Sony Taking On an Even More American Look

In his 1986 memoir, Sony Corp. Chairman Akio Morita berated American executives for their bad habit of jumping ship the minute a competitor offered more pay or a quick promotion.

“I vowed that my company would do its best to avoid adopting this aspect of American managerial technique,” he wrote.

Still, Morita’s top U.S. executives spent most of last week tangling with Time Warner Inc. brass--who filed a $1-billion lawsuit against Sony for allegedly luring away a pair of contract-bound Warner movie producers, Peter Guber and Jon Peters, to run Columbia Pictures Entertainment, which the Japanese giant is acquiring. (Guber and Peters, in turn, sued Time Warner, and Sony has declined to comment.)

However the fight is resolved, it clearly marks a step in the Americanization of Sony. Even as the Tokyo-based electronics and entertainment company spends big to acquire U.S. businesses, it is starting to behave a bit more like the freewheeling American companies that Morita has so often criticized.

By 1990, fully 25% of Sony’s $20 billion or so worth of products sold annually will be made under the aegis of U.S.-based operations, including roughly $1.8 billion from Columbia Pictures, $2 billion from CBS Records and more than $1 billion from manufacturing television sets, computer disks and other products here. According to Sony executives, moreover, the company’s roughly $6 billion in U.S. sales next year will surpass its Japanese sales for the first time in Sony history--a remarkable milestone, given the yen’s slide against the dollar since 1985.

As Sony executives see it, Columbia and CBS are simply creating a new equilibrium for the parent. “Sony will now be a balanced company,” said Michael P. Schulhof, one of Sony’s top U.S. officers, during an interview at the company’s midtown Manhattan offices last week.

According to Schulhof, a physicist by training, the new Sony--riding a tide of prosperity driven by new products like its fast-selling 8-millimeter video cameras--will possess a rare elegance.

While its audio hardware, such as compact disc players, captures almost 25% of the world market, its CBS Records subsidiary holds about a quarter of the global market for audio software, or recorded music--and accounts for about 25% of Sony’s own market value. Sony’s video hardware again holds nearly 25% of the world market, and Schulhof believes that Columbia Pictures, though currently in the doldrums, will soon account for nearly that much of the world’s video software, or filmed entertainment, while accounting for another 25% of the parent’s worth.

Theoretical elegance aside, however, Sony now faces the monumental challenge of integrating huge U.S. operations with its home-grown corporate culture--and of finding its footing in a world where next year’s new electronic gizmo may affect profits less than some maddeningly ethereal decision in Hollywood about whether the guy gets the girl.

“This is a gamble. It is their biggest gamble, and the jury is still out,” City University of New York professor of international business Yoshi Tsurumi, a longtime Sony watcher, said of the company’s bold U.S. thrust.

The Strategy

A pair of converging forces drove Sony toward its strategy of marrying its hardware--a growing array of disc players, video cameras and such--with company-owned entertainment programming.

The first was the Betamax fiasco of the early 1980s, when Sony’s bread-and-butter products, the Beta format VCRs, were knocked off store shelves by an alliance of competitors using the rival VHS format. During a period of intense soul searching, Sony executives decided they could better dictate future product formats if they controlled a significant wedge of records or movies or TV programs to help tease new inventions like digital audio tape (DAT) or tiny, 8-millimeter videocassettes into the market.

According to Richard O’Neill, a Santa Monica-based executive recruiter for Palisades Pacific Group who studied Sony while living for months in one of its dormitories in Tokyo, Sony’s entry-level engineers were vigorously debating what would become of the movie and record gambit as early as 1982. “What do you mean by software? What is creativity? What are creative businesses. . . . They were worrying about all these things,” O’Neill said.

The second force was the dollar’s 50% drop against the yen between 1985 and 1989--partly the result of a Reagan Administration policy that was supposed to make U.S. goods cheaper abroad. Some economists, including Tsurumi, correctly predicted that Japanese companies would simply use the strong yen to buy American businesses.

Sony led the way, first purchasing CBS Records for $2 billion, then offering to buy Columbia for $3.4 billion, two of the biggest Japanese deals to date. Earlier this year, Sony also paid $55 million for Materials Research Corp., a New York-based supplier of semiconductor materials, and another $60 million for Irvine-based Trans Com Systems, which makes movie equipment for airliners.

According to Schulhof, it could be five years or more before the hardware/software marriage begins to pay major dividends. The parent’s strategy, he said, will be to “expose” American record and movie executives to new electronic devices much earlier in their development cycle than would be possible with outsiders, and then “let them decide what is in their interests.”

In his words: “We will expose movie people to high-definition television but let them decide whether to use it. We’ll expose them to 8-millimeter technology and let them decide whether to support it.”

