So Many Dreams So Many Losses

By Barbara Rudolph

The Sony Corporation of America did Hollywood better than Hollywood. In the company's postmodern Manhattan headquarters, designed for AT&T by architect Philip Johnson, the sushi bar in a private corporate dining room had a tiny stream running through its marble counter. The $100 million makeover of Sony's Culver City studio lot included pillars adorned with elaborate murals. A fleet of corporate jets sat in the hangar, and fresh cut flowers were delivered daily to executives. The corporate culture seemed to say that to pamper is to prosper.

Sony invested $5 billion to buy Columbia and TriStar Pictures back in 1989, propelled by a romantic notion that constructors of compact discs and , television sets could marry makers of music and movies. Last week Sony sobered up. The firm took a $2.7 billion write-off -- one of the steepest in Hollywood history -- on its money-losing film studio and reported a second-quarter loss of $3.2 billion. "If we didn't do it once and for all now, we would continue to face losses in our entertainment business," said Tsunao Hashimoto, Sony's executive deputy president. That was the practical assessment. Hollywood's goes something like this: "It is a Japanese failure of judgment and an American failure of management," says a major Sony investor.

But while Sony's disaster drew the harshest verdicts, other Japanese giants have been proving recently that their American investments have suffered from bad oversight, bad calls and bad timing. Last week Mitsubishi, which has an 80% stake in the Rockefeller Group, owner of New York's Rockefeller Center, threatened to default on its $1.3 billion mortgage, taken out five years ago when borrowing was easy. Matsushita, meanwhile, is locked in a struggle with the American executives who run MCA -- the film studio it bought for $6.1 billion in 1990 -- over the Americans' demand for more authority and investment capital. Last week the company reportedly hired Hollywood agent Michael Ovitz and media dealmaker Herbert Allen to help make peace and to "re-evaluate" MCA's assets; one option would be to sell a stake in the company.

Like their American counterparts, Japanese executives cheerfully overpaid for their late-'80s acquisitions. But the Japanese made another fundamental miscalculation, says Gary Saxonhouse, an economics professor at the University of Michigan: "They had a faith in American landmarks, a faith in American blue-chip names."

Sony's Hollywood foray began, as so many sour business deals do, with bold rhetoric and grand strategies. Norio Ohga, the part-time symphony orchestra conductor who has been Sony's CEO since 1989, believed in a "synergy" between Sony's core business, producing "hardware" such as VCRS and camcorders, and Hollywood's "software" -- movies. Owning a studio, Sony thought, would help give the company the clout to set the industry standard for the next generation of digital video technology. In the early 1980s Sony's Betamax format of analog videotapes lost out to VHS, so Sony was determined not be left behind again. But Sony's strategy turned out to be a mistake when the industry agreed last year to an open standard that no single company could monopolize.

Sony paid a daunting premium when it bought Columbia Pictures: 22 times the company's annual cash flow. But its bigger problem may have been a man, not a number: Michael Schulhof, president of Sony's U.S. subsidiary. A smart, capable 20-year company veteran with a Ph.D. in physics, Schulhof charmed his Japanese bosses with the nonconfrontational style to which they were accustomed. He was the only American to serve on the company's board. As a protege of both Ohga and Sony founder Akio Morita, he was given complete autonomy over the Hollywood operation even though he knew little about making movies.

To manage the studios, Schulhof quickly hired Jon Peters and Peter Guber, independent producers who had also never run a major studio. In retrospect, the amounts the Sony team spent verge on the hilarious. The company paid $200 million to buy the Guber-Peters company and gave the two men annual salaries of $2.7 million, as well as $50 million in deferred compensation. Sony then shelled out assets worth $500 million to settle a lawsuit that had been filed by Warner Bros., which had Guber and Peters under contract. "This was an obscenely expensive arrangement," says Porter Bibb, an analyst at Ladenburg, Thalmann in New York.

It was just the beginning. Ensconced in their lavish Thalberg Building suites, Guber and Peters continued on their spree, authorizing millions for antique furniture and fabulous parties. In 1991 Peters departed, but Guber kept signing checks. By 1993, though, the box-office picture was not pretty. The Sony studios scored a few hits during Guber's tenure, but nearly every one of their big-budget films was a failure, including Schwarzenegger's Last Action Hero (which is said to have lost at least $23 million).

With losses like that, it helps to have friends in the right places -- and Guber did. He and Schulhof became great pals, sharing family vacations in Spain. So entwined were the couples that for a time, Schulhof's son dated Guber's daughter. Guber was finally pushed out in late September, but he exited smiling. He reportedly pocketed $40 million in cash and received a commitment from Sony to invest an additional $200 million in his new production company.

But Guber may not be allowed to ride off into the sunset. Just last week former colleagues were accusing him of trying to poach several projects from Sony's development coffers, including an animal-rescue story called Elephants. And the Los Angeles Times reported that Sony is investigating the studio's accounting practices, although Sony denies this.

After years of minimizing his studio's financial problems, Schulhof decided that with Guber's exit it was time to come clean. He urged Sony to take a substantial write-off of its Hollywood assets. (The music and television operations remain big moneymakers.) Around the same time, Schulhof recruited Jeff Sagansky, the former president of CBS's entertainment division, to be his second in command. But observers wonder what role Sagansky has been playing as a long-term strategist. "He's a mystery to everyone," says a Hollywood agent. Though he may have helped save Sony Pictures, Schulhof may be too late to save his own job. "He has a grim future," comments one rival Hollywood studio chief. "He has publicly taken responsibility for Sony's condition, and he is the only human being mentioned in Sony's press release." Sony's Hollywood debacle also raises anew the question of who might succeed Sony chairman Ohga. At 64, Ohga came through coronary bypass surgery, but he has yet to designate an heir.

At Matsushita the Tokyo end of management seems in order; the trouble is between Tokyo and Hollywood. MCA's Lew Wasserman and Sidney Sheinberg -- the longest-running partnership in Hollywood -- have been heading the studio, but have openly complained that their pushes to go after CBS and to open a theme park in Tokyo were ignored. The Japanese firm is especially eager to keep the team intact since director Steven Spielberg, who made close to $1 billion for MCA with Jurassic Park, recently announced that he would stop working for the company if his mentor, Sheinberg, were to leave.

Across the continent, meanwhile, Mitsubishi is struggling to survive the New York City real estate bust, which saw commercial-vacancy rates rise from 8% to nearly 14% over the past five years. To reduce its interest expense, the Japanese company hopes to renegotiate the $1.3 billion mortgage it acquired in 1989. (That was the heady period when another Japanese firm, the Minoru Isutani Group, acquired California's famous Pebble Beach golf course for $840 million, which it sold at a 40% loss two years ago.) Mitsubishi threatened to default on its loan last week, which some analysts say was a calculated move. "They're figuring out that the way to get the banks to listen to them is to threaten bankruptcy," says a New York real estate analyst.

For the Japanese, there is probably a lesson in all these debacles about not + getting stuck on labels. But for Americans, there is also a cautionary tale in drawing pompous conclusions about the nation's economic security when a few Japanese companies invest in premier American properties. When the Japanese did just that in the late 1980s, investment banker Felix Rohatyn wrote, "What is at stake is not only the loss of our position as the leader of the Western democracies, but the loss of our independence of action both in economic and in foreign policy." Turns out it was just about making deals -- and perhaps not very good ones -- in the end.

With reporting by Sam Allis/Boston, Edward W. Desmond/Tokyo and Jeffrey Ressner/Los Angeles