AKIO AND NORIO'

When Sony spent $4.6 billion on acquiring their own Hollywood studio, they thought the venture would bring wealth, prestige and power. Like countless star-struck innocents before them, they were bitterly disappoint ed

IT IS a beautiful January day here in Culver City, west Los Angeles, the perfect day to wander the movie studios of Sony Pictures Entertainment. The security man waves as I stroll by; he must think I work here. I wish I did: such a relaxed atmosphere, such extensive facilities. I pass a pizza place, an ice-cream parlour, a shop selling leather jackets and tapes for the Walkman. I pass the Astaire Building, the Keaton Building, the Hepburn Building, the Tracy Building. This used to be where Metro- Goldwyn-Mayer was based, and it was here that MGM made The Wizard of Oz, Singin' In The Rain, Gaslight and Mrs Miniver.

From the top of the Capra Building, right by the gleaming offices of chatshow host Arsenio Hall, we may look down on the 30 sound stages on which the new Sony movies are in various stages of pre-production, post- production and production. We may look forward to such extraordinary visual treats as Johnny Mnemonic, in which Keanu Reeves plays a cyberpunk with a microchip in his brain, and The Quick and the Dead, in which Sharon Stone plays a rough-and-ready frontier woman with a dangerous proficiency with a six-shooter, and Mary Reilly, in which Julia Roberts is an innocent London housemaid who discovers that her handsome employer Dr Jekyll has a terrifying alter ego. There's something for everyone.

Such bustling activity might suggest great confidence on the Sony lot, but it is difficult to understand where such confidence could stem from. Sony Pictures Entertainment has recently registered a loss of $3.1 billion, and it is hard to see how remakes about Jekyll and Hyde can rescue the company from what may be the biggest disaster in movie history.

Alongside the shock of the loss - and it is still hard to comprehend how large a sum of money this is - most rival executives found it difficult to suppress a show of schadenfreude when news of it broke at the end of last year. The Japanese had bought up large chunks of Hollywood at the end of the Eighties - Sony bought Columbia and TriStar, Matsushita bought MCA-Universal - and some people had feared that before long all of the American entertainment industry would pass into the hands of foreign investors looking to expand electronics and media empires. There were terrible jokes about Pearl Harbour, the sequel.

Five years later, Matsushita has kept its head above water, but Sony's adventures in Holly-wood have been such a dramatic failure that there is talk that the company will soon admit defeat and sell its studios. Sony's experiences are the result of more than just financial mismanagement or bad luck, although there has been plenty of both; they are also the result of an unfathomable cultural divide from which we may learn many lessons. We may learn, for example, that there are clear practical limits to the ambitions of multinational media and entertainment companies; we may learn that the Japanese do not understand the American movie industry; we may also find that, given half a chance, the Yanks will take the Japs for all they're worth.

AT THE TIME of the birth of the domestic video cassette recorder, in the late Seventies, the Sony Corporation had good reason to feel confident. It had developed the Betamax, a system which, it could justifiably claim, was technically superior to the rival VHS format favoured by its long- term rivals Matsushita (whose brands include JVC and Panasonic). The machines and tapes cost about the same to buy, but all the boffins agreed that Beta looked and sounded better.

Yet Beta did not become the industry standard. Unlike its competitors, Sony had always been reluctant to license its technology for use by other manufacturers, and by the time the video rental market took off in the early Eighties it was the VHS system which was preferred in the vast majority of retailers and homes. Sony had assumed that because it had a superior product, it would have little trouble securing the licensing agreements it needed to place all the latest Hollywood films, and a vast back catalogue, on its format. It assumed wrong: most film studios were unwilling to license their films on more than one format, and when people visited their local video store they found the Betamax section to be only about a quarter of the size of the VHS alternative.

A system based on the Betamax format is still the favoured format for professional use. But by 1985 it was clear that Sony had lost the big prize. Defeat on this scale was something the multinational corporation was unfamiliar with, and Akio Morita, Sony's silver-haired co-founder and chairman, resolved that it would never happen again.

Despite his prominence, Morita - perhaps the only Tokyo businessman to be recognised in the West - remained something of an outsider at home. Businessmen were suspicious of his flamboyance; his wife was considered too outspoken. But now, aged 68, he was determined to earn the respect he craved. He could not know it then, but this resolution was to have expensive results.

