Sony’s $962M Entertainment Write Down: A Cautionary Tale For Hollywood Investors


There’s something about Hollywood that dazzles overseas investors — most recently led by those in China. But the $962 million write down that Sony took this morning for its entertainment unit should give them pause.

Sony’s announcement contributed to a 3.5% drop today in its U.S. shares. And it revives painful memories from 1989 when the Japanese conglomerate believed it could ride the entertainment tiger — and made one of the worst deals in corporate history.

Today’s announcement heightened speculation that CEO Kazuo Hirai is setting the stage for a change — possibly a sale of the studio — although he and Sony Pictures Entertainment’s Michael Lynton assured employees this morning that the company’s commitment to movies and TV remains “unchanged.”

SPE is “a very important part of Sony group” and the company “will continue to invest to achieve long-term growth and increased profits in this space,” they said in a memo.

Still, it’s easy to appreciate why many Sony watchers wonder whether Hirai is thinking about a change.

This was the first big impairment charge for the unit since the shocking $2.7 billion one Sony took in 1994. That tacitly acknowledged that the Japanese conglomerate paid about twice as much as it should have in 1989 when it laid out $3.4 billion for Columbia Pictures stock, assumed $1.4 billion in debt, and agreed to pay Warner Bros. another $500 million to let producers Peter Guber and Jon Peters out of their contract so they could move to Sony.

Generally speaking, it’s easier for sellers and buyers to discuss asset values after write downs that get bad news out of the way. With Lynton planning to leave, the charge also would help a new leader — or owner — to craft a story showing growth and other improvements.

And the timing of the announcement is curious. Sony didn’t respond to a sudden or unexpected development. It took the charge to recognize a long term trend: DVD and other home entertainment sales have diminished to the point where the financial types felt they had to assign a new asset value to the studio — which it had carried at the 1989 purchase price less the 1994 charge — the company says.

With the new write down, Sony says that the Production & Distribution operation (not including Media Networks) is just worth the value of the hard assets. It no longer puts a dollar figure on the brand name, or other hard-to-quantify qualities that the accounting world classifies as “goodwill.”

To be sure, the writedown makes sense without assuming ulterior motives. Hirai and Lynton said this morning that the company is “moving forward” with efforts to improve movie profits — and is prepared to be patient.

“One of Sony’s great strengths is the diversity of its business portfolio and unifying power of the ‘SONY’ brand,” they say. “Each business must be autonomous, self-sustaining, but at the same time they work cooperatively under the common identity of ‘SONY’, aiming to enhance the total corporate value of Sony group. It is important to keep in mind that there was a time when some businesses were facing tough challenges; other businesses helped us to improve and sustain the profitability of the entire Sony Group.”

But that isn’t what Sony bargained for when it became a Hollywood power. And it should serve as a sobering reminder for those eager to buy into show business that it’s like no business they know.

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