Hollywood Ending for Sony

It was a significant, if small, sign of change within Japan’s premier electronics company. Sony Corp. Chairman Nobuyuki Idei not only showed up for the London opening of “Spider-Man”--unusual enough--but the stately and reserved executive also mugged for the cameras with star Tobey Maguire.

Sony, it seems, is no longer embarrassed to own a Hollywood studio.

Since purchasing the studio in 1989, Sony has been the butt of jokes, known as much for churning out over-the-top flops as for profligate spending that forced it to take a $3.2-billion write-off in 1994, one of the largest losses in Japanese corporate history.

But that was before “Spider-Man,” which scored the largest opening weekend and has blown past $400 million in U.S. ticket sales. A slate of summer blockbusters have followed, including “Mr. Deeds,” “Stuart Little 2” and “Men in Black II,” which opened July 3 and delivered the biggest Fourth of July box office ever. Coming next month is a potential rocket blast from hip-hop spy thriller “XXX.”

Sony’s movie lineup broke all summer records and helped rack up $1 billion in U.S. ticket sales, more than most studios make in a year. First-quarter earnings are due today, and movie profits this year are expected to make the studio second only to Sony’s successful PlayStation in importance to the bottom line.

The turnaround underscores Hollywood’s fickle nature: Studios are on top one year and buried the next. The trick is putting together a consistent lineup from one year to the next.

Sony has had a few hits, but nothing like this. Though it must prove that it has box-office staying power, its sudden success earns the studio new cachet in Japan: Sony says that its Hollywood assets are worth at least $14 billion.

“I’ve been telling Tokyo this was going to be fine,” said Howard Stringer, chairman and CEO of Sony Corp. of America. “And now we really are having a banner year. It’s hard to argue anymore.”

It was beloved Sony co-founder Akio Morita who pioneered the modern-day marriage of content and technology, a throwback to the early days of consumer electronics when Thomas Edison couldn’t just invent the phonograph, he needed to supply the recordings to build consumer demand.

Morita bought CBS Records in 1987 for $2 billion. Two years later, he approved the $3.4-billion acquisition of Columbia Pictures Entertainment, considered a stunning overpayment for a company carrying $1.6 billion in debt.

In fact, it was a calculated strategy born of past experience.

“Morita believed if they had controlled more content when Sony launched the Betamax his superior system would have won out over rival VHS. He was firm in that view,” said Peter G. Peterson, a former Sony board member and Morita confidant.

But the studio heads Morita hired to carry out that vision nearly destroyed it.

Peter Guber and Jon Peters were two of Hollywood’s hottest commodities when they were hired as co-chairmen of the studio, shortly after producing “Batman,” a $1-billion phenomenon that reinvented Hollywood’s superhero genre. They commanded multimillion-dollar salaries, a $50-million bonus pool and participation in any appreciation of the studio’s assets, a pittance of what the team ultimately would cost Sony.

As part of the deal, Sony paid $200 million to buy their production company, Guber-Peters Entertainment. At the time, the pair was contracted to Warner Bros. Studio, but promised Sony that the contract would never be enforced.

Warners thought differently and sued, forcing Sony to pay an estimated $800-million settlement.

That was only the beginning of a relationship whose excesses have become Hollywood lore. There were the millions spent renovating the Columbia back lot to include street facades that would prove useless because they lacked the cinematic perspective necessary for filming. Tales abounded about how the pair abused Sony’s corporate jet, which Peters once used to ferry flowers to a girlfriend across the Atlantic. And then there were some of the most expensive flops in Hollywood history, such as Arnold Schwarzenegger’s “Last Action Hero.”

Sony was ridiculed as a naive foreigner blinded by glamour.

Guber and Peters declined to comment for this story.

By late 1994, Sony had to acknowledge it had been duped, announcing a $3.2-billion write-off of Hollywood losses.

The movie industry expected the Japanese to abandon their Hollywood sojourn. Sony did, in fact, consider selling the studio but held on out of stubborn pride and devotion to Morita, who stepped down in 1994 after a stroke.

