Sony banking on MGM deal to boost profits in electronics14 September 2004
Sony Corp. is banking on the US$3 billion deal to acquire Hollywood studio Metro-Goldwyn-Mayer Inc. to boost lagging profits by exploiting potential link ups between its electronics and entertainment businesses.
The often repeated promise for a win-win combination of electronics and entertainment has long eluded the Japanese company. Sony's endeavors in film, music and video-games have produced their share of hits, but they have never quite delivered the decisive leverage of lifting Sony gadget sales over those of its rivals.
It's unclear whether accumulating a massive movie library will help Sony's key electronics business at a time when competition from Samsung Electronics, Sharp Corp. and other Asian rivals is battering profits, analyst say.
On the plus side, the MGM deal announced Monday will add more than 4,100 films, including "West Side Story," "Rocky" and "Rain Man," that Sony can offer in DVDs, video on demand and rentals. Sony Pictures already owns 3,500 movies.
Sony also signed a distribution deal with Comcast Corp., the largest cable provider in the United States, that would allow video on demand and new cable channels featuring Sony and MGM movies.
With the arrival of broadband in homes around the world, people are increasingly expected to enjoy movies on Internet-linking equipment in their living rooms.
And Sony is hoping the gadgets will be its own. Sony is now merging its music division with German media company Bertelsmann AG's music unit to form Sony BMG Music Entertainment, which will rival Vivendi's Universal Music Group for market share.
"DVD sales are going strong in the United States, and this deal is going to create new value through various types of software," Sony spokesman Keita Sanekata in Tokyo said Tuesday, while acknowledging specifics were still undecided on how the deal will benefit Sony's electronics business. "The appeal of the content business is definitely going to grow."
But others are more skeptical.
Kazuya Yamamoto, analyst at UFJ Tsubasa Securities Co. in Tokyo, said the "synergy" between electronics and entertainment that Sony executives have been talking about for years is difficult to attain.
"What Sony is going after is extremely ambitious," he said. "But the integration of the electronics and content businesses is unfathomable."
If Sony had ever hoped to come up with a situation to restrict the enjoyment of Sony movies or music to Sony products, those days are long over, Yamamoto said. Consumers are demanding compatibility in electronics to enjoy movies and music on a variety of players, regardless of brand.
More critically, Sony is making a huge cash investment with its partners for MGM, although Sony's profits are shaky and the company is doling out billions to develop next-generation chips for digital TVs and other products that are important for Sony's planned comeback.
Although Sony's profits recovered in the April-June quarter from a year ago, operating income in the electronics sector dipped 50 percent, partly because of costly restructuring. Sony also has worked hard to play catch-up in flat-panel TVs and DVD recorders after getting a late start.
Kazumasa Kubota, an analyst at Okasan Securities Co. in Tokyo, said the deal was more about brand image than gaining profits.
"The purchase underlines Sony's hopes to strengthen its position in the U.S. entertainment industry," he said.
But reclaiming its once-unquestioned domination in electronics symbolized in the heyday of the Walkman may be far more crucial in determining Sony's long-term fate.
"The deal will be one stable source of income because MGM has the James Bond series and other popular films. We won't hesitate to call that a positive," said Yamamoto of UFJ Tsubasa. "But what Sony really needs to do is recover in its core electronics business."
Source: AP via Yahoo
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