Such exposure appears to have quickened the interest of CBS Record executives in digital audio tape, which could make Sony a fortune on the hardware side but is feared by record companies because it permits copying with the quality of a compact disc.

Shortly after the record industry reached a delicate accord last summer to pave the way for DAT machines, a CBS Records representative began pushing the National Assn. of Record Manufacturers for an immediate DAT-cassette packaging standard. Competitors predicted that CBS and Sony would rush DAT to the market here by early next winter, but Schulhof said Sony factories can’t deliver the machines before the following fall.

(On another front, Sony is already hawking CD players with a promotion backed by CBS Records. “5 free CBS discs when you buy any Sony 5- or 10-disc Disc Jockey home CD changer,” read the ads in electronics store windows.)

Tsurumi, Morita’s longtime friend, predicts a pair of far more dramatic strategic thrusts in the near future, however. In Tsurumi’s view, Sony will soon use Columbia’s movies to break a new wave of 8-millimeter video products--and will try to strengthen its home front, the Japanese electronics market, by capitalizing on Columbia’s cachet.

Once a sales laggard in Japan, where bigger competitors such as Matsushita have exploited strong distribution and economies of scale, Sony has already made inroads at home with products such as the American-designed “My New Sony” children’s line by trading on its Westernized image. “ ‘Number One Seller in the U.S.’ . . . that’s a powerful sales pitch,” Tsurumi says.

Now, powerful images from Columbia films could help trigger new sales among Japanese youth, leaving Hitachi, Matsushita and others to contemplate studio purchases of their own.

In a second possible foray, predicts Tsurumi, Sony could expand its U.S. manufacturing base--which currently employs 4,000 workers in five states, exclusive of CBS Records’ disc and record plants--and begin exporting U.S.-made goods to Europe. Schulhof said such a ploy would fly in the face of Sony policy, which is to bring manufacturing to its markets wherever possible, though such exports might occur on a spot basis to fill “short-term needs and demand.”

Yet U. S.-based exports might provide a masterful hedge against what the Japanese fear most: new, European-wide anti-Japanese trade restrictions when the European Community drops its internal trade barriers in 1992. With Sony exporting “Ghostbusters,” “Tootsie” and Michael Jackson albums to an entertainment-hungry European market, it might become more difficult to exclude Sony hardware that happens to be manufactured here. “It creates a political quandary for Europe,” said Tsurumi. “Is a Japanese product made in the USA still a Japanese product? The whole strategy (of Americanization) rests on that equation.”

The People

While some Americans fear the expanding Sony presence could bring the U.S. a strong dose of Japanese management technique, the company has minimized Japanese involvement so far and has operated its U.S. empire under a curiously free-form arrangement.

“There is no structure,” one U.S. banker, a Sony intimate, says of the setup. With about 15,000 American employees, including Columbia Pictures, Sony has sent only about 200 Japanese nationals to the United States. Most perform what Schulhof calls “communications” rather than management functions.

Power, meanwhile, appears to be shared by four key executives who operate not in a formal hierarchy but largely according to personal relationships with Morita and Sony President Norio Ohga.

Sony Corp. of America’s president and chief operating officer is Neil Vander Dussen, a 58-year-old engineer who joined the company from RCA Corp. in 1981 and now oversees hardware sales, production and research from the company’s official U.S. headquarters in Park Ridge, N.J. (Employees call it the “Death Star,” for its futuristic, mirrored-glass design.) Yet much of the production activity at U.S. factories, which accounts for about 30% of Sony’s roughly $4 billion in electronics sales here, is managed at the plants and coordinated with officials in Tokyo, said Schulhof.

Vander Dussen has been less visible than the 46-year-old Schulhof, a fast-paced, blunt-spoken executive who joined the parent company’s board of directors earlier this year and is described by an associate as Sony’s American “hit man.”

“He’s not an administrator. When something interesting comes up, Mickey gets it. That’s all,” said the associate.

A 16-year Sony veteran, Schulhof enjoys extraordinary rapport with Morita, who is said to see a kindred soul in the American. Both are physicists and flying buffs, and both are from wealthy families. A peculiar milestone in Schulhof’s Sony career came in 1979, when he considered leaving the company to shore up his family’s greeting card business after his brother died in an airplane accident. Morita, the scion of a Japanese sake-brewing firm, was impressed with Schulhof’s family loyalty and persuaded him to remain on the Sony payroll even while spending most of his time on the family venture for nearly four years.

CBS Records chief Walter Yetnikoff--the third, and least likely member of Sony’s loyalty system--joined the company with his unit’s purchase just two years ago. But Yetnikoff has been close to Ohga, a former opera star, ever since the two set up the lucrative CBS/Sony Japanese recording company joint venture in 1967.