Morita became enamoured with a new buzzword: synergy. This would come to mean many things, but for Morita it defined the ultimate relationship between software and hardware. This had little to do with computers. Rather, it was Morita's acknowledgement that in this booming era of satellite and cable communications, electronics companies would only find a market for their new gadgets if they had film stars and pop stars to put on them. There was no guarantee that the recent format war was a one-off dilemma, and it was clear that the victors of any future conflicts would be those companies that controlled the software.

For Morita there was another factor at play: hero-worship. Everywhere he went in Japan, he could see that the young people with the most disposable income idolised Western film and pop stars. The biggest faces on the hoardings were James Dean, Monroe, Schwarzenegger, Michael Jackson and Bruce Springsteen. There was no cultural isolationism here. The problem for Sony and its rivals was that their metal boxes created only a means to an end, and the end was in the United States and Europe.

In the mid-Eighties, Morita persuaded Sony president and heir apparent Norio Ohga that if the company "owned" an influential part of Western culture it would earn enormous kudos abroad, and such respect at home that its domination of the consumer electronics market would never again be in doubt. Ohga was a more restrained man than Morita and less impressed by pop culture, but even he had to admit that owning some of the dream factory might be rather fun. Above all, it seemed to represent a great investment: the value of entertainment companies - and the potential for expansion - was increasing at a colossal rate in this period. And so Sony's assault on America began.

The first stage was completed in 1987, when Sony bought CBS records for $2bn. For this, it gained one of the most impressive back catalogues in popular and classical music, as well as the current contracts of Jackson, Springsteen, Dylan and George Michael (a deal that would lead the British singer to the High Court).

Then, at the beginning of 1989, Morita began looking towards Hollywood. Under the guidance of Walter Yetnikoff, the garrulous chairman of CBS Records and a long-term friend of Ohga's, he talked to the agent Michael Ovitz, the most influential power- broker in the film business, about possible purchases. MCA was mentioned, as was Paramount, but both were felt to be too expensive.

Columbia Pictures Entertainment, on the other hand, which consisted of Columbia Pictures and its sister TriStar, was a company within Sony's price range. With it would come a back catalogue of about 3,000 films and 20,000 television programmes. The films included many of the best works of Frank Capra, David Lean, Fritz Lang, and Fred Zinnemann; hits included From Here to Eternity, On The Waterfront, Dr Strangelove, Lawrence of Arabia, even Ghostbusters. For Morita, the prospect of being able to say that he owned such gems promised limitless delight in the Tokyo boardroom, and a deal was done in October 1989. Within months, Columbia Pictures Entertain-ment had become Sony Pictures Entertain-ment. Sony paid $3.4 billion for the studios, and $1.2 billion in assumed debt. It was a high price, and most of the industry regarded it as far too high. The studios' previous owners, Coca-Cola, had bought Columbia in 1982 for $750m. Indeed, Sony would suffer the same fate as everyone else who bought property at the peak of the boom. The value of its assets decreased almost as soon as the deal was struck.

Founded in 1924, Columbia had never been one of Hollywood's wealthy studios; it has always been fitting that its original location was Poverty Row. At the time of Sony's purchase it enjoyed a 14 per cent market share, but was losing money almost every year. Variety, the Holly-wood trade magazine, ran its first ever Japanese headline: translated, it read "Buyer Beware".

If Sony had heeded the warning, it might have learnt valuable lessons from Columbia's past. Only two years earlier, the studio had made Ishtar, the Warren Beatty/Dustin Hoffman caper which involved miles of desert, and much singing. Ishtar cost about $40m to make, which in 1987 made it one of the most expensive flops in film history. But money seemed to be no object. There is a famous story of the search for a pretty camel that would carry Hoffman and Beatty across the north African desert. Two production scouts went to Marrakesh to buy said camel, and found what they thought would be a perfect specimen on the very first day of their quest. But they had an open cheque, and thought that it was too early to return to Los Angeles with the good news. So they didn't buy it, but spent days roaming among tribespeople looking for similarly fine camels. They couldn't find any that looked nearly so cinegenic, and so, having spent many thousands of Columbia dollars, they decided to return to the place where they had seen their first beast. "We'll take your camel," they told its owner. "Sorry," he replied. "We ate it."

