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Media Colossus


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MEDIA COLOSSUS

He's the highest-ranking American at Sony, so it's expected that Michael P. Schulhof would have an office packed with high-tech toys. "Come have a look," he offers. In a massive wall closet behind his desk are rows of the latest Sony machines: digital-audiotape, laser-disk, and compact-disk players, and plenty more. But it's an IBM machine that Schulhof singles out for show-and-tell. The computer is tied into an on-line program called Aviation Weather Service. An avid pilot, Schulhof uses it to check wind currents and temperatures at altitudes thousands of feet above ground. Sometimes he signs on when he's not planning a trip--just to peek at what's developing up there.

It's a fitting pastime. As the man charged with overseeing Sony Corp.'s entertainment operations, Schulhof, 48, must anticipate the winds of popular taste--and make sure Sony is there with a product to please. The Japanese electronics giant, armed with one of the best-known brand names in the world, is bent on building a media colossus so it can deliver what Schulhof calls "total entertainment." That is, Sony wants you to buy videos, laser disks, and 8mm cassettes of its movies and play them on its VCRs, laser-disk players, and 8mm players. Don't forget the soundtrack: Sony hopes you'll buy it and play it on your Sony CD player.

Schulhof, who goes by "Mickey," is spending heavily to get there. In 1988, he engineered Sony's $2 billion purchase of CBS Records Inc. The year after, it was the $3.4 billion acquisition of Columbia Pictures Entertainment Inc., which includes two film studios, a television unit, and the Loews theater chain. But that still wasn't enough. Schulhof's latest move, announced Feb. 27, is the creation of an electronic-publishing arm to sell electronic games and all manner of "multimedia" software, which delivers sound, images, and text on computer.

'IMPORTANT ERA.' Hardware-software combinations may well be the future of electronics companies. Already, formidable Matsushita Electric Industrial Co. has followed Sony's lead by buying MCA Inc. "We are coming upon a very important era," says Sony CEO Norio Ohga. "It will no longer be enough to concentrate solely on hardware."

But the stakes for Sony and Matsushita are huge: Multibillion-dollar investments push the electronics concerns into the ring with some of the world's fiercest media titans, including Time Warner Inc. and Germany's Bertelsmann. And one could argue that Sony isn't particularly well-armed. Columbia's film studios are far from Hollywood's elite, and Sony Music Entertainment, which changed its name from CBS Records in January, while more respected than Columbia, has been dragging domestically.

Until late last year, Schulhof's role in shaping Sony's new direction was mainly that of property scout and dealmaker. But with the new acquisitions, his power has grown markedly. In December, Tokyo-based Ohga gave his chairman's title at CBS Records to Schulhof. Sony also elevated Schulhof from president of its U. S. company--which includes electronics, music, and film--to vice-chairman.

The most significant title was yet to come. In January, Sony created a new U. S.-based company, Sony Software Corp., that put film, music--and now electronic publishing--under one umbrella. Schulhof was made president. His mandate: to oversee the activities of the new entertainment giant, whose approximately $5 billion in revenues for the year ending Mar. 31 will represent roughly 20% of Sony's estimated $27 billion worldwide. As part of that, Schulhof must call upon his technological expertise to help him dream up new ways for Sony to use its entertainment properties to help sell electronics. It's hard to imagine a more unlikely entertainment mogul than Schulhof. After starting as a physicist at Brookhaven National Laboratory on Long Island, he has spent virtually his entire working life in technical jobs at Sony. He is known as a careful, analytical thinker. He has a proper manner and a precise, controlled delivery--the antithesis of the garrulous, gossipy personalities running many entertainment properties. "He's not a schmoozer," says Allen Grubman, attorney for pop star Michael Jackson. "He's not rah-rah showbiz."

But being buttoned down in a world of open collars is the least of Schulhof's problems. Running a $5 billion-a-year entertainment empire will mean making intuitive decisions about public tastes that may not come naturally to an executive whose background is in electronics. Schulhof says he'll rely heavily on Columbia Chairmen Peter Guber and Jon Peters to run the film and television company. But the duo, whom Sony paid dearly to lure away from Warner Brothers Inc., have never managed a company as sprawling as Columbia, and Schulhof will need good judgment when making decisions about big-budget moves.

Schulhof has to put Sony's record business back in the groove, too. Last fall, Walter Yetnikoff, the legendary CBS Records president who built the company into a powerhouse, left abruptly. The resulting vacuum leaves Schulhof directly responsible for creating growth in times of cutthroat competition. Sony Music lost its No. 1 domestic market-share position in 1985 to Warner Brothers Records. Warner claims to have usurped the top spot worldwide, too, though Sony disputes that.

EMPTY CHURCH. At least Sony Software's newest addition--electronic publishing--isn't saddled with history. But after several years of industry pronouncements about the multibillion-dollar potential in multimedia software for the home, the market has barely materialized. Analyst Bill Coggshall of New Media Research calls it "a choir without a congregation." Schulhof aims to woo customers by bundling software with hardware that's less expensive than what is currently on the market.

