The Nation : Sony’s Woes in Hollywood Reflect its Weakness in ‘Knowledge Value’ Industries

Sony Corp.’s shocking announcement that it will write-down its Hollywood investment in Columbia Pictures by $2.7 billion highlights a major reason why Japan’s once unstoppable economic juggernaut is slowing. Having built their economic empire on an indigenous aptitude for craftsmanship and innovation, Japanese companies like Sony are colliding with the limits imposed by an insular culture.

Sony’s foray into Hollywood, like that of its competitor Matsushita Industrial Electrical Co., which owns MCA/Universal, has been hampered by its misunderstanding of the creative forces that go into a world-dominant entertainment product. Unlike the design, development and manufacture of a electronic gadget, the making of a successful film or record product demands an intuitive feel for the sensibilities of a diverse, global public.

“The Japanese tend to think from their own internal logic, the point of view of the company or family,” Sony Deputy President Ken Iwaki told me not long after his company bought Columbia in 1989. “This is historically derived training. We get strong economic power but our awareness is not so strong.”

To obviate their self-perceived cultural shortcomings, Sony and Matsushita purposely placed direct control of their studios into the hands of Americans. To a large extent, the relative success of Matsushita is a consequence of its decision to retain the strong management team already in place at MCA. Thus, the new Japanese owners did not alienate the studio’s network of creative contacts.

Sony, by contrast, bought a lackluster studio and proceeded to compound its problems by replacing one set of weak old-boy-network managers with another of their own choosing. Furthermore, it transferred the authority to make key entertainment decisions to a New York-based executive who lacked studio experience. He stood by as his West Coast minions spent their yen on friends and family with an alacrity alarming even by Hollywood standards.

Of course, even relatively talented Americans can prove quarrelsome, as Matsushita is finding out in its struggle with Sidney Sheinberg and his creative allies over control of MCA. Moreover, with as many as two or three new studios in the offing, “hands-off” Japanese owners now find themselves exposed and vulnerable to the migratory patterns of the entertainment complexes, both managerial and creative. Such behavior is utterly at odds with the system of lifetime employment and corporate loyalty prevalent in Japan.

Taichi Kiuchi, president of Mitsubishi Electric, another Japanese consumer electronics giant, traces much of the Japanese inability to “learn” entertainment management to the highly subjective nature of the business. “Japanese companies have a whole lot of problems when there’s no blueprint or manual to learn from,” he says. “We don’t have any advantage in this business, which is a human product, not a machine. We don’t have the diversity of population to make the creative cultural decisions.” Japan’s home-grown entertainment, it should be noted, has been losing market share to mostly U.S.-made products for a decade.

The Japanese setbacks in entertainment also augur trouble for its economy. As wealthier countries are forced to cede much of mass manufacturing to developing countries, companies and regions will have to increasingly concentrate on what Japanese philosopher Taichi Sakaiya calls “knowledge value” industries, like fashion, entertainment and business services.

By treating “knowledge value” industries as if they were strictly industrial, the Japanese have suffered a score of reversals not only in Hollywood but in computer software, financial services and real estate. In contrast to making cars or CD players, “knowledge value” industries are culturally intensive. Understanding the importance of taste, or subtleties in cultural norms, is often more important in these fields than pure efficiency.

Perhaps nowhere is this misunderstanding more evident than in the idea of “synergy” between “hardware” and “software.” In the period leading up to and during the Japanese acquisitions of Columbia and MCA, synergy was a buzzword. Stock analysts, studio chieftains and corporate strategists incessantly crowed about the natural feedback mechanism between software development--a Hollywood strength--and the electronics hardware manufactured by the likes of Sony and Matsushita.

Five years later, it is virtually impossible to find any real evidence of Japanese core-electronics businesses having benefited from Hollywood acquisitions. Sony video cameras, for example, are sold to all studios and independent producers. No one goes to a Sony Pictures movie expecting to find one iota of technical perfection greater than that of any other studio. As one Sony executive admitted to the New Yorker magazine, the company had learned little from its ownership of Columbia, except that “We see there are up and downs in Hollywood.”

Certainly, Sony and Matsushita’s move into Hollywood has not enabled them to gain share in any of the conceivable spinoffs--from special effects and animation to multimedia--of conventional entertainment. Instead, the winners have mostly been smaller, California-based upstart firms and a handful of independent Japanese game-makers, notably Nintendo and Sega, though they, too, are experiencing slower growth in their historic core businesses.

As the entertainment age unfolds, the siren song of synergy is likely to entrap many U.S. competitors as well. During the past year, as the hype surrounding the information superhighway has intensified, many U.S. telephone, technology and publishing giants have poured billions into entertainment-related ventures--almost always justified by some vague synergy between the company’s core business and Hollywood.

Today, for example, corporate executives--including those at MCA--are doling out cash and kudos to hyper-hyped Silicon Valley electronics companies, like 3DO, while eschewing any fundamental attempt to understand the intricacies of the highly fragmented entertainment complex. Lured by the mirage of synergy, the large companies continue to miss the basic point: that the real source of profits in the “knowledge value” economy are such talents as design and the ability to tell a story and develop characters.

In the 1990s, those set up for the biggest fall will be computer software mega-stars, like Microsoft’s Bill Gates, whose minions are invading Hollywood with their own brand of technological determinism. Like the Japanese with their financial and industrial ascendancy in the 1980s, the techies think their computer-software domination makes them ideally positioned to absorb the markets traditionally enjoyed by the Hollywood fantasy factories.

For the Japanese, their unfortunate foray into Hollywood movie making should serve as a warning to keep their distance from industries in which they have no expertise. It also exposes, in a dramatic way, the fault lines in the once highly touted Japanese management style.