markets in the 1960s and 1970s or court battles related to time-shifting, the Betamax, and illegal music downloading. As such, it is not surprising that Sony also assumes a prominent role in U.S. politics through its subsidiaries, as well as numerous trade organizations. Lobbying is one avenue through which corporations and others attempt to influence government decision making, and Sony is active in this arena through Sony Corporation of American, Sony Music Entertainment, and SPE. In the decade from 2005 through 2014, Sony spent $31.6 million on lobbying, with $19 million of that coming through Sony Music Entertainment and Sony BMG Music Entertainment.42 That annual average of over $3.1 million was a significant increase for Sony, which averaged $694,000 per annum from 2000 through 2004. Between 2005 and 2014, the SPE Political Action Committee contributed $1.3 million to candidates while Sony Entertainment Inc. chief executive Michael Lynton alone donated at least $120,000 to national committees of the Democratic Party in addition to contributions to individual candidates.43 There was a second component of Sony influence in this area, as the corporation is active in three prominent trade organizations: Motion Picture Association of America, Recording Industry Association of America, and Consumer Electronics Association.

Cultural Profile

The cultural profile of the Sony Corporation remains more ambiguous than with other media giants, not tied to a specific nation or product. Even in Japan, Tokyo Disneyland and Universal Studios Japan are far more prominent than any cultural imprint attributable to Sony or one of its subsidiaries. When one digs deeper, however, there are clear links between Sony and consumer behavior that are most prominent in Japan and across the globe, evident in the myriad of ever- smaller media devices and the mainstream consumer media content that define the digital age. The promotion of that lifestyle in its media devices and media content is central to the success of Sony.

Symbolic Universe/Ideology

The trans-Pacific nature of Sony complicates the analysis of its cultural impact and embedded ideologies. One could frame the discussion around the music of Beyoncé, John Legend, and Pharrell Williams that is released on Columbia labels, but the conclusions might be different with a focus on Arashi, a popular Japanese idol group whose music is distributed through Sony Music. There is also not a central theme to films released through SPE and there is no Sonyland theme park, although Jon Peters did push for one when he was co-chairman of the studio from 1989 until 1991.

The one ideology that is at the core of Sony is consumerism, and its electronics unit has developed products such as the Walkman that were about both style and substance. When Sony released its first pocket radio in the 1950s, the model was too large for the average shirt pocket, so Akio Morita had new shirts made for his sales force in Japan and the United States with a larger

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chest pocket. As its electronics business has faltered in recent years, Sony has refocused on high- end products, whether in televisions, smartphones, or tablets. Its past successes, and its future, are predicated on the disposable income of wealthy consumers around the world.

Popular Products/Services and Cultural Significance

The discussion of popular Sony products could revolve around various devices, including the PlayStation and Blu-ray, but it has also been successful with action films that do well in international markets. Two superheroes, Spider-Man and James Bond, represented the most lucrative franchises within Sony Pictures in the mid-2010s. The Spider-Man franchise was built around a comic book series developed by Americans Stan Lee and Steve Ditko in the 1960s through Marvel Comics, while the Bond franchise is based on a character that Englishman Ian Fleming created in a series of spy novels that were first published in the 1950s. Sony Pictures became involved in the Bond franchise with the release of Casino Royale in 2006 and continued to co-finance and distribute the franchise with MGM through Skyfall in 2012. Casino Royale marked the reboot- ing of the Bond franchise with the debut of Daniel Craig as 007, and while Craig, like Fleming, is an Englishman, the big-budget, action-packed genre is pure Hollywood and a format designed for a global audience. Skyfall was the most successful of all the Bond films, grossing over $1.1 billion in theaters worldwide, with 72.5% of that coming outside the United States.44

The Spider-Man franchise follows a similar pattern. Sony Pictures released its first Spider-Man film in 2002 and grossed over $400 million at both the domestic and foreign box office for Spider- Man, which reached $821.7 million worldwide.45 The balance in the first in the series is no longer evident as the four that followed decreased at the U.S. box office, with the balance shifting towards the foreign markets. The domestic gross of the five films has decreased from $403.7 million for Spider-Man in 2002, 49.1% of the worldwide total, to just $202.9 for The Amazing Spider-Man 2 in 2014, just 28.6%.46 The rise in foreign revenue totals, with the last three topping $495 million, ensured that the franchise remained lucrative for Sony, even with the decline in the United States.

