MGM Puts a Content Crown on Sony


By Ronald Grover The deal was three years in the making. Back in 2001, Howard Stringer, chairman and chief executive of Sony of America (SNE), thought he had hit the jackpot. Secretly negotiating with MGM (MGM) Chairman Alex Yemenidjian, Stringer had agreed to merge Sony's U.S. movie studio with MGM in a slam-bang deal that would have created Hollywood's largest collection of movies and TV shows. The symbolism of the deal being made at a wedding attended by both Stringer and Yemenidjian couldn't have been more potent.

"A content superpower," is how Yemenidjian described the new company he and Stringer envisioned. Indeed, it would be one able to stare down the gatekeepers -- the fast-growing cable and satellite companies that were hording the movies and TV shows they needed to populate their channels.

FIRST-CLASS FILMS. But a funny thing happened on the way to superpower bliss. Stringer took the deal back to the parent company in Japan and was turned down flat. The problem: In the complicated merger, Sony would have given up control, with MGM having 60% of the joint venture. Plus, the Japanese company told Stringer it wouldn't give him the money to buy MGM outright.

That was then. Flash forward to Sept. 13, 2004, when Sony announced a tentative agreement to buy MGM for $4.85 billion. In one of the most complicated deals in recent media history, Sony will become the content superpower that Yemenidjian and Stringer envisioned several years ago. No longer will Sony have the second-class status it has been saddled with since 1989 when it paid a $3.4 billion to buy Columbia Pictures, only to write down a staggering $3.2 billion five years later after a wild spending spree and a series of megabombs, such as overbudget remakes of Godzilla and Dracula.

Once this new deal clears federal regulators (expected to happen within a year), Sony will own a library of some 8,000-plus films, including a big chunk of all the movies Hollywood has made since the late '40s. Among its crown jewels: the lucrative James Bond, Rocky, and Spider-Man series, and such classics as Lawrence of Arabia and the The Bridge on the River Kwai. Sony would also own more than 43,000 hours of TV episodes, including everything from I Dream of Jeannie to Seinfeld.

BROADBAND LIFEBLOOD? "Content was the essential element in the age of Sophocles," Stringer said in a recent speech in London. "It's no less essential in the age of Harry Potter. Only the marketing has changed." Indeed, content is the lifeblood of cable and satellite operators, feeding new-fangled technologies like video on demand and luring unsuspecting couch potatoes through the interactive gateway to the future.

It could also be the lifeblood of broadband, a not fully explored distribution model that may one day have folks downloading movies and TV shows to their Sony-made computers, handheld devices, and cell phones.

Considering that as a Japanese company, Sony is precluded from owning TV stations in the U.S., the untapped world of broadband represents a key part of Sony's 21st century strategy. And it might be a smart one. Last year, the company's electronics unit lost $339 million on all those PCs, DVDs, and other electronic products, while it made $339 million selling movies and TV shows and $650 million more selling video-game players.

SINGLEMINDED PURSUIT. The Sony game plan is to marry content and its electronic gizmos -- an effort at which it has yet to be successful. (Remember mini-disks, a big flop in the U.S.?) But once Sony is controlling all those those movies and TV shows, it might have a better chance to promote its new technology, such as Blu-ray, a second-generation high-definition DVD with far more capacity than existing DVDs.

"History will continue to prove that technology innovations, large-capacity data-storage mediums, and higher-speed distribution networks will only boost the value of Sony's digital-content libraries," Stringer said in another recent speech. "Whether we distribute our content via CD, DVD, cable, and satellite today, or repurpose it for high-definition displays or wireless distribution tomorrow, our networks, distribution, and devices enable us to financially mine our high-quality libraries for many years to come."

Any wonder why Stringer was so intent on winning MGM? For a while, it looked like Sony, the early bidder for billionaire Kirk Kerkorian's company, had fallen behind Time Warner (TWX). Sony was having problems keeping its coalition of private equity groups together. But at the last moment, Time Warner pulled out, most likely trying to keep its powder dry as it prepares to bid on bankrupt cable operator Adelphia Communications (see BW Online, 9/14/04, "MGM: Time Warner Leaves It to Sony").

ULTERIOR MOTIVE. Sony then increased its bid to $4.85 billion from $4.7 billion, with the help of Providence Equity Partners, Texas Pacific Group, and DLJ Merchant Partners. Sony is putting up only $300 million, with the private-equity funds putting up a total of $1.1 billion. The rest will be assumed debt.

As a kicker, Comcast (CMCSA) is expected to throw $300 million into the kitty to help ease Sony's cash burden. But Comcast has its own ulterior motive, as it wants to use Sony's treasure trove to power new cable channels. Even though the deal was just announced, Stringer is already reaping the rewards due a content superpower. Grover is BusinessWeek's Los Angeles bureau chief


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