Sony Pictures Entertainment’s Michael Lynton

May 2007

By Anna Carugati

Sony is one of the world’s best-known brands. The name conjures up images of TV sets, laptop computers, digital cameras, not to mention the ever-popular PlayStation. The Japanese media giant is also home to Sony Pictures Entertainment (SPE), the Hollywood studio whose far-ranging businesses include motion-picture and television production and distribution; a bouquet of channels around the world; consumer products; state-of-the-art visual effects and digital production; animation; massive multiplayer online games; and mobile and broadband content. Michael Lynton, SPE’s chairman and CEO, oversees a diverse portfolio, but readily admits that international businesses are an extremely important part of SPE’s success and growth.

Through its division Sony Pictures Television International (SPTI), SPE has formed or invested in more than 40 channels in some 100 countries, reaching over 240 million viewers worldwide. These channels include the well-known brands Sony Entertainment Television (SET), AXN and Animax. SPTI was the first studio to set up local productions in numerous territories, and these include As If and Hex in the U.K., Berlin Break and Post Mortem in Germany; Coast Guard (Gente di Mare) in Italy; A Woman in Love (Une Femme Amoureuse) in France; Balmain Boys and Everybody Says I Love You in the Asia Pacific; Daniela and Machos in Latin America; and Dear Masha and Bednaya Nastya (Poor Anastasia) in Russia. SPTI also distributes motion pictures, TV movies and series around the world. The feature films come from Columbia Pictures, Sony Pictures Classics, Screen Gems and TriStar Pictures, as well as from third-party producers. Recent and upcoming films include Are We Done Yet?, Reign Over Me, Spider-Man 3, Across the Universe and Premonition.

On the television side, SPTI sells series such as The King of Queens,’Til Death, The Shield, Rescue Me and the soap opera The Young and the Restless. The SPE library includes more than 3,500 feature films, plus over 35,000 television episodes, 275 television series and more than 22,000 episodes of game-show programming from 50 years of television history. The catalogue includes such TV classics as I Dream of Jeannie, Bewitched, All in the Family, Married…with Children, The Jeffersons and The Three Stooges.

As a leading producer of content, SPE is actively exploring the multiple distribution opportunities being served up by digital technology. Lynton is particularly well positioned to lead SPE into the “wherever, whenever” new-media world. Prior to joining SPE, he worked at Time Warner, where, among other responsibilities, he spearheaded the successful turnaround of AOL Europe, and extended AOL’s leadership in Asia and Latin America. With firsthand knowledge of the advantages and pitfalls of the new-media world, Lynton is overseeing the development of new business models in broadband, VOD, mobile and other outlets. Raised in the Netherlands and fluent in French, German and Dutch, as well as English, he thoroughly understands the importance of international expansion. In this exclusive interview, Lynton talks about his vision of SPE.

WS: How important are the international businesses, the channels, the local productions and the distribution of movies and television product to Sony Pictures?
LYNTON: The international component is extremely important. And it’s important for different reasons. The network business—the cable- and satellite-delivered networks outside the U.S.—is a very profitable one for us and we continue to launch two or three new channels every year. The largest and probably most significant channel we have is SET India. And beyond the channels business, local-language production has become important for us, both in television as well as in film. We are producing shows in places like Russia, Germany, France and India. We’ve also gotten much more involved these days in international motion-picture production. We have a significant initiative now in Russia. We’ve started producing films again in India. We’ve produced films in Asia, Latin America and Europe.

We think it’s a wonderful business. It also helps us because in any one market, as much as 50 to 60 percent of the theatrical business consists of local production. And in order to have a really good relationship with distributors, it helps to have been involved in producing movies and television shows in that market. And then beyond that, there’s the whole business of exporting our U.S. movies and television product all over the world. On the television side, under Michael Grindon [the president of Sony Pictures Television International] we’ve really had an excellent organization, and it’s extremely important to us. And over the last few years, under Jeff Blake [the vice chairman of Sony Pictures Entertainment and chairman of worldwide marketing and distribution at the Columbia TriStar Motion Picture Group] and Paul Smith [the president of worldwide theatrical operations for the Columbia TriStar Motion Picture Group], we’ve rebuilt our international theatrical distribution, and that’s become a really successful business for us. When you look at a movie like The Da Vinci Code, the ratio of international to domestic box-office revenues is greater than two to one. You have a similar ratio with a movie like Casino Royale, and that underscores why the international market is so important.

