Has Sony become the entertainment group it always wanted to be?

When Sony released the trailer for its forthcoming swashbuckler Uncharted in October, the global fan base of the video game on which the film is based was outraged. Mark Wahlberg seemed perfectly cast as the roguish mentor figure Sully in the Indiana Jones-style adventure, but where on Earth was the character’s signature moustache?

The answer — in a move fans of the hugely popular PlayStation game now see as evidence of Sony’s masterful trolling in the social media age — came in the very final shot of the second trailer, released two months later. This time the moustache was there, but the world must wait until the film opens in February to discover the full mystery behind its dramatic re-emergence.

An even bigger puzzle surrounds the transformed nature of the company that put this trick together. Have investors truly worked out how to value the 76-year-old tech and entertainment company? Is Sony serious about getting into electric vehicles, which some see as a dangerous distraction? And, most importantly, has it finally got its swagger back?

Sony Music

$8.8bn


Music revenue in 2020

Labels include Columbia, Arista, Epic, RCA

In 2020, Sony had the second-highest market share in recorded music and the highest market share in music publishing

The Uncharted moustache “bait-and-switch” is an example of a newfound confidence at Sony. The $157bn symbol of corporate Japan, say an increasing cohort of investors, may be on the verge of achieving an ambition decades in the making but which has long eluded it: to become the world’s most fully integrated entertainment company.

Over many years Sony has either created or bought the right instruments to achieve its goal: world-class music catalogues ranging from Miles Davis to Mariah Carey, Hollywood film and television studios, plus PlayStation, the leading games group. But it could never quite make the orchestra play in harmony.

Now, despite the seismic changes shaking all corners of the entertainment world — including streaming services for music, movies and TV, blockchain-based gaming and the disruptive promise of the metaverse — Sony appears to have finally found a way to make its distinct entertainment groups work together.

Its movie studio is producing Spider-Man and other Marvel blockbusters, while a deep library of films and TV shows is helping to fill the bottomless appetite for streaming content. A revived music business, the world’s second largest, is profiting from the growth of Spotify and TikTok. And with PlayStation, it has decades of experience in games — a sector that Netflix, Apple, Amazon and other deep-pocketed players are desperate to crack. All this with cutting-edge hardware, including the VR headsets and other gear that many believe will be the gateway to the metaverse.

“[Sony’s] strategy puts it in a uniquely powerful position,” says Pelham Smithers, an independent analyst who has covered the company for many years. “They have music, TV, films, video games: things that everyone [else] wants, but only Sony actually does at scale and in a joined-up way.

“Looking ahead to a time when entertainment is consumed in even more immersive settings, there is no company more obviously central to the metaverse,” he adds.

Strength and unity

Investors seem to agree. Sony shares are at a 20-year high, with the overwhelming majority of analysts covering the stock rating it as a “buy”.

The Uncharted series, a flagship title for two generations of players of Sony’s PlayStation consoles, is a good example of the strategy in action. The film release is the result of collaboration between the company’s games division and Sony Pictures — a partnership that might once have seemed impossible in the group’s notoriously siloed culture.

“The companies had been trying to do Uncharted for 10 years,” says Tony Vinciquerra, chair of Sony Pictures Entertainment. “When I first got here [in 2017], I asked, ‘Why can’t we get this stuff done?’”

The project got off the ground after Vinciquerra discussed it with Jim Ryan, president of Sony Interactive Entertainment. Once Uncharted achieved lift-off, 10 more projects went into development between the games unit and Sony Pictures.

“We just needed people to try to do what’s right for Sony as a whole,” Vinciquerra says in what could be seen as an implicit criticism that the company had been working more as a collection of independent empires.

During the past 20 years, investments often looked ill-judged. Business lines were retained for what former senior management now describe as “sentimental reasons”, leaving a misshapen conglomerate, institutionally resistant to streamlining or unity.

Sony Pictures Entertainment

$762m


Profit in 2020

Production companies include Columbia Pictures, Sony Pictures Classics, Screen Gems and Tristar Pictures

Profits have risen steadily since 2017, boosted by a partnership with the Marvel Comics Universe and Spider-Man

“Culture issues are very important,” says Kenichiro Yoshida, a 32-year veteran of the company who became Sony chief executive in 2018. “It is very important for us to collaborate.” The Uncharted project is an example of the cultural change he wants to foster at Sony. “I strongly recommended” that the Sony Pictures and PlayStation teams begin working together, he adds.

Mio Kato, an analyst who publishes on the independent investment research platform Smartkarma, says Yoshida has “executed and pushed things through” since taking charge. “I don’t think people see how big a competitive gap there is between Sony and others in this space. Sony just seems to have better ideas faster. They have recaptured their powers of innovation,” Kato says.

Opting out of the streaming wars

One of the most streamed programmes in America week after week is not an acclaimed original Netflix production such as Squid Game or Stranger Things, but Seinfeld, a dated sitcom that debuted 33 years ago, according to Nielsen data.

The comedy series is streamed exclusively on Netflix thanks to a five-year deal agreed in 2019 with Sony Pictures Entertainment, which holds the rights. The bidding between the streaming services was intense, and in the end, the rights sold for $500m.

Far smaller than its rivals in Hollywood, Sony Pictures decided the smartest strategy in the streaming wars was to opt out of them altogether. Instead of launching its own service, it took what Sony executives call an “arms dealer” approach of selling film and TV rights to the highest bidder.

It certainly appears to be a seller’s market, as Disney, Amazon, Apple, Warner Bros and others are expected to spend billions on content in pursuit of streaming subscribers. The top eight US media companies are forecast to spend about $140bn on content in 2022, with the streaming wars fuelling double-digit spending increases for the next few years, according to estimates by Morgan Stanley.

