Sony Corporation (ADR) (NYSE:SNE) is the most recent target of hedge fund activist Daniel Loeb. He wants the Japanese conglomerate to break off its entertainment arm. That would be good for the entertainment division, but would probably be a big problem for the company’s electronics division.
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.
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).