A volatile entertainment veteran, Yetnikoff recruited his friend Peter Guber to serve as Columbia’s CEO and will be named chairman of a “software committee” to oversee both Columbia and CBS.

(Vintage Yetnikoff: In haggling over a sky-high pay package for Guber and Peters, the record executive broke an impasse by coming up with the bizarre figure of 8.08% for their stake in the studio’s equity appreciation. “Why 8.08?” Guber asked. “So you’ll remember me when this is over,” said Yetnikoff.)

Least noticed among the top four is Masaaki Morita--the chairman’s 62-year-old brother, who quietly moved to the United States two years ago. Some Sony associates say Masaaki has taken little role in running the American companies, but was sent to remind Japanese executives at home how seriously his brother takes the U.S. expansion. “He is a symbol. This matters,” said one of Sony’s U.S. business associates.

By vesting none of these four with ultimate authority, apparently, Morita and Ohga have subtly managed to maintain their own control over U.S. operations while keeping their pledge not to impose Japanese hands on the company’s new acquisitions.

At CBS Records, the policy was tested when U.S. market share (though not profits) weakened, and Warner’s record labels shot ahead of the company only months after Sony spent $2 billion to buy it. Schulhof said that profits remained strong because of international and record club sales and that most of the slide on the record charts occurred because CBS Inc., in its days as corporate parent, had blocked Yetnikoff from spending on new talent.

Yet one former CBS Records executive suggests that almost any American corporate parent would have taken a stronger hand than Sony at that point. “Akio Morita has been everywhere saying the management will be American, American, American,” said the ex-executive. “They’re very sensitive to this. . . . If they were to stick their face in, it would turn into an anti-Japanese thing all over the press.”

The Risk

The internal risks for Sony may actually be less extreme here than in Tokyo, where Japanese managers must now come to terms with the fact that some of their most powerful, and best-paid, colleagues, are gaijin --that is, foreign.

At least one Sony intimate maintains that he has heard some of Sony’s Japanese executives voice suspicion of Schulhof, one of only two non-Japanese to serve on the Sony board.

“A lot of people on the Japanese side are negative about him. They disparage him. They’re suspicious of his political power,” said this Sony associate. “You have to understand, these guys (in Japan) tilled the fields in the hardware business a long time to earn capital as a manufacturing company. Now, do they want to put that capital at risk on the movies?”

Even in the United States, lower-level Sony executives are finding it difficult to accept the salaries, as high as $10 million a year with bonuses, to be paid Guber and Peters.

“How big is the whole movie and TV business? . . . $12 billion? If Sony alone is a $17-billion company, why don’t we make money like that?” one middle-level executive recently asked over lunch at Park Ridge.

For just such reasons, Sony is likely to pause a bit before undertaking another major purchase. “Any time you do stuff this big, there’s a digestion period,” says Steven Schwartzman, a partner in the Blackstone Group investment banking firm, which has handled all of Sony’s acquisitions.

(Schulhof said a next step might be to offer additional stock in the parent company, to help retire debt assumed with the Columbia purchase. In selling stock after the CBS Records purchase, Sony excluded the United States because it feared that rigorous business-segment reporting requirements here would embarrass the parent as it wrote down some CBS assets after the acquisition. Schulhof said Sony is more comfortable with acquisition accounting now and will probably include the United States in any offering.)

A second major risk is political.

Sony Vice President Bob Dillon, who oversees the company’s Washington affairs, said he doesn’t anticipate any challenge to the Columbia purchase. But he fears that “ignorance” is feeding a dangerous backlash against Sony and other Japanese investors.

“I have labored for some time to understand why people are concerned about foreign investment, when it’s been a major contributor for this country. GE, Coke and so many others would be so much smaller without it,” Dillon said.

One element in the backlash, of course, is the “Morita factor”--the Sony chairman’s very American habit of voicing his occasionally very Japanese opinions about the failures of American industry.

The problem erupted recently when Morita was widely criticized for co-authoring a book of essays, “The Japan That Can Say ‘No,’ ” with Shintaro Ishihara, a nationalist advocate of Japanese strength.

Morita has said he doesn’t endorse many of Ishihara’s ideas--and Tsurumi maintains that a defective translation of excerpts, which was widely distributed to members of Congress and others, unfairly exaggerates some of the book’s key points, including Ishihara’s supposed advocacy of selling semiconductors to the Soviet Union.

But even Tsurumi believes Morita went too far, in light of his company’s new dependence on the United States.

“Morita has to learn to play the game now,” the professor says. “He went too far on this one and got what he deserved. As I will tell him, I hope he learned a lesson.”