Alarm bells come too late for Sony Pictures

The memo Sony Pictures co-chiefs Michael Lynton and Amy Pascal sent to employees Monday announcing massive layoffs, most of which will fall in the home entertainment and IT divisions, obviously wasn’t meant to be made public. But it’s fitting that it was leaked when it was, the same day that Bernstein Research analysts Michael Nathanson and Peter Choi published what amounted to an obituary for packaged media as a profit driver for Hollywood.

According to Bernstein:

  • For 2009-2012, we [previously] forecast overall U.S. home entertainment industry revenues to decline at a -2.1% CAGR. This underscores the mature nature of the industry, plus the importance of share gains for individual players. Over this time frame, aggregate operating profit declines of low single digits are also expected.
  • Now one year later, looking at the cold hard facts of 2009, retail spending on sell-through DVDs and Blu-Ray discs dropped by -18% while rental of these products actually increased by 4%. As a result, the sell-through of physical discs declined from 63% of the market to 57%.
  • This massive change in behavior continues to have negative implications for studio profitability as every home video executive would rather book the $16 of profit contribution per transaction from selling a disc vs. the $3.50 to $1.40 per disc profit contribution from rental.
  • [snip]
  • Our analysis also shows that the Blu-Ray format is having a more modest acceptance rate that traditional DVD. In 2009, three years after its introduction, Blu-Ray’s penetration of TV households stood at 4.4%, compared to 13.0% for DVDs in 2000. We also find that Blu-Ray [sic] has seen lower numbers of titles shipped per converted household relative to DVD. We don’t see Blu-Ray stemming the decline of physical sales.

It’s that “massive change in consumer behavior,” according to Lynton and Pascal, that now forces Sony into “hard” decisions and “difficult” steps:

In our article in The SPE Reel in December, we spoke about the shifting landscape of entertainment and its impact on the economic model at the heart of this industry.  Despite the records our studio set at the box office, we’re not immune from these forces, and we said then that costs needed to be controlled as part of a sustained and strategic effort to remake Sony Pictures for the future.

[snip]

Today, we want to let you know, in a timely manner, what will be involved in the crucial – and difficult — next phase of this process.

In several stages, we will have a workforce reduction, with most of the notifications taking place by the first week in March.  It will affect each of the studio’s divisions, with the majority occurring in home entertainment and IT, and in the United States.

[snip]

The decision to take this step was difficult.  But it’s being done in the context of a strategy designed to help us safeguard our competitiveness and chart our own course through these troubled waters.

The need is clear:  from the growth of online piracy, to the social media effect on the performance of films, to the way people have changed how they watch television and acquire DVDs.  The business is going through a rough period of trial and transition, and we have an obligation to take the steps necessary to get through it.

According to Sony Pictures Home Entertainment president David Bishop, the studio is at risk of falling victim to forces “outside of [its] control” if it doesn’t act now, as he said to employees last week in his own memo:

Our choice is simple – we can make strategic choices today to direct the evolution of our business, or be overwhelmed by changes that are imposed on us by forces outside of our control.

We’ve chosen to act now to meet the shifting demands of a fast-changing marketplace. We’re building a new operating model that will streamline decision-making, increase accountability and innovation, and focus on strategic and analytic thinking.

[snip]

Emphasizing our new business model’s focus on innovation, John Calkins will transition from his current role in SPE Corporate Development to a newly-created position within SPHE as Executive Vice President of Global Digital and Commercial Innovation. This new team will focus on developing and implementing strategies to maximize new technologies.

Better late than never, I suppose, but “forces outside of our control”? Like what? Piracy? Some,certainly, but how much “piracy” has resulted from the studios’ failure to respond effectively to reasonable consumer demand for content portability and format transparency? How much time have they wasted suing Kaleidescape instead of figuring out how to take its secure personal copying system industrywide? Yes, I know the case was about the CSS license, blah, blah, blah. But that was never more than an attempt to evade the real issue: personal use copying.

The shift in consumer behavior toward rental? That was a function of wholesale pricing and the consumers’ perception of value, which are entirely under the studios’ control. If 40,000 supermarkets in America were selling new release DVDs for $8.99 by the checkout counter, how many consumers do you think would be lining up at the Redbox kiosk in the parking lot? How many supermarkets do you think would let Redbox on the premises?

Don’t believe me? Then how is it the studios were previously able to alter consumer behavior from rental to purchase when they introduced the (comparatively) low-priced DVD to replace the high-priced VHS cassette?

Digital? The need for a viable post-DVD digital strategy has been blindingly obvious for most of the past decade. But instead of focusing on that existential challenge, the industry wasted four years on Blu-ray, an absurd format that addressed no identifiable consumer demand that could not have been met years earlier, more cheaply and with less consumer confusion with readily available alternatives, like HD DVD or even red-laser DVDs.

