Case 14: Sony Corp International Marketing of Services Sony has long been known for its innovative

consumer electronics products, such as pioneering Walkman. It is an international corporation, with 70 percent of its sales coming from outside Japan, and non-Japanese owners owning 23 percent of its stock. Sony manufactures about 20 percent of its output outside Japan. As of 1986 its sales mix was video equipment (VCRs) 33 percent, audio equipment (compact disk players) 22 percent, TVs (the Trinitron) 22 percent, and other products (records, floppy disc drives, and semiconductors) 17 percent. Sony has always emphasized R & D, spending about 9 percent of its sales on it. The Betamax Experience Sony has been facing increasing competition from other Japanese companies and from countries with lower labour costs, such as Taiwan and South Korea. Its strategy of inventing new, advanced-technology products and then waiting for the market to buy seemed to be faltering. Sonys biggest failure was the Betamax, however. Having invented the Betamax format for the VCRs, it refused to license the technology to other manufacturers. Betamax was high priced, and recording times were somewhat shorter than those of the competing VHS format, although quality of the image was better. Sonys competitors such as Matsushita (Panasonic), Hitachi, and Toshiba, all banded together around the VHS format. They licensed the format to any manufacturer who wanted it. Consequently, the total number of VHS sets produced and sold was far higher than the Betamax-format VCRs, which meant lower retail prices because of accumulating volume and resulting economies of scale. Also, far more Software was available for VHS format; that is movie producers were more likely to make home video copies of their films available for purchase and rental on VHS tapes. This further increased demand for VHS-format VCRs. The net result was that Betamax gradually faded, and Sony stopped its production in 1988. Rethinking Basic Strategy The difficulty in selling advanced technology coupled with the speed of imitation and the impact of lowwage country competitors led Sony to change its basic corporate strategy. The CBS/Sony Group Inc., a 5050 joint venture between Sony and CBS, Inc., has grown dramatically over a 20-year period to become an industry leader in the multi-billion yen Japanese music industry. It releases recordings in Japan, Hong Kong, and Macau, on compact disk and other formats, by popular Japanese artists such as Seiko Matsuda and Rebecca, as well as foreign artists. Sonys Diversification into the Entertainment Industry Sonys Diversification into the global music industry is, therefore, not unexpected. In January 1988 it agreed to buy CBS Records worldwide for 2 billion dollars. But subsequent moves have dramatically transformed Sony as it moves to become more a service company. Table 1 summarizes the major entertainment industry acquisitions made by Sony since 1988.
Table 1 From Electronics to Entertainment: Sony's Acquisitions since 1988 Date October 1989 September 1989 January 1989 January 1988 Company Acquired Guber-Peters Productions Columbia Pictures Tree International Country Music Publishers CBS Records Price Millions Dollars 200 3400 30 2000

