Sony Takes a $2.7-Billion Hit on Studios : Hollywood: Firm calls write-off a necessary move, but some observers say it’s a crushing blow that might foretell sale of the studio.

After five years of defending its costly foray into Hollywood, electronics giant Sony Corp. announced Thursday that it has taken a staggering $2.7-billion write-off on Sony Pictures Entertainment, on top of a $510-million operating loss on the studio.

The news, which amounted to the Japanese version of a mea culpa , shook the entertainment industry and raised new questions about Sony’s long-range commitment to Hollywood. Although some analysts saw it as a necessary move to clean up the company’s books and curtail future losses, other analysts called the announcement a crushing symbolic blow that might foretell a bid to sell the studio.

Sony Pictures is the parent of Columbia Pictures and TriStar Pictures. After producing hits such as “The Prince of Tides,” it has been plagued by failures such as the infamous “Last Action Hero.” Its most recent box office disappointment is “Mary Shelley’s Frankenstein.”

Sony, disclosing the write-off in its regular quarterly financial report, blamed it on slower than expected growth and higher than expected costs of running the studio. The Japanese corporate powerhouse refused to elaborate on its formal announcement, but said that absorbing the losses will improve its prospects.

“If we didn’t do it once and for all now, we would continue to face losses on our entertainment business,” Executive Deputy President Tsunao Hashimoto said in Tokyo.

The write-off was included as part of a change in accounting methods. Sony reported that its loss for the six months ended Sept. 30 was $3.1 billion on a consolidated basis, compared with a profit of $578 million for the same period a year before. Despite the fierce financial blow it absorbed, Sony said it expects to report full-year profits next spring.

Sources close to the company said other actions could follow the announcement. One unconfirmed report had Sony conducting a Tokyo-based investigation of accounting practices at the studio, which has been known for spending lavishly on everything from executive contracts to the renovation of its Culver City studio facilities.

“When you have these kinds of losses, they have to investigate,” one source said.

But Sony of America denied that there is an investigation. One executive said the parent company’s routine request for financial documents may have touched off unfounded fears of an inquest.

In its formal announcement Thursday, Sony blamed the $510-million studio operating loss on “a combination of unusual items, such as abandoning a large number of (unidentified) projects in development and providing for settlement of outstanding lawsuits and contract claims.”

Those claims are said to include the contract buyout of former Sony Chairman Peter Guber, who left two months ago. Sony is also believed to have recently paid more than $100 million in executive bonus pool compensation to Guber and his former co-chairman, Jon Peters.

Although entertainment analysts such as David Londoner of Wertheim Schroder in New York defended the write-down under the circumstances as a common-sense business move, the announcement added to an already cynical view of Sony’s stewardship of the studio.

“Behind this write-off is the admission by Sony that the Columbia investment was a failure,” Kunihiko Kawada, an analyst at James Capel Pacific Ltd. in Tokyo, was quoted as saying.

Sony became a major Hollywood player in 1989 with the purchase of what was then known as Columbia Pictures Entertainment. Other Japanese investors, including MCA/Universal owner Matsushita Electric Industrial Co., followed Sony into Hollywood.

Although the published price tag paid by Sony was $3.4 billion, analysts said debt and other considerations drove the actual cost to more than $7 billion.

In the social and political environment of the 1980s, Sony also came under criticism in some quarters for participating in what was perceived as a Japanese takeover of American business.

But Sony replied that it was actually saving an American landmark that had fallen on hard times, and Guber and Peters followed through on that pledge by raising production at the studio to include such big-budget film projects as “Hook” and “The Prince of Tides.”

The early momentum faded after Peters left in a dispute with the Japanese and a steady succession of movies failed, climaxing with last summer’s “Last Action Hero.”

In its limited breakout of entertainment figures, Sony reported that motion picture revenue declined 13.7% for the six months ended Sept. 30. The music group was up 6.6% and is said to be reporting record profits, thanks to releases such as the “Forrest Gump” soundtrack. Sony noted in its report that the dollar’s devaluation against the Japanese yen also depressed results.

Sony Pictures’ combined market share is less than 11% so far this year, compared to more than 19% last year. Sources say the studio is also essentially living hand to mouth.

The write-off prompted credit rating company Standard & Poor’s to give notice that it might downgrade its current “single A” debt rating of Sony. Meanwhile, Merrill Lynch & Co. downgraded its recommendation for Sony shares traded on the New York Stock Exchange to “sell” from “neutral.”

Sony’s American shares tumbled $3.25, to $55.25. Its share price plunged in heavy Tokyo trading this morning, dropping 8.1% on volume of 2.6 million shares. The market’s benchmark Nikkei Stock Average also took a hit, falling 137.33 points, or 0.71%.

Thursday’s news puts added pressure on Sony of America President Michael P. Schulhof to turn the business around. Schulhof has come under criticism for presiding over continuing entertainment losses. Some observers contend that his job is in jeopardy, but Schulhof’s defenders say he is already taking steps to improve entertainment results.

Earlier this year he named Jeffrey Sagansky, who led CBS to the ratings crown, as his second in command. Sagansky is said to be pursuing strategic partnerships and financing deals for the company. Schulhof also put Sony Pictures President Alan J. Levine in control of the studio after Guber’s departure. Levine and motion picture chief Mark Canton have since moved to step up production and shore up morale.

Sony has also pared its thick management ranks, partly by consolidating the distribution and marketing functions at Columbia and TriStar. Schulhof, in a prepared statement, said the write-off was another step in the restructuring effort.

“That strategic analysis has already led to a number of steps designed to strengthen management and realign operations,” he said, adding that “Sony’s enthusiasm and commitment to its motion picture, television and video business is undiminished.”

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