Riddle me this, investors: What is the point of Sony (NYSE:SNE)?
Do people who purchase Sony Bravia TVs expect a better experience watching Wheel of Fortune and other TV shows and movies that the company produces?
Of course they don’t.
See, Sony — which has a consume electronics business and an entertainment side — has a business model that harkens back to the early days of the 20th century when the Victor Talking Machine Co. sold records of opera star Enrico Caruso along with its phonographs.
These days, companies don’t see the need to make both the content and means to disseminate it. That’s why Apple (NASDAQ:APPL) doesn’t own a music label or a movie studio along with its iTunes service. That’s also precisely why last year I argued that the pairing of Sony’s struggling consumer electronics business with a profitable entertainment operation doesn’t make much sense in today’s business climate.
Now, billionaire Daniel Loeb is starting to see things my way.
According to media reports, the investor — known for his successful moves in Yahoo (NASDAQ:YHOO) and Herbalife (NYSE:HLF) — wants to break up the conglomerate by spinning off the entertainment businesses. The New York Times is reporting that Loeb has acquired 6.5% stake in the Japanese company through his Third Point hedge fund, making it one of the company’s biggest shareholders. He has “signaled” that he would accept a spot on Sony’s board — whatever that means.
Regardless, the reason why Loeb is going through all this trouble is simple: Sony’s media and entertainment businesses are doing much better than its electronics operations.
Under the leadership of Norio Ohga, a former opera singer who helped invent the compact disc, Sony acquired CBS Records in 1987 for $2 billion. Two years later, Sony bought Columbia Pictures Entertainment for $3.4 billion. These businesses have helped Sony from a financial abyss in recent years.
In its most recent fiscal year, Sony Pictures Entertainment reported sales of $7.79 billion, an increase of more than 20%, thanks to hits such as Skyfall, a James Bond film, and The Amazing Spider-Man. The depreciation of the yen has helped as well.
Operating income rose nearly 50% to $509 million as well, while Sony and Columbia Pictures rank seventh in the domestic box office this quarter, according to Box Office Mojo. The movie business, however, ebbs and flows based on hits. Luckily, Sony also makes a fortune from its television business, which also includes the critically acclaimed drama Breaking Bad and Jeopardy.
Sales at Sony Music Entertainment were little changed at $4.69 billion while operating income rose slightly to $396 million thanks to hits from artists such as Justin Timberlake and Pink. Sure, data from Nielsen SoundScan shows Sony lagging behind Comcast’s (NASDAQ:CMCSA) Universal Music Group in all relevant metrics in the music business last year … but given the god-awful state of the music business, mediocre results like these have to be seen as a plus.
So compared with the rest of Sony, its operations in Hollywood are gems. In fact, management likes to point out how the steady cash flow from these businesses helps bolster the rest of its operations. See, Sony’s Products and Communications business and Home Entertainment and Sound both reported operating losses in the last quarter. The company’s Devices business swung to a profit thanks only to a one-time items.
Bloomberg News recently noted that Sony’s TV business posted its ninth straight unprofitable quarter. South Korea’s Samsung (PINK:SSNLF) outsells Sony in the smartphone market by a 7-to-1 ratio and earns more than triple the revenue of its rival in the flat panel TV business.
The dichotomy between Hollywood and consumer electronics is painfully evident to Sony’s shareholders, who have seen their stock value plummet almost 90% since 2000. Heck, in the last five years alone, it has shed 50% of its worth.
Investors had hopes that the company’s PlayStation 4 would help bring the company back the glory it once enjoyed in the gaming market. Unfortunately, the company has only give vague promises that the console would be ready for the upcoming holiday season, unnerving investors even more.
So in the end, Loeb is right — the entertainment side should be its own entity. But even if Loeb’s efforts are successful, the electronics side left behind will continue to struggle even under the most optimistic of scenarios.
As of this writing, Jonathan Berr did not own a position in any of the aforementioned securities. Follow him on Twitter @jdberr.