The industry is still wasting time and resources trying to invent uses for Blu-ray to justify the time and cost sunk into it.

Hitting the snooze button when the alarm goes off doesn’t mean that what happens in the meantime is beyond your control. It means you’re asleep.

13 Comments

  1. This article offers pure wisdom about the past mistakes, current dismal outlook and likely steadily downward fate of the home video (and, by extension, the entire motion picture) industry. Likely that is if the people running the business do not wise up to their past head-in-sand errors, and their fatal attempts to preserve old business models–and old profit margins–in the face of sweeping technological, consumer behavioral and indeed societal change. If Sony has gotten the message, that is indeed good news, as their role in pushing Blu-ray for purely selfish corporate reasons shoulders a big measure of the blame for today’s declining state. But the other studies are more to be faulted for stupidity than greed in following Sony’s lead. As someone who has been directly involved in nearly every aspect of the home video industry since the first VHS (and Beta-max) cassettes were shipped to retailers in 1980, our industry should be ashamed that a journalist–even one as perceptive as Mr. Sweeting–seems to be far more aware of how we got into this mess than the people running the business. Now the industry needs to address–urgently–how to reverse these alarmingly negative trends.

  2. Let’s see. Sony is the company which tried to pwn everybody’s computer by loading rootkit software into CDs. They are a leading voice in an industry which wants to abolish the right to a fair trial, the right to face one’s accuser, and any semblance of the rule that you *don’t* hold third parties responsible for the behaviors of others. (See “three strikes” policies.)

    And I’m somehow supposed to *weep* here?

  3. Maybe if Sony were to innovate on a new, incompatible media format, then they could resurrect their home entertainment business.

  4. It’s always easy to beat up on behemoths, especially when most people saw the writing on the wall and responded a year or two ago.
    Still, I have to say the most telling part of Sony’s situation is that they are laying off a ton of employees but, promoting a manager!
    I believe in management but, in the end, you need tons of workers to get stuff done. Innovation comes from the guy sitting in front of his computer with a good money saving idea or revenue generating idea. Don’t get rid of him! Find him and get him to give his good ideas to you!
    Follow the model of pharmaceutical or chemical companies. They live for innovation in the ranks. Good luck to Sony! It’s a great place.

  5. “social media effect on the performance of films”

    What does that mean? “If we make crappy films, people realize it and tell their friends not to go see them”?

  6. Kim :“social media effect on the performance of films”
    What does that mean? “If we make crappy films, people realize it and tell their friends not to go see them”?

    Yeah, damn these people finding about crap movies before they part with their hard-earned!

    Excellent post, btw. There is a general point here about the organisational lethargy of cultural enterprises signalled by a single word (in the comments quoted in the original post): obligation.

    Lynton and Pascal express their ‘obligation’ to respond to the challenges of digital culture rather than expressing what should be an ‘opportunity’ to produce new revenue streams. I have found that many managers and owners of cultural enterprises from the print industry are likewise seemingly confounded by the now-decade long impact of digital culture and feel ‘obligated’ to finally respond. I am not sure if it is a lack of vision or just a very human anxiety about ‘new’ ways of doing business that produces such slow-reacting management teams?

    The sleep button/alarm clock metaphor is a good one! I shall borrow it!

  7. Here’s the problem on a very basic consumer level…Sony are F’ing themselves with Blu-ray…after being squeezed repeatedly with DVD, people are simply not prepared to pay all over again for blu. I was very tempted to by a PS3 (which Sony have been bundling with a dual digital TV tuner at a good price for favored retailers) but then ( realised all my Amazon bought discs wont play in it…we’re too used to region free players to be manipulated by this region rubbish and pricing. They think because they can control the game market they can do the same with films. It simply wont work.

  8. So, in the 80’s Sony held the superior picutre Betamax (with less record time per tape) vrs. VHS with ok picture and 8 hrs tape time in very low resolution.
    Betamax dies. Now Sony has the higher resolution Blue ray with over DOUBLE the
    cost of std. DVD (which can usually upconvert with most cheap DVD players to decent
    pic. quality. Rentals, streaming downloads and a little piracy for several years time are just NOW being seen by their exec’s? Remember the past SONY…just because your product is slightly better dosent mean it’s not doomed.

  9. sony = gm of entertainment
    the medium by which entertainment is distributed has passed sony by. to stay in the game, these corps must be nimble, i.e. apple, disney, hulu.

    and quantize, you’re an idiot. of course you can buy amazon bluray disks and play them in the ps3.

  10. @easypeasy: I think the reason quantize was saying his bluray/dvd discs won’t work in the ps3 is because they are of different regions. He probably has non-us region encoded bluray/dvd discs.

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