WS: Can you give me an idea of the total revenues for SPE—what percentage is generated from international?
LYNTON: We don’t break out total revenues for SPE, international to domestic, but it’s bigger than a breadbox. However, in terms of what we did at the box office, total revenues for us in 2006 were $3.3 billion worldwide, with about $1.7 billion in the U.S. and $1.6 billion internationally. That’s a pretty even split, and in addition to setting a new industry record in the U.S., the total number was a record for us at SPE as well.

WS: How do you see the channel and local-production businesses in the next 12 months or so?
LYNTON: The channel business is going along at a very nice rate. The competition has heated up quite a bit in India, so we’re going to be paying a lot of attention to that market because it has great promise. As far as local-language television production is concerned, we’ve been probably the most successful of all the U.S. studios. I think there’s a ways to go judging from the work of companies like FremantleMedia and Endemol. We have to get more involved in the formats business because that’s really where the money is.

WS: But you did benefit from being the first studio to get local productions up and running in a lot of different countries.
LYNTON: Oh, absolutely. We’re probably still the only studio that does have significant production in places like Germany and Russia and the other countries I mentioned. And we make good money doing it. I just say that our European counterparts in Endemol and Fremantle do it even better, and we’d like to do it better.

WS: During an interview we did with Howard Stringer [the chairman and CEO of Sony Corporation] a few years ago, he was down on the network model of producing TV series and more bullish on the cable model. Is producing for cable more economic, or are you open to producing for whomever will take your shows?
LYNTON: Well, I don’t want to speak for Howard, although I know when he was examining the television business he changed it. The cost structure of the business was out of whack. We were carrying huge overheads in producer’s deals, and that was really for a time that had passed. So yes, we have changed our business, we did focus early on the cable side, more so than some of our competitors, and it really bore fruit. We’ve had success with shows like The Shield and Rescue Me on FX. At the end of the day, though, some of our biggest income producers have come out of syndicating our comedies, and we have now paid a lot of attention to try to make certain that we have some more comedies in the future. So we’re looking at ’Til Death on FOX and Rules of Engagement on CBS, both of which have had some initial success. We’ll see how it goes. We like that business. Interestingly, since Howard spoke, the economics of dramas have changed, because, with the success of CSI and Desperate Housewives and Lost, the international market for American product has picked up significantly.

So whereas five years ago you couldn’t really find a home for dramas in Europe, now all of a sudden they’re driving some of the networks’ ratings and we can get good prices for our series. So that has improved the economics of the drama side of production.

WS: We recently surveyed a number of European buyers who were noting that the cost of U.S. dramas has gone up. Some buyers were even saying that the prices at some of the studios have gotten so high that they’re better off producing their own series rather than acquiring. That may play in your favor too, since you’re involved with local productions in a lot of these countries.
LYNTON: It helps to be on both sides of it, I agree. In fact, we have a series in Germany which is a procedural drama called Post Mortem. I was there on the set last summer watching them shoot it in Cologne. The production values are brilliant and it looks very much like a U.S. series. And it got very good ratings when it aired on RTL, so it’s been successful for us.

WS: How do you decide in a given year how many movies are going to be franchise movies—because those are important for a lot of economic reasons—and how many instead are going to be “original” movies, not based on something that already exists?
LYNTON: Well, you hope that even the franchise movies are original in their idea! I think Amy Pascal [a co-chairman of Sony Pictures Entertainment and chairman of Sony Pictures Entertainment Motion Picture Group], who heads up that effort, really would tell you that making good sequels is even more difficult than making a good version of the original. And she has made some terrific ones—in Spider-Man, for example. But coming back to your initial question, we have right now two or three big franchises, between Bond and Spider-Man and the Robert Langdon character [from The Da Vinci Code]. We have secondary franchises through Screen Gems like Underworld and Resident Evil, but those are smaller. Candidly, you take what you can get. And if you look around Hollywood, each of the big studios has maybe two, at most three of those franchises. And you space them out every two or three years and try to maintain their quality. For the rest, we’d like to make between 20 and 22 movies a year. We want some that are quite large, and hopefully will turn into franchises. Screen Gems will be producing six or seven movies a year, which tend to be smaller-budget genre pictures. So it sort of plays out against that backdrop.