To understand Sony's urgent push into entertainment, it helps to understand the Betamax fiasco. Introduced in 1975, Betamax was the world's first videocassette recorder for home use. But in the 1980s, rivals deprived Sony of its lead by uniting behind another format--VHS. Soon, many moviemakers weren't even releasing their films on Betamax, which left Sony high and dry. Says Schulhof: "We learned a lesson." That lesson: Without software, such as movies, there's no guarantee that you'll sell any hardware.

Nowadays, Schulhof and Ohga like to talk about "synergies" among Sony's hardware and software. For instance, Sony is releasing Columbia movies in the new 8mm format, which it hopes will fuel sales of its 8mm videorecorders and players. Columbia is also building a high-definition-television editing facility on its studio lot. HDTV equipment is particularly useful for adding special effects, and Sony has welcomed other studios to use it. As the leader in HDTV equipment, Sony will benefit if Hollywood gets hooked on the technology.

Synergies also work among software units. Schulhof says Sony Music artist Michael Jackson is about to enter into a "much more synergistic relationship" with the company. The singer has already signed to do a movie with Columbia, and he could turn up on anything from electronic games to television shows--though Schulhof won't specify.

Nice as the strategy sounds, some doubt that the synergies will work as Schulhof imagines. Lou Kerner, a financial consultant to the film industry, notes that with only a slice of the box-office total, Columbia lacks the leverage to make or break a new technology. "Someone with a 10% market share can't dictate where the market goes," he says.

Others suggest that the double emphasis on electronics and entertainment could spell trouble. If Columbia were to lose $25 million on a dud, as it did on Ishtar in 1987, resentment could flare up, especially since only a fifth of Sony's revenues come from software. And the vastly larger salaries earned by top film and music executives will likely raise hackles among their hardware colleagues. "Down the road, some conflict between the software and hardware parts of the business will happen," warns Michael Dornemann, chairman of Bertlesmann Music Group.

'TRANSLATOR.' Schulhof's position at Sony has much to do with his ability to bridge two other realms: American and Japanese cultures. Schulhof and CEO Ohga have an unusual rapport. Schulhof doesn't speak Japanese, but Sony Deputy President Ken Iwaki says Ohga, who is fairly fluent in English, refers to him as "my translator," for his ability to jump in and elaborate on what he says. Schulhof says it comes down to common interests: He and Ohga are both pilots and often fly together, and they share an interest in ham radio, art, and music. Schulhof's training also links him with Tokyo brass: More than half of Sony's board members studied physics.

The question of how much real power Schulhof has is hard to answer. He is not a member of Sony's five-man management committee, which makes key decisions. One entertainment-industry executive calls Schulhof a "conduit" through which Ohga controls American operations. Schulhof himself says he's in touch with Tokyo frequently--he phones Ohga daily. Iwaki calls him a "telephone maniac," adding that if the phone rings between midnight and 6 a.m., "I know it's Schulhof." But he says Schulhof's new assignment should be seen as a sign that Sony expects him to play a "very significant role" at the company.

Schulhof grew up in Great Neck, L. I., the affluent New York suburb where his parents settled after leaving Czechoslovakia and Germany in the 1930s. His brother Thomas says Schulhof was a reserved child, preferring his ham radio set and, later, flying lessons to sports or socializing.

Classmates at Iowa's Grinnell College remember Schulhof as precocious. "He gave the impression he knew a lot," says James Harrington, a fellow student who now teaches physics at Rutgers. "I found him a bit abrasive." In 1962, soon after lasers were invented, Schulhof chose a senior project involving the technology. "The rest of us didn't have any appreciation for what this was all about," says Harrington. As a postdoctoral fellow at Brandeis University, where he got his PhD in physics, Schulhof was chosen to work on a prestigious research project at Brookhaven involving magnetic-phase transitions. He stayed on two more years, publishing 27 papers in his academic years, including 17 while at Brookhaven. He also married while at Brookhaven, and he and his wife, Paola, have two teenage sons.

FAST TRACK. Schulhof says his ambition all along was to combine physics with business. A family friendship with then CBS Records President Clive Davis led to his first job in business, in 1971, as assistant to the vice-president of operations at CBS Records, which involved overseeing recording studios and manufacturing plants. In 1973, Davis introduced him to Harvey Schein, then head of Sony USA. Schein hired Schulhof as his assistant.

Because of his scientific background, "I thought he would fit in well with the executives in Japan," says Schein. And so he did. Schulhof moved quickly from one job to the next, running the dictating-machine division, magnetic-tape operations, and others. In the mid-1970s, Sony's reputation was hurt by the notion that when its machines broke, it was impossible to get them fixed. Schulhof built a new service structure. By 1981, Sony asked him to join the board of CBS/Sony, a joint record venture it had had since 1967.

Five years later, connections Schulhof had made in that post would turn Schulhof into a dealmaker. When Walter Yetnikoff passed the word to Schulhof in 1987 that CBS Records might be available, Schulhof, then vice-chairman at Sony Corp. of America, was ready to pounce. "Our mind was already made up," he says, meaning himself, Chairman Akio Morita, and Ohga. Schulhof negotiated with CBS for a year, which culminated in the biggest Japanese acquisition of an American company up to that point.

