Sony Corporation (NYSE:SNE) (TYO:6758) got a surprise visitor on its earnings call this week. Dan Loeb the founder of Third Point who holds over $1 billion worth of shares decided to call in. What is slightly unusual here is that Dan Loeb speaks to management so there is really no need to dial into their conference call. Therefore, obviously is trying to make a statement that will be heard by people outside Sony’s management, although nothing substantial appears to have been discussed so it was likely a waste of time for him. Loeb has been ‘a bit’ rude in the past but on this call likely because of his understanding of Japanese culture he was more cordial. Below is the back and forth between Loeb and Sony’s CFO.
Operator Dan Loeb, Third Point.
Dan Loeb – Third Point – Analyst
Could you talk about a couple of things? First of all, what was the reason behind selling the music publishing catalog in the quarter, and who did you sell that to? And what would the operating income have been for the entertainment business had you not sold that catalog?
Masaru Kato – Sony Corporation (NYSE:SNE) (TYO:6758) – CFO and EVP
Okay. The sales of our music catalog, this is in SPE, this is for films. It is basically, Pictures segment makes money in various ways. Obviously, film, TV programming, distribution through network, etc. But sales of these catalogs of music rights is part of our business strategy in creating value and monetizing in every which way we can. So when we make a film, there’s obviously music to it, and if we acquire rights to it and we have a nice hit in a movie, that music catalog will increase in value. So this is one way of monetizing the value in what we have created.
Now having said that, this particular deal was made with a company called Olay Publishing in Canada, and the net effect to our bottom line was roughly in US dollars $106 million; in terms of yen, JPY10.3 billion.
Dan Loeb – Third Point – Analyst
Okay. So were it not for this one-time event, the Pictures business would not have been profitable. And one other question, if you don’t mind. How do you see profitability of the Playstation 4 product cycle versus the Playstation 3 cycle? And any comments on the consumer response to the Playstation 4; any further comments with respect to timing and ability to meet demand?
Masaru Kato – Sony Corporation (NYSE:SNE) (TYO:6758) – CFO and EVP
Okay. The comparison between the two platforms, Playstation 3 and Playstation 4, I think the one big difference is in the amount of investment that we are making in the platform. PS3 was at that time the leading-edge product. We developed the LFIs, the CPU and the GPU from the ground up, working together with our partners in Toshiba and IBM. We spent millions of — hundreds of millions of dollars in designing the chipset.
We spent billions of dollars in semiconductor fabrication technology, as well as fabrication capacity, building plants requiring equipment to fabricate semiconductors. The reason why we did this was there was no chipset around to meet our requirements. There was no manufacturing capacity or technology to manufacture these chipsets. So the amount of investment that went into PS3 was quite big.
Now PS4 in contrast is a much more lighter platform in terms of investment, because as for the chipset, at the core we are taking off-the-shelf technology available and we are putting our proprietary technology around that core chipset. So the amount of investment is much, much smaller. I cannot give you absolute amount. In terms of manufacturing, this time. we are totally fabless, meaning that we are relying on our foundries or semiconductor manufacturing companies to supply it for us. So we do not have CapEx related to having the chipset ready for us.
So on the software side, well, the PS4 is obviously more advanced than PS3, but here, the cost depends on how the development community works to create good titles for us. So I cannot comment further than this. Now as to your question, our capacity to meet demand, at the moment we have not disclosed how many units we will prepare for the launch and
for the fiscal year. This I think Sony Computer Entertainment will inform you when the time comes.
But we are very much I would say encouraged by the response that we’ve received at E3. Some polls indicate that about 80% of potential customers prefer PS4 over our competition’s new platform. This is very encouraging and we are doing our best to secure enough chipsets and capacity to meet whatever demand that is there for us. So that is as far as I can say at the moment, but we are very encouraged with the developments so far.
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Dan Loeb – Third Point – Analyst
Thank you very much.
