Special Report: Foreign Owners From Walkman To Showman

By Janice Castro

Back in the days when the only way to see a movie was to go to a theater, a handful of Hollywood film studios shrewdly bought cinema chains to showcase their latest hits. Last week Japan's Sony put a new twist on this Hollywood strategy by plunging into the movie business as a way of selling its expanding video technology. In the largest-ever Japanese takeover of a U.S. company, the electronics giant (fiscal 1989 sales: $16 billion) snapped up Columbia Pictures Entertainment, agreeing to pay $3.4 billion and assume $1.2 billion in debts. Coming less than two years after Sony's $2 billion purchase of CBS Records, the acquisition completes the transformation of the maker of Walkmans, televisions, stereos and videocassette players from gadgeteer to master showman. Sony now hopes to market American pop culture through leading- edge Japanese technologies in film, television and music.

The takeover may help inflame growing U.S. anxiety about foreign investment in American companies. Last week the U.S. Department of Transportation persuaded Alfred Checchi, who led a $3.6 billion buyout of Northwest Airlines, to reduce the participation by KLM Royal Dutch Airlines in the deal from $400 million to $175 million. DOT officials said they would also scrutinize plans by British Airways to invest $750 million in the $6.8 billion employee purchase of United Airlines. Transportation officials said one concern is that foreign investors might share inside knowledge about U.S. airlines with their own governments, thus undercutting U.S. negotiations with other countries over air routes.

Some entertainment-industry observers suggested that Congress should challenge the Sony deal as well. For one thing, entertainment is the second largest U.S. export industry (aerospace is first). Moreover, Pat Choate, an economist and author of a forthcoming book on Japanese involvement in U.S. politics, sees Sony as a company that zealously lobbies for its own interests and stands to gain substantial influence over U.S. public opinion. Just as overseas firms are barred from owning U.S. television stations because of the potential for spreading propaganda, Choate notes, limits should perhaps be placed on foreign ownership of Hollywood studios.

Yet Sony is only one of the foreign investors rushing to claim a stake in Hollywood. In the past year, Britain's Television South bought MTM Enterprises, Australia's Qintex Group reached an agreement to take over MGM/ UA, and Italian financier Giancarlo Parretti acquired control of Hollywood's struggling Cannon Group, an action-picture mill.

Columbia represents Sony's chance to become one of the world's largest producers of what the entertainment industry calls "software" (movies, video and recorded music). Built on chairman and founder Akio Morita's devotion to technical innovation, Sony is diversifying into cultural products as the patriarch, 68, gradually hands over control of the company to president Norio Ohga, 59, an accomplished musician. While electronic goods account for 84% of Sony's current sales, the addition of Columbia will give the company a 60-40 split between hardware and software. Says Gordon Crawford, a senior vice president at Capital Research, a Los Angeles investment firm: "Sony has seen , that the people who own the software make more money."

Sony believes it can help guarantee the success of new hardware by ensuring that potential buyers will have a plentiful supply of entertainment software to play on their new machines. After buying CBS Records in 1987, Sony swiftly began converting the vast CBS library of popular albums by such artists as Michael Jackson, Bruce Springsteen and Barbra Streisand to the booming compact-disc format. Along with the wave of CDs from other companies, the CBS discs helped boost sales of Sony CD players from 2.9 million machines in 1987 to an estimated 6.5 million this year. Sony expects its musical gold mine to give the same boost to its new digital audiotape players.

At the same time, Sony gave free rein to CBS Records chief Walter Yetnikoff, 56, to build the unit's creative output. "CBS always treated us like a stepchild, a little, dirty urchin," says Yetnikoff, "but Sony gives us respect. The important thing is, they like the artists and the business. They understand it's more important for me to take Bruce Springsteen's call than Norio Ohga's."

As the new owner of Columbia, Sony will control a rich library of 2,700 films, including such Best Picture Academy Award winners as On the Waterfront (1954), Bridge on the River Kwai (1957), Lawrence of Arabia (1962) and Gandhi (1983). The company hopes to use that collection to boost sales of its new 8-mm videocassette equipment.

Columbia's hot hand these days is in TV production, where it is a leading producer of network series. The studio has eleven such programs in production, including Who's the Boss? and Designing Women. The division has a library of 23,000 TV episodes from which Sony can pick candidates for syndication and videocassette sales. Columbia also owns the 820-screen Loew's theater chain.

Aside from a few major hits such as Ghostbusters, The Karate Kid and When Harry Met Sally . . ., Columbia's movie-production unit has been floundering for years. The most spectacular flop: Ishtar, the Dustin Hoffman-Warren Beatty desert lark released in 1987, which lost $25 million. Three top-management teams have come and gone since CEO David Begelman was forced out in 1978 amid a financing scandal. Coca-Cola, which bought the studio in 1982 and still controls 49% of its stock, fired British producer David Puttnam (Chariots of Fire) in 1987 after barely a year at the helm, during which he accomplished little besides alienating Hollywood's establishment. Dawn Steel, the current film chief, has had mixed results during her brief tenure, and her future is uncertain. Coke plans to plow its $1.2 billion profit on the sale into the soft-drink business, giving up on the large screen and moving back behind the snack counter.

While outsiders often have trouble adapting to Hollywood's insular ways, Sony appeared decisive and savvy last week. Columbia CEO Victor Kaufman and chief operating officer Lewis Korman announced that they would be leaving once the deal was set. At the same time, Sony said it agreed to pay $200 million to buy Guber-Peters Productions. One of the hottest producer teams in Hollywood, Peter Guber, 47, a former Columbia production executive, and Jon Peters, 42, who got his start as a hairdresser to the stars, produced Rain Man for United Artists and Batman for Warner Bros.

Sony reportedly hopes to put the two hitmakers in top posts at Columbia, but that courtship raises some knotty questions about how the two would fulfill their existing obligations. Guber and Peters recently renewed an exclusive five-year production agreement with Warner Bros. Already in the works under that contract are a sequel to Batman, a film adaptation of Bonfire of the Vanities and other projects. Sony's first creative challenge may be negotiating a deal under which rival Warner gets its hits and Guber and Peters are given a shot at jump-starting Columbia. Now that Sony has paid the price of admission, the company seems eager to see lights, camera and action.

With reporting by Seiichi Kanise/Tokyo and Elaine Lafferty/Los Angeles