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Breaking up Sony: What One Investor’s Plan Would Mean for PlayStation

May 20, 2013 Written by Kayvon Ghoreshi

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Recently a prominent hedge fund owner wrote a letter to Kaz Hirai with the idea of splitting up Sony as a company. Specifically, he wants Sony to separate its entertainment and electronics businesses.

The man in question here is Daniel Loeb, who runs New York-based hedge fund Third Point and was also partially responsible for kicking out the past Yahoo CEO and bringing in Google executive Marissa Mayer. Loeb and his firm own about a 6.5% stake in Sony – while that may seem insignificant, they are still the largest shareholder in the company and their holdings are valued at roughly $1.1 billion.

So what exactly is he proposing? Well, first it needs to be understood that Sony is a large, multifaceted company: There is Sony Electronics, which is responsible for things like TVs and tech; Sony Entertainment, which encompasses things like Sony’s movie studios and music label; Sony Mobile, which does smartphones; Sony Computer Entertainment, which does all things PlayStation, and, believe it or not, there is also an insurance division within Sony. However, for the sake of this article, let’s focus on just the electronics, entertainment and PlayStation branches. Loeb is advocating that Sony offers around 20% of Sony Entertainment (not Computer Ent) to the public and allows it to be its own independent entity, separate from the rest of Sony. He believes that this move could help Sony push down some debt, and the money raised could be put towards revitalizing the electronics portion of the company. He also gave some advice regarding the electronics division, advocating that Sony takes a page from Apple and reduce costs while focusing on only a few major products. The primary reason for the move, according to his letter, would be to unlock the value of Sony Entertainment. He gauges that by being an independent entity, Sony Entertainment can become more focused and increase its profit margins. He predicts this increase could lead to as much as a 50% increase in earnings for Sony Entertainment, which currently brings in $11.5 billion in annual revenue, and cause the market valuations for Sony to go up by $6 billion. If this were to happen, it would be beneficial to all those that currently own Sony stock or purchase some of Sony Entertainment should it go public.

As an investor, Loeb has plenty of grounds for critique. Share prices for Sony have gone down nearly 85% in the past decade and there has been plenty of increased competition from the likes of Apple and Samsung in the electronic devices market. And while Sony just reported its first profit in 5 years, there is still significant skepticism about the strength of the company. I’m really in no position to say whether Loeb’s suggestions will increase Sony’s stock value or not, but its worth noting that him just making these suggestions caused Sony’s share price to jump up a little.

So now for the important question – how would this affect PlayStation? As previously mentioned, the PlayStation brand isn’t a part of the section that Loeb wants to give up, but PlayStation isn’t just about games. It’s meant to be a source for all kinds of entertainment, some of which are part of the Sony Entertainment branch. There is no telling whether this kind of split would have an effect on that relationship, but it certainly is a possibility. However, Kaz has already stated that he has no intention of splitting up the two and that Sony Entertainment “is not for sale.”

Kaz’s stance on the future of Sony Entertainment speaks more widely to his philosophy of there being ‘One Sony’ and a need for a content ecosystem within that one company. As I said before, the devices being made in the electronics division aren’t designed for one particular purpose. For example, the PS3 and the Xperia smartphone line aren’t just for gaming or making phone calls. Like a lot of devices, they are becoming a way for us to access all of our content; music, games, movies, TV shows, etc. For Sony to remain competitive, content – particularly a diversity of content – is key. And a lot of that content comes from Sony Entertainment, which is why Kaz is so reluctant to put it on the market for investors. Just as other companies in the tech world are desperately buying content and making hasty deals, Loeb wants to travel in the opposite direction.

The PlayStation is the perfect example of what can happen when content and electronics is married. Loeb wants a divorce.

The broader influence is that, in all of Loeb’s suggestions, there was the underlying theme of maximizing profit and streamlining for efficiency. While I agree that Sony should be running a profit, it scares me as a gamer if the mentality is solely about profit and not about the consumer. Maximizing profit would mean taking fewer risks and not developing certain games out of fear they would not be commercially successful. As if there weren’t already enough, we would be treated to endless sequels and reboots because those are guaranteed money makers. This same philosophy can be seen in publishers like EA, Activision, and even Ubisoft who continue to put out more franchise titles and less new IPs. This drive for more profitability is what also led to the birth of things like the online pass (which thankfully EA has finally realized is a bad idea) and microtransactions.

If anything, this story forces us to once again accept one of the ugly truths about the gaming industry – at the end of the day it’s a business, and the bottom line is really all that matters to most shareholders and investors. Investors will probably continue to push Sony to become more profitable and, in turn, increase the value of the company, and it is within their interest to do so. I too want the PlayStation brand to do well and for Sony as a whole to succeed, and Sony does need to make drastic changes to become stable, but this is not the right one. This will severely hamper PlayStation, right on the eve of the PS4′s launch, and weaken the offering of the electronics division as a whole.