This was a cautionary tale, for it showed one thing above all else - that the people in charge of a film studio have to display ruthless command. It may sound obvious, but there is so much conspicuous waste in the film business, and there are such massive egos involved, that a studio which operates without the tightest financial restraints can soon find itself in trouble.

But this was precisely the problem at Sony's newly purchased studio. Michael Crichton's novel, Rising Sun, had recently postulated a dire scenario in which an evil "yellow peril" was planning to dominate America, yet this appeared fanciful next to the Sony reality: the people in Tokyo didn't seem to be in control at all. Within months, there were patronising stories that Sony executives were so clueless as to the workings of a Hollywood studio that they viewed it as they might a domestic electronics production line: the more you make, the more you make.

SONY'S FIRST big mistake came with its first managerial appointments. The company had made it known in Hollywood that it was not interested in faceless, buttoned-down executives who would produce dull and unexciting products. What it wanted was stars.

The company's first approach was to Michael Ovitz. When he declined, Walter Yetnikoff advised Morita and Ohga to get his long-term friends Peter Guber and Jon Peters to run the show. These two were as flamboyant as movie executives got: their bouffant hair suggested they might be more at home in a Seventies night- club; indeed Peters was a former hairdresser, and had famously made over Barbra Streisand during their fiery affair in the Seventies.

At the time of Sony's approach in 1989, Gubers and Peters had developed what all of Hollywood craved: the mercurial art of picking winners. Batman and Rain Man were the latest in a long line of lucrative hits, and the Japanese believed they should obtain their services at any price. Certainly, they did not come cheap. In addition to colossal salaries, Sony had to spend about $600,000 to buy them out of the contracts they had recently agreed with Warner Bros. It appeared that the Japanese then gave Peters and Guber carte blanche to work as they wished.

Today, both Peters and Guber are prevented by the terms of their contracts from talking about their time in charge at Columbia. But this hasn't prevented other people from denigrating their performance. "As soon Jon Peters got the job," one Hollywood source told Vanity Fair in 1991, he "started sending empty Falcon jets to London at $30,000 a pop to pick up his girlfriend, and he put his girlfriend and his ex-wife on the Columbia payroll... and he redecorated the studio for another $100 million, and he ordered up sketches of Sonyland theme parks and took them around to everybody and tried to sell them on it." ("Of all the criticism of Sony, the one that's been really unfair is the bit about the refurbishment," says Peter Bart, the editorial director of Variety, who once worked on the lot as a senior vice-president for MGM. "Before Sony bought it, the lot was like Kobe after the earthquake." )

Peter Guber seemed equally adept at finding ways to spend money. There were rumours that he insisted that all key employees should have fresh flowers in their offices every day, "irrespective of wiltage". But under Guber, these employees would appear and disappear almost as fast as their flowers. There was great competition between Columbia and TriStar executives, and all reports suggest that there was seldom an atmosphere conducive to the creative process.

As their offices were being remodelled around them, Peters and Guber wasted no time in racking up the flops. It was remarkable how fast and how thoroughly their golden touch deserted them. Hudson Hawk, starring Bruce Willis, was a box-office disaster, and was soon followed by the $40m Bugsy, Spielberg's $60m Hook, and the $40m Geronimo.

Those were the films that were made. There were others we never saw. Shortly after Sony took over, the new bosses learnt that Milos Forman was contracted to direct a film that included sumo wrestling. For whatever reason, Sony said they didn't want a picture that involved sumo, so they paid Forman off in full. Peter Bart says that there was one condition to the pay-off. "I'm a friend of his, and I asked him about it, and he said, `Listen, they gave me $5m to shut up. I'm not going to talk about it.' " $5m not to make a movie? It would be a generous critic who did not conclude that Sony's priorities had become a little confused.

Over the years, Sony Pictures Entertainment did enjoy some more successful films: Sleepless in Seattle, Cliffhanger and Philadelphia. Indeed, Philadelphia was a rare example of consumer synergy: the film's hit soundtrack appeared on Sony Music records, and one Oscar-winning song was by Bruce Springsteen, a Sony artist.