The acquisitions themselves are large, totaling over 5 billion dollars, or about half of Sonys total assets. More interesting is the reasoning behind Sonys decision to acquire a slew of entertainment companies. A summary of the acquisition follows: CBS Records: For 2 billion dollars, Sony was able to acquire control of the worlds largest record company, CBS Records. CBS Records Inc., consists of CBS Records (Domestic), CBS Masterworks, CBS Records International, CBS/Sony, Columbia House, and CBS Musicvideo. The acquisition gave Sony an immediate international presence in the music industry. Traditionally selling music hardware, Sony was one of the worlds largest producers of CD players, tape recorders (including the phenomenally successful Walkman), and stereo TV. But all of these products were subject to competition because innovative ideas could be imitated and prices cut. Sony realized that being in the music business allowed it to take advantage of the entire installed base of compact disk players around the world, not just those it alone manufactured. Imitation was impossible because each musical performance was unique; however, managing such a creative business required great cultural sensitivity and use of local managers rather than predominantly Japanese management. The music industry is a fast growing business. In 1988 over 150 million CDs were sold in the U.S. alone, and there were over 11 million CD players in households. Columbia Pictures: The major attraction of Columbia Pictures was its large library of movies that continue to earn revenues every time they are shown in cinemas and on video around the world. Columbia also had a profitable TV production and syndication business. Thus, the acquisition gave Sony products to sell to owners of TV sets and VCRs in a manner analogous to providing music on record and tape for owners of CD players and tape recorders. There are two other reasons that Sony might have found Columbia Pictures attractive. First, TV in Japan is being liberalized, with a doubling in the number of TV stations and on-air time because of launch of satellite TV. There will be a sudden increase in demand for product, such as films and TV shows, to fill air time on Japans satellite stations. Sony will be in a position to supply such product for premium prices in yen at a time when demand will be increasing. The other reason is hardware related. Sony has been trying to establish its 8 mm camcorder format, again in competition with a VHS-C based format from competing Japanese producers. This standards battle is reminiscent of Sonys experience with Betamax. This time, however, Sony realizes the need to build the installed base. Hence it has licensed the 8 mm technology to other producers and is willing to manufacture the camcorders for sale by others under their brand names. Sony is thus making sure that the volume sales of 8 mm camcorder will be achieved, resulting in economies of scale and lower prices. The next step is to stimulate demand by making available a variety of movies in this format. Sony can do this by putting the entire Columbia Pictures catalog on 8 mm video, thus giving consumers a reason to buy the camcorder, which can also be used as a video player. This availability will be crucial to the success of Sonys newly introduced 8 mm video Walkman, a pocket sized portable colour TV set that will appeal to the extent that videos are available for use with video Walkman. Thus, with CBS Records and Columbia Pictures acquisition, Sony becomes one of the worlds major producers of entertainment hardware and software: record producer and CD player producer; a leading manufacturer of TV sets and an owner of a library of classic films. Guber-Peters Productions: When Sony purchased Columbia Pictures, it obtained a film library as well as a studio for film production. Columbia had gone through four producers in five years, however, and needed more capable film production management. The logical step was to take over one of Hollywoods most successful film production companies. Guber-Peters (G-P) (formerly Barris Productions), which had been responsible for Batman, one of Warner Communications all-time best selling films. In fact, G-P had signed a five-year exclusive agreement with Warner to produce movies on its behalf. G-Ps expertise lay in spotting hot properties, signing them, and then convincing major studios to bankroll the films and distribute them. G-P had a unique culture-specific talent for working in and with Hollywood, producing successful films for the huge U.S. TV and film audience. Sony acquired G-P for over 200 million dollars, or for about

five times G-Ps latest year revenues. The two key producers, Peter Guber and Jon Peters, received about 50 million dollars for their stock in G-P, a 10 percent stake in future profits at Columbia Pictures market value, and about 50 million dollars in total deferred compensation. Warner immediately sued Sony for acquiring G-P. Warner refused to release Peter Guber from a long term contract. Of course, Sony and Warner ultimately settled out of court, exchanging valuable assets such as a share of the movie studio, video rights, and so on. Clearly, Sony wanted the management talent, Americans who knew Hollywood and could hire the right people, had the appropriate financial and creative contacts, and, most important, knew how to make hit films. Tree International: Sony also acquired, through CBS Records, the ownership of Tree, the premier country music publishing company. The ownership of rights to several generations of hit country songs guarantees a steady stream of revenue, especially as the catalog becomes popular around the world and in Japan through Sonys music and video production divisions. This is a minor acquisition, but it may point to a trend toward acquiring other music publishing companies as a means to further control the software end of the entertainment business. Sonys Future Looking to the future, Sonys heavy involvement in new hardware technologies such as advanced highdefinition TV, computer workstations, and compact disk interactive technology will require further research and development; but their acceptance by consumers will depend equally on availability of software products that showcase the new hardware products. Sonys long-term plans focus more on services and entertainment; paradoxically, this will help it to become a stronger hardware company and to reduce risk by smoothing revenue fluctuations and providing the stability of recurring earnings from sales of music, film, and videotapes.