Are Japanese planning pullout from Hollywood?

When Sony Corp. and Matsushita Electrical Industrial Co. bought movie studios, many in Hollywood feared that the movie industry would become dominated by the Japanese. Now, just a few years later, Hollywood executives say Japan's power in Hollywood is fading and they expect Sony and Matsushita to sell their studios or partial stakes in them in the near future.

The theory that the Japanese only make long-term investments is being put to the test as merger mania heats up in the communications industry. Many believe the Japanese giants are caught in a squeeze between their electronics past and America's electronic superhighway future.

Both Sony and Matsushita's core electronics businesses are currently suffering and they are not well positioned for future growth in the U.S. because they are not players on the emerging electronic superhighway. That venture is being driven and pioneered by the cable television and telecommunications companies. Triggering speculation that the Japanese might be tempted to sell all or part of their Hollywood empires is the bidding war between Viacom Inc. and the QVC Network Inc. over Paramount Communications Inc. This five-month battle has inflated Paramount's value to more than $10 billion.

Some speculate that Matsushita and Sony will seek to capitalize on the current high valuations of entertainment stocks. Investors have been buying up Sony and Matsushita shares in the U.S. and Japan to create three-year highs in their stock prices in anticipation of some type of spinoff. That run-up has not come because the company's have done well -- both have been reporting sliding profits.

Sony and Matsushita each paid in excess of $6 billion in Sony's acquisition of Columbia and TriStar Pictures in 1989 and Matsushita's 1991 purchase of MCA Inc. (Universal Pictures). Analysts now estimate that both Matsushita and Sony could double their money if they sold today.

MCA could fetch around $12 billion and Sony's software holdings, which include a New York music division (formerly CBS Records), could bring somewhere between $12 billion and $14 billion, analysts estimate. Those figures are based on Paramount's $10 billion bidding ballpark, with the rising Paramount price tag in effect providing a new basis for reckoning a studio's value.

Some in Hollywood predict the Japanese giants will take the money and run. But no one predicts it will happen immediately or even in 1994.

The assumption is either a regional Bell telephone or cable television company would be the logical suitor because of rapidly accelerating developments on the nation's superhighway. These deals are already being made. Time Warner Inc. has an alliance with US West and if Sony were to sell a 25 percent interest of its software empire it could bring in between $3 billion and $4 billion, analysts predict.

The biggest merger to date has been Tele-Communications Inc., the country's largest cable operator, agreement to be acquired by Bell Atlantic Corp. TCI could be logical candidate to snap up a piece of MCA or Sony because it is aggressively expanding its fiber optic network and will need more programming in the near future.

Historically Sony has been the pioneer and its arch-competitor Matsushita has followed Sony's lead as was the case in the Hollywood studio acquisitions.

Cable and phone companies are converging in an effort to expand programming options that could deliver 500 channels of cable programming. Movies and other studio-generated productions will be the main fare on this expanded channel capacity that will reach consumers through fiber optic networks leading into homes well before the century is out.

"I expect Matsushita to sell a piece and the same will happen with Sony to lessen their investment risk here," said a Hollywood producer whose films accounted for more than $210 million at the domestic box office last year. "It makes sense for them to partner with hardware suppliers to get on the information highway and to also take advantage of the high valuation of their stocks.

"I sense the Japanese appetite for the business is different now," he added. "It's been a difficult business and Sony can't be happy with the negative cash flow coming out of Hollywood. The record business has been easier for them to manage and there has been more synergy for them there."

The costs of operating Hollywood studios is rapidly rising as competition among them heats up. Production is increasing and now, to remain competitive, studios churn out 30 to 40 films a year with an average production cost approaching $30 million each.

When Sony bought in, studios were making 15 to 20 films a year and costs were around $25 million per film. To be competitive, a studio needs an annual production war chest of at least $800 million.

And marketing costs are zooming faster than production costs. In 1993, Sony spent $163 million just on advertising for its movies and music. Universal spent more than $82 million.

An executive at a major talent agency predicts Matsushita will spin off at least 20 percent of MCA in the next 18 months because the electronics titan has been battered both in the electronics business and in Hollywood and needs to raise cash to pare debt.

"They have lost money here (in Hollywood) and are probably wondering where is the return. Universal (MCA's movie-making subsidiary) had 'Jurassic Park,' a huge hit, but still only managed to finish third for the year behind Warner and Disney. One film doesn't make Matsushita's investment a hit," the talent executive said.

There have been several recent signs that Sony and Matsushita are ready to deal. Michael Schulhof, chairman and chief executive of New York-based Sony Corp. of America, parent of Culver City based Columbia and TriStar Pictures, acknowledged in a recent Wall Street Journal article that there had been a meeting with top telecommunications executives to discuss a strategic alliance and he said a public offering for a piece of Sony's software holdings is another possibility. However, he ruled out Sony giving up controlling interest in its movie or music companies.

The decision to stay or cash out of the entertainment business will be made by Sony's board in Tokyo. Akio Morita, Sony's founder and chairman, was supportive of Schulhof when he engineered Sony's music and movie acquisitions. However, Morita is recuperating from a cerebral hemorrhage and not playing a major decision making role at the moment.

Earlier this month, the Los Angeles Times reported that Matsushita is exploring several spin-off possibilities including a U.S. public stock offering for a minority stake in MCA and a sell-off of 15 percent of the company to MCA's senior management headed by Lew Wasserman and Sidney Sheinberg, chairman and president of MCA.

Matsushita is not commenting on the report but the Wall Street Journal last week ran a story speculating that Matsushita would sell a piece of MCA to a phone or cable television company. Again the company is not commenting on any of the speculation.

The only concrete sign that Japan's ardor for Hollywood has cooled is the gradual shutdown of Largo Entertainment. Largo was an independent film company funded in 1989 with $100 million from JVC/Victor Co., an electronics company that is 51 percent owned by Matsushita.

Largo turned out a string of turkeys ("The Super," "Judgment Night") and when JVC pulled the plug, Larry Gordon, Largo's chairman, went to Universal Pictures with a production deal. The company still has two movies to release and 40 employees.