But there were more recent disappointments too, including Wolf, I'll Do Anything, My Girl 2, Blankman, The Next Karate Kid, I Like It Like That, The Road to Wellville, and Kenneth Branagh's Mary Shelley's Frankenstein. Sony's policy was clear: churn out a lot of product in the hope that at least some of it will prove popular. The risks of this have become only too apparent, a direct result of the creative heads of the studio being more powerful than the financial ones. Nowhere was this more visible than on Last Action Hero, the Arnold Schwarzenegger would-be blockbuster that proved to be Sony's biggest catastrophe. This "movie within a movie" turned out, in one critic's famous phrase, to be "a movie without a movie".

Before Last Action Hero opened, Mark Canton, the head of Columbia Pictures (who reported to Peter Guber, the chairman of Sony Pictures Entertainment), claimed that he had tightened up the Columbia act. He had been appointed in October 1991, replacing Frank Price, one of the few Columbia executives with a reputation for financial prudence. Now, Canton told a Las Vegas convention in 1993, new financial strictures were in place. "We've stopped overpaying," the New Yorker quoted him as saying. "We used to say, `We want it, no matter how much it costs.' Now we've adopted the mantra of all well-run businesses: `We want it, but only if the price is right. Or if Arnold is in it.' "

Arnold was in it, but Last Action Hero, released in the summer of 1993, is estimated to have lost well over $100m, though some of this has now been recouped by video sales. Remarkably perhaps, the key players, Guber and Canton, remained in place (Jon Peters had left his management post in 1991, receiving several millions to establish his own development deal with Sony).

"Some of the mavericks at Sony have obviously cost the company so much money," says the producer Sarah Caplan, who recently made the Brad Pitt film Legends of the Fall for Sony and is perhaps best known in Britain for producing thirtysomething. "But ultimately this is what can happen when you employ mavericks. It's the way this town is set up. It's so hard to get movies made in the studio system, that the very fact that you got one made brings you some respect. It's not normally held against you that you made five flops."

Only when Last Action Hero failed did the alarm bells begin to ring. The Japanese found it hard to understand why so many movies they had been convinced would work - star actors, effect-packed action, just what everyone had been waiting for - had actually turned out to be stiffs. In 1993 there were reports of new money men arriving in Hollywood from Tokyo, but still nothing really seemed to change. The flops continued, and the cultural gulf between Hollywood and Japan seemed as large as it had ever been. Four years into their relationship, it was becoming increasingly hard to comprehend why Sony failed to curtail its miserable folly.

Rumours began circulating at the beginning of last year that 25 per cent of both the music and film companies were up for sale for $12bn. "Such an asking price was seen as laughable by any prospective purchasers," says one former Columbia executive.

"THE JAPANESE are probably congenitally incapable of managing a movie studio," says David Puttnam, who ran Columbia for a short while in the mid-Eighties. "That's not in any way to insult them, it's simply a result of the very ordered way their minds work. I think the Germans are likely to also prove incapable of managing a movie studio. For the same reason I've always been more surprised that Britain hasn't had a bigger investment in Hollywood, because actually we're very good risk investors. If you're in the shipping insurance business, you're in a version of showbusiness - it's all about informed risk assessment."

Puttnam is not a man to be surprised by the workings of the film industry, but he cannot understand why Sony still hasn't rectified its mistakes. "It need never have been ownership," he says. "It could easily have been a financial relationship based on guaranteed access to the Columbia back catalogue. If I was Mr Ohga I'd say, `Now just a minute, I never really needed to own a movie studio, I never wanted all those ongoing managerial problems in a situation that's almost uncontrollable. But with guaranteed access to a major library I could launch all the hardware initiatives I wanted.' Once you're inside and you see the chaos and the confusion it's inexcusable that a calm and ordered management doesn't sort its priorities out and make a long-term arm's-length deal.

"Within 18 months to two years this will have to be the emerging solution. It will be devised by some acute lawyer on Wall Street who'll earn several million dollars for doing it. It won't look like a sale, it will be an unbundling. The unbund- ling will involve Sony hanging on to the core rights they require, with future production and investment taken over by someone else, someone probably more competent or more nave."