The shifting balance between the box office in the United States and that elsewhere in the world also points to a central business tactic within Sony Entertainment. While Sony Music does produce localized content on some of its smaller labels, most of what is produced within its content divisions is created for worldwide audiences. The Spider-Man franchise, for example, features high-end special effects and storylines that translate with ease. While the films were based in New York City, the use of high-rise buildings makes a natural connection to major metropolitan centers around the world, including the 12 cities in Japan with a population of over 1 million. And Spider- Man did well in Japan, grossing over $56 million, second only to the United States. This approach is consistent with the other media giants that focus on big-budget products that are exportable to markets around the world.

Conclusion

Sony is a corporation at something of a crossroads. Is it a manufacturer of devices that transmit and display media content, or is it a producer and distributor of that very same content? Sony has attempted to be both since it was scarred by the format wars that started in the 1970s, but there are real questions being raised about the path forward. New ventures such as computers and phones have presented challenges to the corporation, and it has lost market share to Samsung and others in televisions and other sectors. The content businesses were among the most successful over the first half of the 2010s, but the hacking of SPE in 2014 cast a negative light there as well. The corporate identity crisis is further complicated by the cultural gap between its Japanese roots and its Hollywood beachhead.

There is one constant, however, as the success of Sony Corporation, whether in devices or content, hardware or software, is built on consumer culture and ideology. That extends from the corporate headquarters in Tokyo to its entertainment units in Hollywood to Sony operations around the globe. The films, television programs, and music, moreover, largely represent the Western culture in which they are created and from which they are shipped around the globe. In the end, it is media globalization that provides the roots of the Sony story and from which its power is derived.

Notes

1 Sony Corp., “The Founding Prospectus,” www.sony.net, accessed March 15, 2015. 2 Sony Corp. Form 20-F, 2014. 3 Reputation Institute, “Meeting the Demands of Consumers – 2014 Global RepTrak 100,”

www.reputationinstitute.com, accessed February 15, 2015; William Pelegrin, “Sony, Uber, and Spring can count themselves Among America’s Most Hated Companies,” www.digitaltrends.com, accessed February 15, 2015.

4 Dr. Charles J. Fombrun, “Sony Reputation Challenge,” Reputation Institute, December 14, 2014. 5 Quoted in David E. Sanger, “Sony Had High Hope For Columbia Pictures,” The New York Times,

September 28, 1989, D1. 6 Michael Cieply, “Lucrative Sony Offer to Managers Is Detailed,” Los Angeles Times, October 6, 1989,

accessed December 6, 2014. 7 Nina J. Easton, “Sony Oks Paying Up to $500 Million to Get 2 Producers,” Los Angeles Times, November

17, 1989. 8 Quoted in Martin Fackler, Brooks Barnes, and David E. Sanger, “Sony’s International Incident: Making

Kim Jong-un’s Head Explode,” The New York Times, December 14, 2014. 9 Hiroko Tabuchi, “Recession and Strong Yen Drive Sony to Annual Loss,” The New York Times, May

15, 2009. 10 Quoted in Takashi Mochizuki and Eric Pfanner, “Sony Turnaround Effort Falters, Expects $2.15 Billion

Yearly Loss,” The Wall Street Journal, September 17, 2014. 11 Sony Corporation, Form 20-F, 2010; Sony Corporation, Form 20-F, 2005; Sony Corporation, Form

20-F, 2000; Sony Corporation, Form 20-F, 1995; Sony Corporation, Annual Report, 1990; Sony Corporation, Annual Report, 1985; Sony Corporation, Annual Report, 1981. All U.S. dollar totals were derived using the end of fiscal year exchange rate. Sony Corp. and Bertelsmann AG combined the bulk of their music interests in a 50–50 joint venture, Sony BMG Music Entertainment, in March 2004. Sony Corp. acquired Bertelsmann’s 50% interest in August 2008, at which time Sony BMG became Sony Music Entertainment. Sony Corp. did not break out sales for Sony BMG in corporate documents in the fiscal years from 2004 through 2008.

12 Sony Corporation, Form 20-F, 2014; Sony Corporation, Form 20-F, 2012; Sony Corporation, Form 20-F, 2010. All U.S. dollar totals were derived using the end of fiscal year exchange rate.