Buying a movie company proved more complicated. When early efforts to acquire MGM/UA Communications Co. got nowhere, Schulhof turned to Columbia Pictures. Schulhof had told Sony's Tokyo brass that Columbia's management was in such turmoil that he didn't want to buy it until he had managers of his own in place. So he enlisted Yetnikoff's help. Early in the game, they were turned down by superagent Michael Ovitz. By the fall of 1989, the two seized on the idea of hot producers Peter Guber and Jon Peters (page 74). Yetnikoff arranged a meeting, during which Schulhof and Guber discovered they were fellow hams. A deal was subsequently laid out for Guber and Peters to each get an annual salary of $2.75 million, plus sizable earnings incentives. Sony also later paid $200 million for the producers' publicly traded company, Guber Peters Entertainment Co.

Hollywood is still clucking over what Schulhof and his team did next. Just weeks earlier, Guber and Peters had signed a five-year contract with Warner Brothers. Originally, Guber and Peters' Sony contract included a provision that they had to extricate themselves from Warner before they could work for the Japanese company. But Sony chose to waive the provision. "It was the worst kind of stupidity," says one analyst, adding that it gave Warner a chance to "skin them." In October, 1989, Warner slapped Sony with a $1 billion suit seeking to block Guber and Peters from joining Columbia.

Schulhof settled the lawsuit but looked bad in the process. With little experience in Hollywood, he was suddenly pressed to make tough decisions about the value of various properties being swapped with Warner. In the end, he gave Warner a 50% interest in CBS Records' huge Columbia House video-and-record club, plus cable TV distribution rights for features, TV films, and miniseries made by Columbia. Sony also swapped Columbia's 35% interest in Warner's Burbank studio for a Culver City studio lot Warner owned.

At the time, several analysts valued the properties Columbia gave up at approximately $500 million. Schulhof disputes that strongly, insisting that the settlement cost Sony much less. "I understand why it is in Warner's interest to make the settlement look large," he says but adds that Sony is "satisfied" with the swap.

He has plenty of other worries at Columbia now. The industry consensus is that with its $3.4 billion price tag plus $1.5 billion in debt, Sony overpaid for the company, and with free-spending Guber and Peters in charge, it could drag Sony's earnings down. At a time when other studios are desperately trying to rein in costs, Columbia is paying $100 million to refurbish its Culver City lot. And a flood of high-priced executives has pushed annual overhead at Columbia from $200 million to $300 million in two years, industry executives say. That's not counting the estimated $700 million invested in film development. Columbia and Tri-Star Pictures have already launched several films with budgets estimated above $40 million (table, page 67). Another potential thorn is a lawsuit pending in connection with Sony's Columbia purchase. The class action, which names Schulhof as well as Sony, alleges Sony executives made "misleading" statements about efforts to buy Columbia, depriving some Columbia shareholders of a hefty stock-price premium. Schulhof declines comment.

He professes confidence about Columbia. Its television unit can be counted on to produce strong revenues from such shows as Wheel of Fortune and syndication of reruns. Schulhof says Columbia as a whole is turning an operating profit. And though he refuses to comment on specific cost runups, he says Sony can't expect to build a major studio without spending big. "We are in the business to take risks," he says.

He'll find plenty of those at the records unit as well, including spiraling costs. Sony recently granted Michael Jackson a contract that sets wildly high new standards for the industry. Besides an equity-participation agreement on many projects, he'll get $5 million up front for his next album plus about twice the royalties garnered by most performers, an industry executive says. All told, the contract is said to be worth at least $60 million. Sony is also creating a new company for Jackson so he can develop young talents.

BIG SHOES. A more immediate concern is finding a powerful manager to run the record company. Industry executives say Yetnikoff's increasingly volatile behavior in his final months at Sony alienated performers and made it necessary for Sony to push him out. Yetnikoff wouldn't comment, and Sony says he left voluntarily. Schulhof won't say when he'll replace Yetnikoff, so for now, he's relying on the chiefs of Sony Music's U. S. and international operations. Sony Music USA President Thomas D. Mottola is thought by some to have the inside track, but several industry executives say Mottola, a former manager, lacks the breadth necessary to run an entire company.

Succeeding with the new electronic-publishing business is a challenge of another stripe. Sony aims to build demand by making the necessary hardware more cheaply available and then exploiting its vast catalog of music and films to create entertainment and educational software. There's no guarantee that consumers will see a need for it, but analysts say Sony's hardware strength, linked to an ability to tap vast film and music archives, gives it a good shot. Says New Media's Coggshall: "The single company most likely to succeed in this business would be Sony."

Say, for argument's sake, that the strategy is a smashing success. How far would it propel Schulhof up the ladder? He doesn't pretend to know. But he has faith that Sony will figure out how to use him next. "Every time I thought I was getting stale," he says, "top management has always figured out another challenge." This time, there seems little danger of that happening soon.Andrea Rothman in New York, with Ronald Grover in Los Angeles, Robert Neff in Tokyo, and bureau reports


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