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Sony rides high -- except in Hollywood

Film business bleeds while electronics and other entertainment segments profit

Losses by Sony's pictures and mobile phone segments have become a drag on a group busy rebuilding its TV and camera businesses.   © Reuters

TOKYO -- In its role as a Japanese technology conglomerate, Sony thrived on the earnings front during the first quarter. But when it comes to the big screens, Sony's alter ego as a movie company has seen better days.

Sony achieved a group net profit of 226.4 billion yen ($2.04 billion) for the three months ended in June, the company reported Tuesday. The bottom line soared 180% from a year earlier as sales climbed 5% to 1.95 trillion yen. Operating profit jumped 24% to a first-quarter record of 195 billion yen.

The company said it raised full-year sales guidance by 300 billion yen to a 1% gain of 8.6 trillion yen. Sony also ditched its projection of a profit decline for the year in favor of a 2% increase in net income to 500 billion yen.

"It was a reasonable start," Hiroki Totoki, the chief financial officer, told reporters Tuesday.

Sony's semiconductor business maintained its solid performance, allowing the electronics segment to be profitable. But the biggest reason for the earnings upgrade played out in the entertainment division, particularly video games. Operating profit for the gaming segment nearly quintupled on the year to 83.4 billion yen during the first quarter. The company now expects to sell 17 million PlayStation 4s in fiscal 2018, a million-unit upgrade from April's forecast.

The music segment also is humming along. The subsidiary handling that business, Sony Music Entertainment, reports growing revenue from mobile games. Both gaming and music are generating operating margins in the upper teens.

But festering beneath Sony's rosy earnings figure is the pictures segment, which logged a 7.6 billion yen operating loss during the quarter. The movie business is an iffy trade since earnings are swayed heavily by unpredictable hits. That said, "Sony ranks in the top three globally when it comes to games and music, but with films it's different," remarked Yasuo Imanaka at Rakuten Securities.

Sony's late co-founder Akio Morita, looking to strike a balance between electronics hardware and entertainment "software," purchased Columbia Pictures Entertainment in 1989, overcoming strong resistance in the U.S. against a Japanese buyout of a Hollywood studio.

Cast member Dwayne Johnson and Lauren Hashian attend the Hollywood premiere of "Jumanji: Welcome to the Jungle," one of Sony's few box office hits last year.    © Reuters

Columbia, later rebranded as Sony Pictures Entertainment, went on to produce hit movies like the "Spider-Man" and "Men in Black" series. But Sony, which was the top grosser as recently as 2006, remained in fifth place last year among major Hollywood companies for share of box office receipts.

While Sony hits a slump, blockbuster mergers at American media companies are going into high gear. A federal judge in June approved AT&T's $85 billion takeover of Hollywood runner-up Time Warner. On Friday, shareholders for both Walt Disney, the industry leader, and fourth-ranked 21st Century Fox signed off on a $71 billion deal transferring Fox's film and television assets to Disney.

The value of either transaction surpasses Sony's entire market capitalization of roughly $69 billion on Wall Street.

Third-place NBCUniversal is already part of cable provider Comcast, making Sony the lone member of the top five not part of the recent flurry of mergers. "We wish to ascertain the types of opportunities to be had amid the industry reorganization," Totoki said.

The movie business is entering an era where scale is increasingly crucial. The cost of making one film has grown by leaps and bounds, so studios must develop a diversified lineup to spread the risk. The media landscape once dominated by the big screens and television has spread to smart devices, fragmenting the audience. Without a wide scope of content, a studio could lose viewers.

Furthermore, Netflix and Amazon.com have emerged as rivals, pouring resources into producing original content. Disney will launch its own online streaming platform next year.

But Sony is not sitting idle. The group last year hired Tony Vinciquerra away from Fox to install him as chairman and CEO of Sony Pictures Entertainment. The unit also is instituting reforms, such as a leaner management team. Those reforms have yet to bear fruit, because a film's release typically comes three years after planning begins.

Last year's "Jumanji" film became a global hit, and a new "Spider-Man" movie is in the works for next year. Yet the web-slinger alone cannot rescue Sony.

Losses by Sony's pictures and mobile phone segments have become a drag on a group busy rebuilding its TV and camera businesses. Smartphones racked up over 30 billion yen in impairment losses for the fiscal year ended March 31. "Sales in Europe and Japan fell more than we originally anticipated," Totoki said.

The time appears ripe for a business deal involving Sony's pictures segment. President Kenichiro Yoshida says a company's ambitions should be tied to those of the founders. If Sony wishes restore the film business and fulfill Morita's aspirations, only a few options appear available.

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