During the 1990s, nearly every big media company was seduced into buying or building an Internet portal. On paper, it sounded great: Distribute your movies and music over the Internet to a global audience, make big money. Many companies made pilgrimages to Yahoo Inc. and the like, where the dot-coms made thrilling white board and PowerPoint pitches.
Sony Corp.'s Yair Landau heard his share of proposals on trips to Silicon Valley, but he was skeptical about whether it would work at his company.
"I think integration within a large, multicultural company is very difficult," he recently recalled in an interview. "We were not going to be able to acquire an Excite [at Home] or a Yahoo and integrate them into our culture -- a relatively mature, slow-paced company." Sony passed on the buying bacchanal and never struck a deal with an Internet company.
Instead, it slowly developed an in-house Internet business on the back of something it knew well: its burgeoning games division, one of the most profitable units at Sony.
The company created a subscription-based online gaming business that is projected to break even this year -- a success story, by Internet standards. More than 432,000 subscribers pay $12.95 per month to sit at their computers and play Sony's EverQuest, a medieval role-playing fantasy, against other gamers online.
The modest EverQuest launch set the stage for what would become Sony's larger, long-range online strategy post-bubble -- delivering its vast library of music, movies and television shows to home viewers over the Internet.
If it works, Sony may end up accomplishing the sort of "synergy" that its rivals promised but have yet to deliver, leaving the come-lately Japanese company as a leader in using the Internet to marry content and consumer electronics.
Or the idea may not move past a small group of techies, with the great mass of consumers never feeling the need to buy movies, music or TV shows over the Internet, remaining happy to have their entertainment delivered via cable, satellite, VCR and DVD.
"Will [people] start consuming media outside of broadcast and cable avenues? I don't know," said Landau, now president of the Sony Pictures Digital Entertainment division. "I'm certainly hopeful that more and more will be consumed through the Internet, so Sony's advantages as a manufacturer of content and hardware will be realized."
Building a Bridge
Turning the Internet into a distribution channel is perhaps more important to Sony than it is to some of the other media giants. As a foreign-owned company, Sony is prohibited by law from owning controlling interest in television stations and networks. Unlike media giant Viacom Inc., which owns CBS, UPN, several television stations and cable channels such as TNN, Sony must find alternative delivery methods.
To do so, it needs to get consumers to migrate from their computers to their televisions.
The catalyst will be Sony's PlayStation 2 video game console, already in more than 12 million U.S. homes and outselling Microsoft Corp.'s Xbox and Nintendo Co.'s GameCube. The movement will begin with the February 2003 rollout of EverQuest Online, for play on the PS2 box.
Instead of playing EverQuest on their small computer screens, EverQuest Online gamers will use their $199 PS2 box to challenge foes online and play on their larger television screens.
A $39.99 adapter, which allows gamers to connect the system to the Internet, already is selling almost as fast as Sony can make it, the company says, and is approaching the 500,000 mark. By the end of next year, the company anticipates there will be 50 million networked PS2 boxes worldwide.
Why move gamers from their computers to their televisions? The answer lies in psychology and ergonomics. PC users adopt a posture called the "lean-in position," industry researchers say, which is closely and negatively associated with study and work. Television viewers typically have a "lean-back position," which is associated with leisure and recreation. Simply put, Sony believes more people would spend more time playing EverQuest -- and the company's other games -- on their televisions than on their computers.
From there, Sony hopes, it is a short step to using the PlayStation 2 for more than games. If Sony's plan works, game-playing will soon be only one function of the PS2, which, with some relatively inexpensive add-on hardware, can be converted into a digital entertainment center hooked to the Internet.
With that, it is likely the company will find itself going head-to-head with Microsoft.
To morph into a device that downloads and plays music, movies and games, the PS2 and Xbox need a hard drive -- like that on a PC -- where digital content can be stored. The Xbox already has one, so Microsoft is ahead of Sony in the hardware race. But there already are far more PS2s in U.S. homes than Xboxes. And Sony will begin selling (yet-unpriced) hard drive attachments for the PS2 next year. Perhaps more importantly, Sony already has thousands of its own movies, music and games digitized and ready to download, something Microsoft cannot match. In Japan, PS2 boxes are already sold with hard drives.
