Electronics Giant
Sony is best known for its electronics. While Apple Inc. (NASDAQ:AAPL) and Samsung are the hot companies in the space today, Sony Corporation (ADR) (NYSE:SNE) was once the market leader for style and functionality. Its Walkman line, for example, was revolutionary when it was released.
Today, however, competitors have left Sony looking like an also ran. An unfortunate shift toward televisions a few years back, just as that market was getting set for a price war, has been a huge drag on results. The company’s top line has been stagnant at best since the 2007 to 2009 recession. The bottom line has been mired in red ink.
A Diamond in the Rough
One of the company’s saving graces has been the entertainment arm. According to Bloomberg, the music and movie division accounted for almost 50% of the company’s operating income last year. That’s a big portion of Sony Corporation (ADR) (NYSE:SNE)’s business. However, with such hits as Men in Black, Spider Man, and The Client List (on TV), and musical performers like Bruce Springsteen, the company’s content arm has a lot of value. The breakup request, however, isn’t outlandish.
A Digital Age
Time Warner Inc (NYSE:TWX) has moved aggressively since its failed marriage with American Online to streamline itself. It sold off AOL and its cable business. More recently, it has looked to jettison its magazine business. Essentially, the company has been paring down to digital content.
It is a model that makes a great deal of sense, as owning just content allows for the sale of the same material to multiple distribution partners. The big up front cost of creating the content, then, gets leveraged over more than just one platform. A company that is locked into just one distribution arrangement, even if it owns the platform, doesn’t get the same multiplier effect.
Over the last decade, Time Warner Inc (NYSE:TWX)’s top line has been pretty volatile because of the spin offs. However, its profit margin has improved from the low teens to around the 20% mark. That, plus aggressive share buybacks, has allowed earnings to ramp up nicely despite lower revenues. The shares have advanced at a heady clip over the past year or so, though they remain well off from their historical high. Momentum investors might be interested in this increasingly pure play content provider.
Getting Picky
Content is getting sold into an aggressive distribution market that includes television, cable, satellite, and now online (mobile and otherwise). This has increased the demand for good content, which Sony Corporation (ADR) (NYSE:SNE) clearly has. Netflix, Inc. (NASDAQ:NFLX), for example, decided to let a content deal with Viacom expire because it didn’t want to buy everything the company was offering. Netflix, Inc. (NASDAQ:NFLX) wanted to cherry pick the best content. The online streaming giant is also looking for exclusive deals, like the one it inked with The Walt Disney Company (NYSE:DIS).
Netflix, Inc. (NASDAQ:NFLX) is, essentially, working to become a television station on the web. With more and more companies looking to stream video, it wants to differentiate itself in a rapidly maturing market by offering top-quality content. If Netflix pulls off the transition from broad content to in-demand content, it could very well continue increasing its subscriber base.
That said, while customer rolls and revenues continue to increase, the company’s expansion efforts have been burning a lot of cash. Increasing content costs could make that situation even worse. Investors appear to be betting on Netflix’s first mover advantage based on the recent share price advance. Momentum investors should look here, but most others would be better off sitting on the sidelines.
While the Getting is Good
Sony Corporation (ADR) (NYSE:SNE), meanwhile, should soon be going back to the market with an expiring content distribution deal. That could mean a nice boost for Sony’s entertainment arm. It would also be a nice support for the company while it tries to right the ship on the consumer products front. That’s the hill Loeb must climb, though the company appears to be at least listening to his request.
That said, it doesn’t make sense for a company trying to fix one division to get rid of another that is helping to fund the turnaround. Add in the conglomerate culture in Japan and Loeb may be taking on a fight he can’t win.
Sony Corporation (ADR) (NYSE:SNE) shares jumped on the news, but will likely come back to Earth as investors realize this is, most likely, a long fight with an uncertain outcome. Sony remains a turnaround play for more aggressive investors, though now probably isn’t the right time to buy in. Be patient. Longer term, if Sony Entertainment gets spun off, investors of all stripes should take a good look at it.
The article A Fight In The Land Of The Giants originally appeared on Fool.com and is written by Reuben Brewer.
Reuben Brewer has no position in any stocks mentioned. The Motley Fool recommends Apple, Netflix, and Walt Disney. The Motley Fool owns shares of Apple, Netflix, and Walt Disney. Reuben is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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