March 8, 2005

My, oh my… what a jolt a little news can bring.

In a hurry, what everyone has known for years - that Hollywood's future has a lot riding on Asia - is a lot less theoretical. Howard Stringer is the big story, since his relationship to the entertainment side of Sony's business, long thought to be a sitting duck for a takeover, seem a likely signal about a major shift of corporate priorities.

But here is the rub on that… there is no empire building opportunity in the film business. Yes, it is a lot of money and you can get very rich. But the electronics business is a business in which an entire conglomerate can be turned around by a technological Spider-Man. But the movie Spider-Man (or Spider-Man 2 or 3) is great if you are waiting on your Sony Pictures bonus check… but a few hundred million of profit is finite and does nothing to assure another such hit, year in and year out.

There is no doubt that under Stringer and Pascal and Blake - and then Calley and now Lynton - Sony Pictures has stabilized and succeeded. The division is no longer a drain or an embarrassment… it is a real asset. But in the big corporate picture, how it integrates with an electronics hardware business has been unclear.

The pick-up of MGM was more about Sony corporate than Sony Pictures, as power in determining the standard for the next generation of HD DVD is all about forcing the company's proprietary hardware into industry (and thus, consumer) leadership.

That said, Stringer could change that. Not because he has such a love of the film business, but because the mindset of the hardware business sometimes forgets, as Stringer pointed out in his acceptance news conference, that the end result of selling hardware is that "software" is played on it. Stringer can change Sony's world by understanding the end user better than anyone in Japan does.

The trouble with Sony's electronics business, besides internal management issues, is very much the same as the IBM faced in the computer business. A premium brand has been chipped away at by serious price competition and an ever-increasing level of quality on the part of cheaper competitors. Even with shrinking prices and margins, Sony quality has not always won the day. (Again, issues of comparative Sony quality have also come up, but I'm trying to stay big picture.)

Sony is not the only electronics company to fail to respond to the iPod efficiently. But they also allowed Apple to take the lead in CD and DVD burning… they have not found a way to dominate the DVR business that is only going to grow, even if Tivo goes under…. they have not created the best home entertainment system or the best integrated components or the definitive piece of electronics that simplifies and enhances our lives… not since the Walkman.

Even more important to Stringer's portfolio than Spider-Man is Sony Home Entertainment, which is one of the industry's strongest units. You'll recall that one of Tom Freston's imperatives when taking over the Viacom film group was building their home entertainment into a powerhouse. That division alone is moving towards $3 billion a year for Sony.

Without diminishing the importance of the production and theatrical distribution of films, home entertainment, as the name suggests, is part of the home experience. Purchased DVDs take a place in a living room much like the DVD player they are played on.

Can or should Sony DVD players be the razor to the DVD razor blades? Maybe that mindset would work… maybe not. But the freedom to even consider it is the kind of thing that Stringer brings to Sony for the first time in its history.

It seems to me that Sony's success in leading the way in HD DVD could be advanced by considering the players a loss leader in its first years of introduction. In fact, just discussing it brings to mind the opportunity that Sony or other companies could take by creating DVD players - as Cinea failed to do - that can deal with one-machine-only coding. Again, they could lose money on the effort, but building the quality proposition for the brand again is everything. Look at how many scores of millions of dollars Cadillac is spending right not to reassert their brand as a muscular, 5-seconds-to-55-mph, ride.

But I digress…

The other huge story in Asia is Warner Bros., which has not made a spectacle of their efforts, but which has quickly become the clear leader in evolving into the international leader in the American-based film industry. (Ironically, Sony has an Asian production arm that has made great films that have not been terribly well exploited by Sony Pictures USA yet. Kung Fu Hustle is their next big test.)

In just the last week, Warner Bros. has announced two huge initiatives in China. First, they are planning on building dozens of multiplexes, raising the quality of the theatrical experience is the country well above what there now is. Remember, WB has also lead the way in exhibition in Europe and has a significant footprint in Australia, pushing the stadium seating revolution that has since come to America as well.

The second move, which may become the most important story in a long, long time, is the decision to fight Asian piracy with price in addition to governmental enforcement. According to an excellent article on this in the Wall Street Journal, illegal DVDs are generally selling for a dollar in China. WB is planning on pricing legitimate DVDs for around $2.50 and feature-heavy DVDs for about $4.25.

Whether this will work, no one knows yet. But I would suggest that by creating a realistic alternative, it will not only create a new revenue stream through the sale of these DVDs, it will inspire a more effective enforcement of anti-piracy laws. Think about it. If you were on Canal Street in NY (where there was a marked decrease in the amount of available pirated material on the street when I visited a few weeks ago) and an illegal copy of a DVD was $5 and a real copy was $9.95, wouldn't most people feel better about spending a little more not to be breaking the law and to be assured of quality?

Of course, part of this strategy requires getting to the market with legit DVD releases as quickly as the pirates… which means a lot of day-&-date releasing that is not at this point an option in the United States.

The mindset about all of this needs to change as the world market continues to grow and the Asian market is cultivated further. Is Howard Stringer that expansive a thinker? We'll see. Or will some other great mind emerge to lead the way? We'll see.

READER OF THE DAY: GOSH DARN BRITAIN writes: "How about the fact that Kung-Fu Hustle was only made for 5 million??!!! To me that is phenomenal. The idea that you can take 5 million and get a movie that looks that good (granted you need the talent that knows what they're doing), excites me more on the idea of a more entrepreniual filmmaking age. Technology is going to even the playing field, and then it's going to come down to who knows how to tell a story visually."

And DO THE DEW writes: "I think there were three cinematographers on the movie - Doyle, Pung-Leung Kwan and Yiu-Fai Lai.

And the movie is a MESMERIZING experience. In my opinion, it's Kar Wai most ambitious and accomplished masterpiece."

E-ME: Yes, I will get to 2046 sometime this week. And more. In the meanwhile, I would love to hear what additions to your currect electronics would change your life in a real way.

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