“The streaming wars are good for us,” Vinciquerra says. “[The streaming services] say they will be profitable in 2023, 2024 and they may well be, but the amount of investment to get there is phenomenal. It’s billions of dollars. And they’re doing that by buying from us.”

Last year Sony made deals with the top two streamers — Netflix and Disney+ — to give them streaming rights to its theatrical releases between 2022 and 2026. Together, the deals are estimated to be worth close to $3bn.

Some analysts say Sony’s arms dealer approach is looking smarter as subscriber growth slows at services like Netflix and Disney+, prompting questions among bearish investors about whether streaming will ever make much money. Across the industry there is an expectation that there will be a period of consolidation among the streaming groups once the “land grab” phase is over, leaving just a handful of services.

This is where the potential risk for Sony’s strategy lies. The arms dealer strategy is “certainly different from what everybody else is doing”, says Doug Creutz, an analyst at Cowen & Co in San Francisco. “Everybody else wants to be Netflix and is currently losing vast amounts of money [trying to achieve that].”

Sony Games and Network Services

7.8m


Number of PlayStation5 units sold in 2020

Popular games include FIFA 22, Call of Duty: Vanguard, Battlefield 2042, Marvel’s Spider-Man: Miles Morales

Sony’s PS5 became the fastest-selling PlayStation in its history when it was released in 2020

For Sony, he says the potential problem is that there will be fewer companies to sell its content to after the inevitable consolidation that will follow the streaming wars, eroding the price advantage it has now.

To hedge against this, Sony is betting on niche streaming services, or what Yoshida calls “communities of interest”, to serve small groups of dedicated viewers in areas ranging from anime to a faith-based service. Sony is also building a general entertainment streaming service in India following the acquisition of Zee Entertainment last year — a market also being pursued aggressively by Netflix and Disney+.

The other plank of the turnround of Sony’s entertainment businesses has been improvement in the motion picture division. Profits at the group have risen dramatically under Vinciquerra and Tom Rothman, who runs Sony Pictures Entertainment Motion Picture Group. Much of the division’s success is down to the Spider-Man franchise, which helped it prosper in 2021 — despite another dismal, Covid-racked year for the global box office.

Sony Pictures had three of the top 10 films in the US, led by Spider-Man: No Way Home, which brought in more than $668m after its December release and quickly became the sixth biggest grossing picture in US cinema history. The group is expected to report record profits of $950m in 2021 — up 150 per cent from 2017.

Sony executives readily admit that their film and TV studio is “subscale” compared with Disney, Warner Bros and other Hollywood groups. But Yoshida says he is committed to keeping the studio, despite industry consolidation as seen by Amazon’s $8.45bn acquisition of MGM last year.

“It’s no secret that we’re a very small player among giant competitors,” Vinciquerra says. “We are subscale but when you consider the three entertainment companies together we have a lot of assets, a lot of [intellectual property] and we can compete where we need to.”

Defeat from the clutches of victory?

Yet several large shareholders believe there will always be risk and scepticism around the company. For all its globalisation, Sony remains a Japanese corporation at a time when global investors are either frustrated or dismissive of the profit and value-creating powers of managements in the country.

Since Yoshida took the reins, Sony’s shares have risen more than 180 per cent. But even at that elevation, it commands a valuation roughly 20 times smaller than that of Apple. Sony’s home stock market is lacklustre, but this vast disjoint remains in place, says Smithers, despite Sony standing out from most Japanese companies due to its greater focus on return on equity and on making the firm’s capital work hard through buybacks and unexpectedly successful acquisitions.

Damian Thong, a veteran analyst of Sony at Macquarie in Tokyo and one of the few analysts with a “neutral” rating on the stock, says there are a number of reasons for caution around the great Sony transformation story.

Particular alarm bells, he notes, were sounded by the company’s announcement at the start of January that it was creating a new subsidiary — Sony Mobility — to explore entering the electric vehicle market. The project, which emphasises the idea that cars of the future will essentially be rolling entertainment centres, may be more shopfront for its products than a true intent to take on Tesla or Toyota.

Locked into the ambition and pizzazz of the announcement, say a number of observers, was a flash of something of the “old” Sony and a historic propensity to lose focus at just the wrong moment. On one hand, says Thong, the ambition and willingness to take risks was impressive given the company’s conservative approach in other areas. The attractions of the $3tn automotive market is strong, as is the clear love among investors for automotive disrupters.

“On the other hand, we think the likelihood of Sony succeeding in cars is low, and we are concerned that a full-on push into the EV business will destroy value, bringing years of losses,” says Thong. He adds that although EVs demanded a lower minimum business scale than traditional carmaking, it was hard to expect any kind of profits from this venture for Sony in the 2020s.

Apple, he says, has been working on its car project for over seven years with no apparent result.

The problem, as ever with Sony, he adds, is that history is an imperfect guide. The company’s 1980s success in consumer electronics came despite the scepticism of US incumbents. Its success in games came despite the sneers of Nintendo and Sega. Its success in mobile phones and PCs, which at one point seemed highly probable, turned out to be wholly elusive.

It is no coincidence that Sony feels so attached to the Uncharted series — games whose far-fetched narrative of treasure-hunting hinges on the combination of luck and judgment. For years, Sony has struggled to have both at the same time.

Creutz says the company has finally got the mix right. “For a long time they were a big conglomerate in search of an identity,” he says. “But now they’ve figured out the right focus on entertainment, where they have a strong position in both music and video games — and are attractive in TV and movies because they can sell content to the highest bidder.”