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Sony to tighten control of US film unit
From the Financial Times of Mon, 22 Dec 2014 16:29:45 GMT
TOPSHOTS Workers remove the poster for "The Interview" from a billboard in Hollywood, California, December 18, 2014 a day after Sony announced it had no choice but to cancel the movie's Christmas release and pull it from theaters due to a credible threat. Sony defended itself Thursday against a flood of criticism for canceling the movie which angered North Korea and triggered a massive cyber-attack, as the crisis took a wider diplomatic turn. AFP PHOTO / VERONIQUE DUPONTVeronique DUPONT/AFP/Getty Images©AFP

Workers remove a poster for ‘The Interview’ after Sony announced it was pulling the film from cinemas

As the consequences of a massive cyber attack on Sony’s US movie studio were unfolding, an eerie silence fell on the group’s Tokyo office. Kazuo Hirai, chief executive of the Japanese electronics company, made no comment and all external communication was left to Sony Pictures in the US.

Management consensus seemed to be that this was an “American problem” better handled locally.

But the hands-off relationship between Sony and its entertainment arm appears set to change — and the straight-talking Kenichiro Yoshida, the group’s new chief financial officer, is behind the shift, according to people familiar with the matter.

Having been credited with taking the tough decisions to fix Sony’s struggling electronics business, his aim is to tighten the group’s oversight and risk controls for Sony Pictures Entertainment and all of the 1,300 units in its sprawling empire, the people say

Since Sony bought the US movie business in 1989, Sony Pictures had been run independently, with executives in Tokyo rarely intervening in the process of creating films — a realm deemed beyond their core expertise.

That autonomy seemed to be maintained even after hackers infiltrated Sony’s US computer systems last month, unleashing a trove of embarrassing materials — including details of executives’ salaries, unpublished film scripts, sensitive contracts and private emails about actors from Amy Pascal, the co-chairman of the studio, who later apologised for her remarks.

Last Wednesday, a further threat from hackers prompted America’s five largest cinema chains to decide not to show Sony’s movie The Interview, a comedy about an assassination attempt on North Korea’s leader. Sony Pictures Entertainment then cancelled the film’s US release.

However, Sony officials say Tokyo executives have been regularly briefed and updated on developments in the US, and all employees in Tokyo have been given fresh reminders about cyber security risks.

Directors discussed the cyber attack in depth at one recent board meeting, alongside other issues higher on the priority list, says one person familiar with the discussions. Executives expressed support for Ms Pascal and Michael Lynton, Sony Entertainment CEO, and “confidence” in their ability to handle the situation, the person added.

Analysts say Sony’s reticence about discussing the issue publicly is not surprising, considering the complicated nature of the attack, which the White House has called “a serious national security matter”. Sony officials also note that it would be premature to speak on the matter before investigation by US authorities and an internal probe are completed.

Given that the group expects an annual net loss of Y230bn ($1.9bn) this year, it also has more pressing problems to deal with, such as the restructuring of its struggling smartphone business. Even within the film division, the cancellation of a $42m movie is weighed up against total revenues of more than $8bn last year.

One Sony executive said: “The majority of the challenges the company faces are electronics and a greater proportion of the energy will be spent on that.”

Even so, analysts warn that the costs of cyber attacks will grow.

Withdrawing the film from cinema release and other contractual breaches will result in a $100m cost. Mark Rasch, a former federal cyber crimes prosecutor, estimates that the additional cost of hiring lawyers and forensic investigators is $1m. Sony then faces potential liability risks from former and existing employees upset by the release of private information, including their US social security numbers.

“Sony can withstand this,” Mr Rasch says. “This is not existential to Sony. But it’s a serious and devastating attack to their reputation and image.”

Before the cyber attack, Sony had started taking steps to strengthen financial controls over its movie and music arms. Following pressure from activist Dan Loeb last year, the company has increased its disclosure of financial performance at its entertainment businesses and implemented a wide range of cost cuts including lay-offs.

Mr Hirai had sought to increase dialogue between the company’s electronics and entertainment businesses — especially with Sony’s growth strategy depending more on the integration of content, including games, TV shows, films and music.

Now, Mr Yoshida, with his reputation for being “blunt” and “ruthless” when it comes to achieving targets, is aiming to accelerate that trend, according to people familiar with Sony’s thinking.

Macquarie analyst Damian Thong anticipates “a tightening of the risk management procedures, approval and oversight” — with more scrutiny expected over which films will be coming out of the studio.

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