My efforts to have such speculations confirmed or denied by Sony have proved fruitless. No one from Sony would talk on the record for this article, and polite requests to the corporate press office initially elicited the response that everyone in the entire corporation was too busy to talk; soon this became the blunter "We are not engaging with this story." Of all the companies Peter Bart deals with on Variety, he says that Sony are by far the least cooperative.

Perhaps such lack of communication has been part of the problem. Bart laments that the Japanese have made no effort to become an integral part of the creative community. "They're here, but there are no sightings. I'm sure there are number-crunchers, but no one really knows who they are or where they work, and that's clever. They are," Bart says without visible irony, "completely inscrutable."

IN NEW YORK, Sony synergy is proceeding as if the concept had just been invented. Sony Plaza, in midtown Manhattan, incorporates the Sony Wonder technology lab, the Sony bakery, the Sony news-stand and the Sony Signatures showroom (where you can place your wedding-list and see the latest products displayed in a Sony kitchen and a Sony living room).

A few blocks away, at Lincoln Square, is the showcase in the Sony cinema chain, where you may watch all the latest Columbia and TriStar releases. A new version of Little Women, with Winona Ryder and Susan Sarandon, is showing in Sony Dynamic Digital Sound, a new system which directors are now obliged to use if they wish to do creative business with the Corpora- tion. In the foyer you may purchase the book called Little Women, but it has fewer pages than the Louisa May Alcott original. This is a novel "by Laurie Lawlor, based on the motion picture screenplay by Robin Swicord". The copyright is owned by Columbia Pictures Industries Inc.

New York is also the home of Sony Music Entertainment, that part of the Sony empire that is making some money. It was here that George Michael came in October 1992 in a bid to settle a creative dispute.

Michael was not a synergy fan. He claimed that he was being treated as "little more than software... a small part of the production line", and that his long-term development was being sacrificed in the search for short-term profits. He went on: "Musicians do not come in regimented shapes and sizes, but are individuals who... evolve together with their audience. Sony obviously views this as a great inconvenience."

He was addressing Norio Ohga and Michael Schulhof, the overall head of Sony's operations in the United States. When they failed to see his point of view, the singer set in motion the longest and most costly dispute ever seen in the music business. He failed in his attempt to free himself from his contract in the High Court in London last year; his appeal is due to be heard in February 1996.

The news of Michael's complaint coincided with the launch in November 1992 of the MiniDisc, Sony's digital, recordable alternative to the cassette, with a sound quality comparable to CD. Its London unveiling was accompanied by dry ice and disco lights; excited executives kept calling it "the future"; Paul Russell, chairman of Sony Music Entertainment UK, called it "a sexy format that has a lot of sizzle on it".

To date, it has performed poorly in the West, and it is becoming increasingly hard to find pre-recorded discs in the shops. Partly this is because of cost (at launch, the machines cost about £400), but more significantly because it came up against the launch of Philips's Digital Compact Cassette (DCC), which, although it was a different format, none the less competed for the consumer's purse and the record companies' back catalogues. Philips owned PolyGram, and had secured a deal with MCA; Sony countered with Thorn EMI and the Warner Music group. And so the old nightmare repeated itself. But what could Sony do? The bulk of the record industry that it did not own was already owned by its competitors.

There are other format wars underway. In Japan, Sony has recently launched a computer games system in direct competition with those of Sega and Nintendo. And then there is potentially the most damaging war of all. The Digital Video Disc (DVD) is due to appear next year, and already there are grand claims for it. It will look like a CD, and will be able to play full-length films with a higher sound and visual quality than video tapes. As with regular CDs, there will be instant access and no need to rewind. These are unlikely to replace video cassettes for several years because of the high cost of domestic recording, but the low expected costs of pre-recorded DVDs, and the fact that they can store fives times as much information as current computer CD-ROMS, have led to claims that they will completely restructure both the home entertainment market and information storage systems. In a decade overcrowded with domestic gadgetry, this new technology represents a genuine advance.

But there are problems ahead. Toshiba has developed a rival DVD format, one incompatible with that favoured by Sony and its partner Philips (Sony and Philips jointly developed the audio CD). Toshiba has the backing of Time Warner, MGM, Hitachi, Pioneer and possibly Walt Disney. Two weeks ago Toshiba dealt Sony/Philips its biggest blow: it had also recruited Sony's old rivals Matsushita to its list of backers.

