David Rosenthal: evaluation

Transcript context

…Let me say, this is a great deal from a financial perspective. If you're Berkshire Hathaway and you're just going to come in and own something, great. This ends up being a great financial purchase. From a strategic perspective, big, open question mark. Are they able to effectively manage a growing electronics business, the life insurance company, and now a music label that's wholly-owned while they again cast their eye where you're alluding to in buying a movie studio? It starts to open this big question of not only focus but are there synergies here? Because I think Morita and Ohga are pretty convinced that to continue being a successful growing electronics company, they need to own the content that ends up on those devices or at least have some leverage and ability to design more custom experiences using wholly-owned content. I don't know if that ever actually became true. I think it certainly did not. Here's what's interesting in my perspective on this. Going back to the CBS Records deal, as you point out, that was a great financial deal and a great asset to own at the price that they paid for it. I think you could argue, to some extent, any of this synergies thing—I think in large part synergy became a bad word because of what companies like Sony did during this time. If any of that were valid, it would be valid in the music business given Sony's history and given their ownership of the CD format. It's almost definitely not true in the movie business. Of course, we're talking about Sony buying Columbia Pictures in 1989 for $3.2 billion, but that was the equity purchase price. Ultimately, when they assumed debt and a few other things, they spent about $6 billion to buy Columbia Pictures. Everybody at the time knew that that truly was way more than the company was worth. Supposedly, the real driving factor behind it was Betamax. Morita felt like that was such a defeat for the company and a point where they realized they had no leverage in this industry. They felt that if they owned a studio, they could at least be at the table against the Lew Wassermans and the like when they were negotiating formats, licensing fees, and all the strategic stuff. I think that was the real driving factor. It sounds good on paper, but what ended up happening is that there was a lot of infighting between the hardware teams and the movie team, so you had misaligned incentives. We've talked about this a lot in previous episodes, but it's the vertical versus horizontal strategy issue where the devices people wanted to make it so that they could play the widest amount of content possible. By the way, including pirated content. If you're trying to move electronic devices, you want to be super-duper Switzerland—buy this thing, have as much fun, and get as much value as you want out of it. Meanwhile, the music label folks and the film studio want to leverage the channel that they have with these devices to find a way to increase sales of music and movies. Unless you can figure out some way to align incentives, you have a huge problem there.…

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