13 Sony Corp., Annual Report, 1985. 14 Sony Corp., Form 20-F, 1995. 15 Sony Corporation, Form 20-F, 2014. All U.S. dollar totals were derived using the end of fiscal year

exchange rate. 16 Sony Corp., Form 20-F, 2014, 49. 17 Sony Corp., Annual Report, 1985. 18 Sony Corp., Form 20-K, 2014, 33. 19 Eric Pfanner and Takashi Mochizuki, “Sony’s TV Business Head for Profit, but Big Challenges Remain,”

Dow Jones Newswires, December 12, 2014. 20 Ibid. 21 Kyle Orland, “Updated numbers show PS4 with at least 65 percent of two-console market,”

www.arstechnica.com, October 31, 2014, accessed March 17, 2015. 22 Affirm Films, “Mission Statement,” www.affirmfilms.com, accessed February 16, 2015. 23 www.BoxOfficeMojo.com, accessed February 15, 2015. 24 Sony Corp., Form 20-F, 2014, 28. 25 Sony/Columbia includes films distributed under the Columbia, TriStar, and Screen Gems labels,

www.Boxofficemojo.com, accessed February 16, 2015. 26 Sony Pictures Television, Worldwide Networks, https://sites.sonypicturestelevision.com/aboutspt/

spt.php?id=5, accessed February 16, 2015.

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27 “The Biggest Record Lables of 2014, By Market Share,” www.thatericalper.com, accessed February 21, 2015.

28 Year End 2014, Billboard; www.billboard.com/charts/year-end/2014/top-billboard-200-albums. Retrieved September 25, 2015.

29 Quoted in Ben Sisario, “U.S. and European Regulators Approve Universal’s Purchase fo EMI,” The New York Times, September 21, 2012.

30 “The Biggest Record Labels of 2014, By Market Share,” www.thatericalper.com, accessed February 21, 2015; “2013 SoundsScan Stats—Market Share of Major Record Labels Compared to Independent Labels,” www.routenote.com, accessed February 21, 2015; “The Nielsen Company & Billboard’s 2012 Music Industry Report,” www.Businesswire.com, accessed February 21, 2015; “The Nielsen Company & Billboard’s 2011 Music Industry Report,” www.Businesswire.com, accessed February 21, 2015; “The Nielsen Company & Billboard’s 2010 Music Industry Report,” www.Businesswire.com, accessed February 21, 2015.

31 “UMG and WMG see gains in recorded-music market share in 2013, while Sony/ATV dominates music publishing,” https://musicandcopyright.wordpress.com.

32 Sony Corp., “Stock Information,” September 30, 2014, accessed February 20, 2015. 33 Sony Corp., 20-F, 2014; www.Sony.net, CorporateInfo, accessed February 15, 2015. 34 Knowledge Center, “2014 Catalyst Census: Women Board Directors,” www.Catalyst.org, January 13,

2015, accessed February 21, 2015. 35 Sony Corp, Form 20-F, 2014, 108. 36 Sony Corp, Form 20-F, 2014, 109. 37 Mark Magnier, “Sony to Cut 17,000 Jobs in Bold Restructuring,” Los Angeles Times, March 9, 1999. 38 Hiroko Tabuchi, “Layoffs Taboo, Japan Workers Are Sent to the Boredom Room,” The New York Times,

August 16, 2013. 39 “CEO-to-Worker Pay Ratios around the World,” www.aflcio.org, accessed February 21, 2015. 40 Lawrence Mishel and Natalie Sabadish, CEO Pay in 2012 was Extraordinarily High Relative to Typical

Workers and Other High Earners,” Economic Policy Brief #367, June 26, 2013. 41 John Nathan, Sony: The Private Life. New York: Houghton Mifflin, 1999. 42 Sony Corp., Center for Responsive Politics, www.opensecrets.org, accessed February 20, 2015. 43 Donor Lookup: Lynton, Michael, www.Opensecrets.org, accessed February 20, 2015. 44 Skyfall, www.Boxofficemojo.com, accessed February 16, 2015. 45 Spider-Man, www.Boxofficemojo.com, accessed February 16, 2015. 46 Spider-Man and the Amazing Spider-Man 2, www.Boxofficemojo, accessed February 16, 2015.

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