SONY Sony Group Corporation

By Ben Fritz 

As Hollywood's two worst-performing movie studios seek new leaders, Paramount Pictures and Sony Pictures Entertainment also face more fundamental questions about how to turn around their businesses after years of underinvestment by their parent companies.

Paramount has consistently ranked last at the box office among Hollywood's six majors studios since 2013 and Sony Pictures has been No. 5 or No. 4, according to industry data.

Paramount's profits have declined for five straight years, most recently reaching a loss of $445 million for the fiscal year ended September. Sony Corp. doesn't report its motion-picture profit separately from television, but recently took a write-down of nearly $1 billion at its studio. It also reduced profit projections for movies after a series of box-office disappointments.

Viacom Inc. abandoned plans to sell 49% of Paramount last year and Sony has denied rumors it is looking to sell its studio. Both companies are looking to turn around their movie businesses under new management, but face formidable challenges, current and former employees say.

Their struggles illustrate the importance of long-term investments and strategic acquisitions in the film business at a time when franchises and recognizable brands generate the biggest profits. "The movie business has become a story of haves and have-nots," said Michael Nathanson, senior analyst at MoffettNathanson Research. "You need to build a good farm system and then you need to execute."

For instance, Walt Disney Co.'s multibillion-dollar acquisitions of Pixar Animation Studios, Marvel Entertainment and Lucasfilm LLC have provided most of the franchises that have helped it dominate the movie business in recent years. Universal Pictures for years lingered at the bottom of the box-office rankings until Comcast Corp. bought it from General Electric Co. in 2011.

The cable company upped annual production spending to about $1.2 billion from $850 million, invested in its consumer-products and theme-parks businesses and last year bought DreamWorks Animation SKG Inc. The investments have boosted Universal's profits, and employees say this has helped improved morale.

Rather than increase spending, new Viacom Chief Executive Bob Bakish wants the studio to focus on films related to shows and talent on its cable networks such as MTV and Nickelodeon. Viacom is currently negotiating with former Fox studio executive Jim Gianopulos to lead Paramount, according to people familiar with the matter. "There are significant resources and it will be up to the studio management to take those resources and produce returns for shareholders," Mr. Bakish said in an interview.

Sony isn't as close to finding a new CEO for its studio, a larger job than Paramount as it also includes a television business in which it has invested. But since Tom Rothman was named head of Sony Pictures' motion-picture unit in 2015, he has sought to improve results by increasing the focus on international markets and trying to bring PlayStation games to the big screen, although box-office results haven't improved.

"We are confident that the groundwork has been laid for meaningful, long-term reform," said a Sony Pictures spokesman.

Sony finance chief Kenichiro Yoshida said last month that the struggles of the Japanese company's studio stem partly from decisions "to raise short-term cash in exchange for long-term cash flow when the electronics units were struggling."

He cited the company's decision to sell its 25% interest in the merchandise rights to Spider-Man to Marvel in 2011. Under the deal, which also resolved longstanding legal disputes, Marvel made a net payment of about $180 million, according to documents released in a corporate hack. Sony still controls film rights to Spider-Man.

Paramount and Sony haven't bought assets to augment their movie businesses in the past decade. Paramount previously distributed movies from Marvel and DreamWorks Animation and considered trying to buy both, employees said. Instead, Marvel and DreamWorks were acquired by Disney and Comcast, respectively. Sony Pictures executives discussed buying Metro-Goldwyn-Mayer, whose James Bond movies Sony had distributed for years. Instead MGM reorganized itself into an independent venture. Other potential acquisitions targets for Sony included DreamWorks Animation and pay-cable network Starz, according to employees. Lions Gate Entertainment Corp. ended up buying the network.

"There was a cautious business philosophy where we did not want to take big swings," said a former Sony Pictures executive. Many at the studio have also expressed frustration at the lack of synergy with Sony's biggest entertainment asset: the PlayStation. The company could have used the videogame console's huge global footprint to launch a Netflix-like streaming service featuring Sony Pictures content, they note.

Paramount and Sony have at times chosen release dates not based on what is best for a film, but in order to maximize short-term profits, employees said. Releasing a movie late in a fiscal year typically means accounting for tens of millions in marketing expenses while waiting until the next fiscal year for the revenue that follows.

Paramount and Sony spend less than $1 billion a year on movie production, people who have worked at both said, while other studios spend as much as $1.5 billion. Major "event" movies typically cost between $100 million and $250 million to make.

That was the reason Paramount, whose fiscal year ends in September, delayed the Leonardo DiCaprio thriller "Shutter Island" to February 2010, from October 2009, and why it has released no movies in August or September for five of the past seven years, employees said.

"Cutting, cutting, cutting as a way to create the appearance of wealth was the philosophy here for a long time," said one Paramount employee.

Paramount and Sony have each made two or three such movies annually for the past few years, while studios such as Disney and Universal have made between four and eight such movies.

Write to Ben Fritz at ben.fritz@wsj.com

(END) Dow Jones Newswires

March 18, 2017 02:47 ET (06:47 GMT)

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