GOODBYE TO A PRODIGAL SON

By John Greenwald

EVEN BY HOLLYWOOD'S STANDARDS, Michael Schulhof was a notoriously big spender. As the chairman of the U.S. operations of Sony Corp. and protege of company founder Akio Morita, Schulhof set out to build an entertainment empire that would create movies, records and other "software" for Sony's hardware: TV sets, vcrs and gadgets of the future. He started slowly at first by acquiring CBS Records for $2 billion in 1987. The real spree began in 1989 when Schulhof paid $3.4 billion for perennial also-ran Columbia and its sister TriStar studios. He immediately spent some $800 million more to recruit Batman producers Jon Peters and Peter Guber, who had never headed a major film company, to run the acquisitions. Next, Schulhof popped for a $175 million make-over of Columbia's movie lot in Culver City, California, and threw in daily deliveries of fresh fruit and flowers to studio executives. Peters was forced out in 1991, and Guber followed three years later. With little more than a string of box-office flops to show for the spending, Sony had to write off $2.7 billion last year in one of the largest such charges for a Japanese company.

It was not until last week, however, that Sony finally removed Schulhof, the architect of its Hollywood dreams and the only American ever to sit on its board. With Morita sidelined since his 1993 stroke and unable to protect him, and new president Nobuyuki Idei, 57, clearly ascendant, Schulhof, 53, resigned after conferring with Sony chairman Norio Ohga, his remaining Tokyo mentor. Ohga "felt he had no choice but to support Mr. Idei," Schulhof told Time in an interview. "Therefore I could not stay here."

The ouster is the most dramatic move so far by Idei, a former marketing executive who was Ohga's surprise pick in April as president and heir apparent. In the past few months on the board, Idei persuaded Ohga, who has always been partial to Schulhof, that it was time for his protege to go. Like Morita and Ohga, Idei is a cosmopolitan blend of East and West. He speaks fluent English and French, loves gadgets and rock 'n' roll, and favors stylish Italian attire. A high-energy executive who has trouble sitting still, Idei navigates Tokyo streets in a Jaguar sports car. His vision for Sony goes well beyond Walkmans and vcrs to future generations of products that can combine the functions of TVs, computers and other gear, and draw information and entertainment from sources as varied as satellites, cable lines and the Internet. That vision, however, did not include Schulhof. Sony Entertainment will now be run out of Japan, not the U.S.

Schulhof, a physicist with a Ph.D. from Brandeis University, rose through the technical ranks of Sony's U.S. operations, where he caught the eye of Morita. "From the beginning, Mr. Morita and Mr. Ohga took a liking to me," Schulhof proudly recalls. For 20 years "there was a chemistry that worked. I talked to Mr. Ohga at least once a day and Mr. Morita once every three days. We operated in a collegial fashion. There was almost nothing in writing."

Armed with his broad mandate from Morita, Schulhof scooped up CBS Records and Columbia. "CBS asked, 'Are you authorized to sign this?' when we were ready to close the deal," Schulhof remembers. "It never occurred to to me that I needed authorization. Mr. Morita had to fax it."

The good times ended with the arrival of Idei, who kept a tight watch on his American subordinate. Says Schulhof: "I have received many, many written memoranda in the past six months from Mr. Idei outlining his views of how I should do things. Stylistically, it was not something I was used to dealing with." Schulhof concluded that his mandate to meld entertainment and electronics was over. "He's truly a visionary," says a former Sony executive. "He bet the ship that profits would ultimately come from this concept, but it didn't work in the short term. Was he a good manager? No. He was totally unable to make it happen."

There was little sympathy for Schulhof in Hollywood, where fellow moguls delighted in the downfall of a rival who was widely regarded as an interloper. Schulhof, the buzz said, may have been in Hollywood, but he was never really of it. Schulhof added to Sony's Hollywood expenses with the corps of studio chieftains who came and went at TriStar and Columbia, often departing with golden handshakes. Guber reportedly left with $40 million and a $200 million agreement from Sony to back him in a new company, an arrangement that was said to have infuriated Idei. A Hollywood executive summed up the prevailing view of Columbia as a place filled with "huge, bloated hogs feeding at a trough." Schulhof, who could take home a severance package worth some $40 million, dismisses the porcine image. "There may have been some overspending," he concedes, "but it was not excessive. In the last two years, we made a very, very concerted effort at cost control. We've had three consecutive quarters with great results, and we should have a fourth." He insists that his ouster "was not about performance." His biggest failure, Schulhof says, was "not being able to work with Mr. Idei."

The shake-up inspired talk that Sony (1994-95 sales: $44.8 billion) might now follow the lead of fellow Japanese giant Matsushita, which sold control of MCA and its Universal Studios to Seagram last April for $5.7 billion. "The real significance of Schulhof's ouster is that it is the last nail in the coffin of synergy between hardware and software," says analyst Porter Bibb, who follows the entertainment industry for the firm Ladenburg, Thalmann. "You can count the days until the movie business is sold."

But while Sony may be at a crossroads, the company staunchly denies having plans to leave Hollywood. Idei has stressed the importance of both entertainment and electronics to the future of Sony. He hammered home the point again last week in a statement declaring that "there is a definite linkage of hardware and software. Our companies will work together to maximize our business opportunities. That's Sony's big advantage." To further buttress this notion, Idei said, the heads of Sony's U.S. film, music and electronics businesses will for the first time sit together on the executive committee that oversees the company's American operations.

Sony's big problem, however, is that it risks losing its role as a leading-edge producer of electronic equipment. It has fallen behind Time Warner and Toshiba in the race to set the standard for a successor to the videocassette player called the digital video disc, which offers sharply improved picture quality. And some experts are scathing about Sony's plans to develop its own brand of personal computers with chipmaker Intel. Says Bibb: "The profits are going to hell in the PC market."

Whether Idei wins his hardware bet remains to be seen, of course. But Sony continues the lavish spending on software that Schulhof charted. Last week Variety reported that TriStar agreed to pay Tom Cruise $20 million up front to star in the comedy Jerry Maguire. It was the third $20 million payday that Sony has recently served up to top Hollywood talent.

--Reported by Sam Allis/Boston, Patrick E. Cole/Los Angeles and Edward W. Desmond/Tokyo

With reporting by SAM ALLIS/BOSTON, PATRICK E. COLE/LOS ANGELES AND EDWARD W. DESMOND/TOKYO