When Idei replaced him as chairman, he cleaned house.

The overriding desire in Tokyo was to hire American managers who could be trusted.

If they also created hit movies, “that would be the gravy,” said Sony board member Peterson, who was charged with the hiring.

Peterson brought in a new studio chief, John Calley, a former Warners top executive who at the time was running MGM. A year later, Stringer--a former president of CBS--was brought in as president of Sony Corp. of America.

“It took patience,” Stringer said. “The suspicion [inside Sony] was always that the entertainment industry was lying in wait for the unsuspecting outsider.”

For much of this time the studio bled red ink, despite occasional hits such as “Jerry Maguire,” “Air Force One” and “Charlie’s Angels.”

The dry spell dragged on as Stringer’s team struggled to follow through on projects left behind by the previous regime and formulate a new strategy. It was years in the making, but soon the studio buzz was all about a slate of sure-bet films for summer 2002.

“It’s all about putting a program together,” said Amy Pascal, who took the helm at Columbia Pictures in 1996 and defended the time it took to turn things around. The deals for “Spider-Man” and the sequel to “Men in Black” were more difficult to put together than the movies themselves.

Launching the slate would send a powerful signal to Hollywood--and Wall Street. But it would be an expensive gamble, costing nearly $600 million in film production alone. That’s as much as some studios, and certainly Sony, spends in a year.

To convince Sony’s Japanese executives, who had an image of extravagant studio spenders, Stringer hatched a good-faith deal. If Sony agreed to fund the summer slate, the studio would slash $150 million in annual overhead.

Network television production was curtailed, and the Culver City TV production facility was put up for sale. Staff cuts included eliminating executive positions such as president of Sony Pictures Entertainment, a job held by Mel Harris.

In all, Stringer eliminated $400 million in annual overhead throughout Sony America.

“There has been a major restructuring out there,” Peterson said.

Despite the studio’s progress, Sony faces daunting challenges.

Sony’s music business is grappling with sagging sales, rampant Internet piracy and a dearth of new pop music sensations. It’s a struggle to keep the profit margins of Sony’s electronics’ business in the mid-single digits as Chinese, Korean and East European manufacturers copy Sony’s components and rush knockoffs to market in less than six months.

Sony’s hope for standing out depends on consumers with high-speed Internet connections both at home and through their portable Sony devices. These connections are coming, but dozens of entrepreneurs and companies who bet on the “broadband” future have run out of cash waiting for it to arrive.

Sony is trying to fast-forward to that future with video- and music-on-demand services and other digital offerings such as EverQuest, which enables hundreds of thousands of subscribers to play a fantasy computer game together online; Movielink, a joint venture by Sony and four other Hollywood studios to offer downloadable movies; and Screenblast, a Web-based service to help consumers create and share videos and music.

Although the services will work on everyone’s gear, the studio works with Sony’s electronics designers in Tokyo and San Jose to optimize the look and feel of the software on Sony devices such as an Internet-ready PlayStation 2, the Vaio personal computer and the Clie hand-held digital assistant.

Among other new projects is a line of cell phones being made jointly by Sony and Ericsson. The phone’s ability to play “Men in Black II” and “Spider-Man” games and graphics not only sets the phones apart from the masses but could encourage users to pay to jazz up their electronic messages with images from Sony movies.

“[Sony America] is the center of content and also the crossroads of technology,” said Stringer, who now has Sony’s backing to make new acquisitions.

The improved dialogue between Sony’s entertainment and electronics divisions also has given Sony new clout on Wall Street.

“They are getting their groove at Sony,” said Merrill Lynch analyst Jessica Reif Cohen.

Will it last? That depends. Sony must capitalize on its PlayStation success by developing more hit games and following this summer with another round of money-making films, such as sequels to “Spider-Man.”

“Consistency is what every company strives for,” said Joe Roth, whose Revolution Studios is producing “XXX,” with Sony, and who has been approached to replace Calley when he retires. “Now it’s their job to build off their record.”

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Times staff writers Alex Pham and Jeff Leeds contributed to this report.