WS: Because moviemaking is a risky business and you have to cover a lot of bases?
LYNTON: It is a risky business. You do have to cover a lot of bases. You also have a lot of mouths to feed because you’ve got both a domestic market here, for which genre pictures work really well, and there’s low risk and high reward, but those pictures tend not to work with big distribution organizations that we set up outside the U.S. The international market likes bigger franchise movies or local-language productions. That’s part of the balance as well.

WS: How important is the gaming industry to your division?
LYNTON: The gaming industry is very significant. Through Sony Online Entertainment, down in San Diego, we have a big business with EverQuest, which is a popular massive multiplayer online game. And the business has become very diversified in recent years, including console, portable, mobile and PC games. The fact that broadband has become more prevalent than it was in the past just increases the audience for games, and that’s why some of the games we’ve brought to market in the last couple of years have had enormous acceptance. We’ve become even more convinced that there’s a big audience out there for games, and we are investing in new ones.

WS: How do you see consumers making the switch from regular DVD to Blu-ray, and how can you convince them to make the switch?
LYNTON: We think Blu-ray is the best format going forward for a lot of reasons—the quality, the content advantage, the encryption, the disc’s capacity to do many things. More of the consumers’ favorite movies will only be available on Blu-ray disc. Blu-ray is outselling HD DVD more than two to one, and seven of the eight major studios support Blu-ray. Since January of this year, 23 of the top 25 high-definition movies sold have been Blu-ray, which doesn’t hurt!

It starts with the consumer bringing HD into their home, which they do primarily by purchasing large flat-screen televisions and watching, in the first instance, broadcast sports, nature programs and things like that. And certainly, if they put a significant investment into their home entertainment system, they want to make certain that they can see their movies in HD. And that’s the point at which Blu-ray becomes significant.

WS: What’s driving the DVD business right now? Is the television portion more important than feature films?
LYNTON: I think the TV business sort of surprised everybody by coming on very strong last year and the year before. It became a significant part of the DVD business. It has flattened out somewhat at this point; it’s still robust but it’s not growing the way it once was. I think the DVD business has, in general, been showing single-digit growth, not double-digit growth the way it was in the past. What’s driving its growth is good new-release product and expanding distribution beyond traditional retailers.

WS: What opportunities do new media offer a studio like Sony?
LYNTON: In the future they will be really significant. Whether it’s mobile or IP-delivered television or IP-delivered film, either streamed or on a per-transaction basis, the potential is enormous. As to where it will happen first, that varies market by market. Korea, which has very high broadband penetration, is likely to move sooner, for example, than Italy. At the moment it’s all nascent.

Through our television group we have an excellent distribution system in place inside and outside the U.S. We’re trying to make certain that we have as many distributors for our product as we can. This is similar, in a way, to the home-entertainment business, and some of the new-media opportunities will bear more fruit than others.

WS: Is it fair to say that everyone right now, whether the studios or the smaller content providers, is still in the phase of trying different things to see what will work and what consumers are willing to pay for and how?
LYNTON: Yes, that’s absolutely the case.

WS: What synergies does SPE look to create with other divisions of Sony? I’ve heard of Howard Stringer’s initiative called Sony United.
LYNTON: There are lots of examples of Sony United, but probably the most telling was just recently when the PlayStation 3 [PS3] came out. We were going to launch Talladega Nights on Blu-ray disc in December. We chose to bundle 500,000 Blu-ray discs with the PS3 in late October to demonstrate how good the movie looks on Blu-ray. That really helped consumers understand that the PS3 was something more than just a game system, and that was Howard Stringer directly intervening and saying that this needs to happen. Also, our Sony Online Entertainment team helped develop the back-end infrastructure for the PlayStation network.

WS: What are your priorities for SPE in the next 12 or 18 months?
LYNTON: I think our priorities are to minimize the volatility in the business and to position ourselves as well as we possibly can for these new platforms that we’ve been talking about, such as broadband and mobile. The international market remains a big priority for us, both in terms of local production and distribution.