There are three conceivable outcomes to this battle. The competing formats may be standardised, although there are many technical obstacles to this; both formats may compete to the death; or - and this is considered increasingly likely - Sony/Philips might abandon its system. This would be a costly climbdown, and it would bring into question Sony's ability to launch successfully lucrative and significant consumer innovations. It might also make its purchase of the film studios appear even more of a superfluous blunder.

BACK IN Los Angeles, there are signs that last year's $3.1bn loss is finally having its effects. The film studio's loss included a write-off of $2.7bn (47 per cent of its declared value), an admission that Sony had paid too much for the studio in 1989, and an attempt to wipe the slate clean and begin again. Recent changes have included the merging of the marketing and distribution departments of Columbia and TriStar (resulting in the loss of 40 jobs), and talks of forming financial partnerships with other companies in an effort to share production risks.

There is growing speculation that soon even Sony's film business will be controlled from New York, at least financially, under the stewardship of Schulhof and Jeff Sagansky, a one-time TriStar executive who was recently recruited from CBS Entertainment.

Peter Guber left the Sony lot at the end of last year, just as the spectacular extent of the disasters he had presided over was becoming clear. But he seemed to have had the last laugh. Remarkably, he got Sony to invest in his own new film development company. Perhaps Sony figured that he had to have a hit some time.

Mark Canton remains chairman of Columbia, at least for the time being. "I don't believe there's any possibility that Mark Canton will last until the end of this year," says one experienced former Columbia executive. "The rumour in Hollywood is that he's out, and most rumours in Hollywood are eventually proved right. But one of the things that could last two or three months is the negotiation of the exit contract. There will be a lot of money involved. Frequently the thing that takes the longest is the press release. He could be out, but there might be two sets of lawyers haggling for weeks and weeks over the press release."

Akio Morita is now virtually out of the picture, as a result of ill health. His experiences in Hollywood have not provided a happy end to his remarkable career.

The sort of films being made on the Sony lot are changing. The blockbuster is out; the smaller movie with less reward but also less risk is in favour. The most visible casualty has been Godzilla, the monster movie remake that was clearly spiralling out of control, even in pre- production. Jan de Bont, the director of Speed, believed it would cost him $130m to bring the creature to the screen again using the latest morphing effects. TriStar said it would put up no more than $100m, no doubt scared off by the example of Waterworld, Universal's futuristic Kevin Costner adventure that is expected to cost $200m by the time it opens in the US this summer.

Quentin Tarantino recently observed that there are now so many markets for every film - cable, satellite, video, foreign - that "You've got to be sort of dopey to lose money." None the less, the newer, smaller projects at Sony (excluding the $65m Richard Gere epic First Knight) follow a new process. This is called "doing the numbers", and involves drawing up charts. Detailed calculations are made as to how much a particular star in a particular genre of film might earn in a particular territory - gone are the days of making a movie on gut instinct. "It's a much more systematic and financially orientated way of choosing a slate of films than at any other company," Peter Bart says.

What such a policy does not necessarily provide, however, is original films. "You can't quantify the potential of any film," Bart says. "I was the person at Paramount who brought in Francis Coppola to do The Godfather. Coppola had just come off a flop, Marlon Brando had just come off a flop, and every gangster picture that had been made in the previous five years had been a disaster. So if you try and quantify that picture, you wouldn't make it."

One producer, who requested anonymity, says that he is finding it difficult to do business with Sony at the moment. "No one's making decisions. There are lots of locked-door meetings. One or two key people are never available, flying back and forth to New York all the time."

And yet, amidst the frantic activity, the past month has brought some moderate success to the Sony studios. Little Women, Legends of the Fall and the racial drama Higher Learning have all exceeded box office expectations.

Perhaps, after all, this will finally be Sony's year, the year in which its executives walk around their exciting new lot with some pride, secure in the knowledge that for a short while at least they haven't made a film that no one wants to see. Perhaps this will also be the year when people buy more Sony microchips as a direct result of seeing Johnny Mnemonic, and synergy will no longer be regarded as a dirty word. If so, then Hollywood may finally begin to seem a little less like Las Vegas to the Japanese, and a little more like the place where dreams come true - the way they do in the movies. !