The networked PS2 with hard drive is the bridge, Sony hopes, for the next phase of home entertainment beyond the VCR and DVD: video-on-demand. Like pay-per-view movies now available on satellite and cable systems, with video-on-demand, viewers will be able to sit in their easy chair and, using their remote control, rent any movie, special or TV episode from a huge digital library and have it shipped to their television. But unlike pay-per-view, video-on-demand allows viewers to watch the movie with what is called "VCR functionality" -- that is, they can fast-forward it, rewind it, stop it to watch at another time, and so on.
After years of hype, video-on-demand is becoming a reality. Sony and four other Hollywood studios, fearing that digital movie piracy will do to their industry what Napster did to the music business, have combined to create Movielink, a Web site where movie fans with high-speed Internet access can pay to download movies to watch on their computers. Movielink launched in November.
But almost no one wants to watch movies on their computers, industry executives are learning. People want to watch movies on their televisions while "leaning back." Sony is betting consumers will use the PS2 to do so. It hopes that its base of online gamers, who are accustomed to paying for games over the Internet and playing them on their television with their PS2, will do the same with movies, music and television shows.
"We hope that Movielink will be accessible on PS2 in short order," Landau said. "In its pure sense, our software is helping to drive the hardware."
With a few cables or a wireless home network, such as WiFi, consumers will be able to connect their PC to their television and PS2, just as they hook their cable and DVD player to their televisions.
By the time Sony introduces the PlayStation 3, probably within two to three years, network adapters and hard drives will be built in, and "people will be buying PS3 with [video-on-demand] in mind," Landau said.
The strategy also allows the company to minimize its investment, analysts said.
"They're not really producing anything new, they're just converging what they've got. You add a little piece to it and now it's a new service and another revenue stream," said Steven Artuso, an equity analyst with Pittsburg Research Inc. who covers Sony.
Cross-Pollination at Work
If Sony can achieve its goal of distributing its movies and music over the Internet, it may be because the company has succeeded, in small ways, at something its rivals failed to do in large ways: making the various parts of its sprawling conglomerate work together while minimizing its weaknesses.
The success of Sony Pictures over the summer, with blockbusters such as "Spider-Man" and "XXX," grabbed the trade-paper headlines. Easy to overlook was the quieter cross-pollination between the company's other divisions.
The recently released Sony game ATV Offroad Fury has a soundtrack featuring Sony Music Entertainment Inc. artists. Sony will soon make its games available on cell phones from Sony Ericsson Mobile Communications. Music lovers who want to buy digital music from Pressplay -- the online music download subscription service that Sony Music partially funds and is full of Sony artists -- may soon be able to do so by hooking their hard-drive PS2 consoles to the Internet. Cooperation between the company's television, hardware and online game divisions made EverQuest a reality.
AOL Time Warner Inc., for instance, has failed to create significant synergies partially because executives have failed to manage a clash of corporate cultures. Time Warner executives were slow to implement AOL changes -- and revenue expectations soon were seen by Wall Street as unrealistically high, crashing the company's stock price.
During an early December meeting with analysts, AOL Time Warner said it would make a second big run at synergy by pumping company content -- such as Time Inc. magazine stories and New Line Cinema Inc. film clips -- over AOL to the service's subscribers for a fee. AOL Time Warner also is likely to wrestle with the "lean-in, lean-out" problem; consumers tend to use their computers differently than their televisions, and it's unclear whether they will spend lengthy amounts of time watching films while hunched over a small computer screen.
Three short years ago, Sony was seen as shortsighted for missing what turned out to be the Internet (fool's) gold rush. "I would think that the tortoise-and-hare analogy is appropriate here," Landau said.
Now, some analysts think that conservative, plodding Sony may be positioned to sell its content via its hardware and its cautious, home-cooked Internet strategy.
"They own the studios and potentially the system people use to download the movies and the hardware to watch it on," said David Kathman, an analyst with Morningstar Inc. "They own all of that, so they get a piece of it every step of the way."