CONFIDENTIAL SONY PICTURES ENTERTAINMENT MID RANGE PLAN OCTOBER
4, 2012
Slide 2
Agenda Executive Summary SPE Divisional Details Television
Motion Pictures Digital Productions Home Entertainment Financial
Summary Closing Q&A 2
Slide 3
EXECUTIVE SUMMARY 3
Slide 4
SPE continues to deliver strong company performance; however,
currency fluctuations and the carry-forward impact of
under-performing films prevent SPE from maintaining the projections
in its prior MRP Television offers multiple opportunities for
growth The networks business will strategically manage its current
assets and identify select investment opportunities to capitalize
on market growth The production and distribution business is
increasing the number of returning domestic series and building its
international team to develop a new hit format The film industry is
navigating a new economic model Consumer tastes are shifting;
action and family genres remain strong, but PG domestic comedies
are giving way to R-rated comedies Production and talent costs
remain high across the industry Domestic cinema admissions are
declining but are offset by higher ticket prices Admissions and
ticket prices are growing in emerging markets, but such territories
offer relatively meager ancillary revenues There is a continuing
shift to lower margin home entertainment models, however, the
decline in sell-through appears to be leveling off New models for
digital distribution continue to gain traction and have superior
margins to their physical counterparts Executive Summary 4
Slide 5
Executive Summary (continued) SPE is also faced with internal
challenges Carry-over impact in the MRP period of underperforming
films from FYE12 and FYE13 Reduced contribution of international TV
production to the MRP due to management relaunch and fewer show
commissions than previously anticipated However, with its
well-balanced portfolio of television and film businesses, SPE
expects to achieve $725M of EBIT and $456M of Net Cash Flow (1) by
FYE16 (1) Net Cash Flow excludes strategic investment spend for the
MSM India and GSN Buy-Up 5
Slide 6
SPE Key Strategic Initiatives Manage the shift in consumption
of home entertainment by driving incremental transactions and
higher margin models New windows New distribution partners New
business models Focus on franchises to drive profitability of
motion pictures Invest capital to expand the high margin television
networks business Become the premier independent producer of
television content Create compelling U.S. content with global
appeal to maximize hit potential Develop local content in
international markets that can be exploited across multiple
territories Exploit attractive economics of cable production
Continue cost reduction efforts Operating costs, e.g., production,
talent, and marketing Overhead costs Manage the business to
maximize cash 6
Slide 7
One Sony: SPE is also supporting Sonys strategic initiatives
SEN / PS+ 4K and 3D Emerging Markets Creating exclusive offers and
providing content to drive transactions and subscriptions
Leveraging Crackle content and expertise Providing marketing and
promotions inventory Evangelizing the benefits of 4K and 3D to the
film and TV community Identifying 4K content to support sales of 4K
hardware Managing the 3D Technology Center Co-promotions, e.g., The
Smurfs in Latin America and The Amazing Spider-Man / Sony Mobile in
India and China Content bundles, e.g., limited edition This Is It /
Michael Jackson Sony Walkman in Latin America Shared Services
Expanding the benefits of SPEs shared service centers to include
Sony Global Treasury and Sony Electronics Cloud Media Services
Creating a new service business for Sony based on SPE-generated
technology Incubating the new business on the SPE lot 7
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By FYE16, two thirds of SPE EBIT will be generated by the TV
business EBIT by Division Total TV = 57% Total TV = 67% 8
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DIVISIONAL DETAILS Television 9
Slide 10
Growth opportunities exist across the television industry The
global number of television households continues to grow There are
a greater number of distribution customers in the marketplace
Affiliate fees are generally stable; ad sales have rebounded since
the 2008 downturn, although economic conditions in some territories
have slowed growth International consumption of U.S. TV dramas
continues to be strong SVOD customers are creating greater demand
for studio content The television industry also faces a number of
challenges European economic issues have slowed the growth of the
ad sales market in many territories Studio programming prices are
expected to rise creating margin pressure on networks Volatility of
foreign currencies creates uncertainty for predicting financial
results in U.S. dollars Competition across the global TV industry
remains strong Television Market Update 10
Slide 11
Industry Trends: U.S. TV consumption continues to increase
Source: BMO Capital Markets. Total Household Hours of TV Viewing
Per Day U.S. 11
Slide 12
Industry Trends: Television networks are key profit drivers for
all media conglomerates Time WarnerDisneyNews CorpViacom Television
Networks as a Percentage of Conglomerate Profit (1) Source: SEC
filings and wall street research. (1)Profit calculated as operating
income, LTM as of 6/30/2012 12
Slide 13
Industry Trends: Emerging markets have the strongest outlook
for growth TV Subscription and Ad Revenues: 2012E 2016E CAGR 2012E
Revenue ($BN) Source: PWC. $79$168$83$40$15 4.3% 5.7% 8.8% 9.6%
10.0% Western EuropeNorth AmericaAsiaCentral & Eastern Europe
LatAM 13
Slide 14
Television Business Overview Sony Pictures Television
Production Networks Distribution Development, acquisition, and
production of television programs for broadcast, basic cable, and
premium cable networks Program genres include scripted comedies and
dramas and non-scripted reality, talk, and game shows Sale of SPEs
film and television content to television and digital customers
Customers include U.S. and international broadcast and cable
networks, U.S. local television stations, and digital services,
e.g., Netflix Management and distribution of branded networks and
channels worldwide International brands include AXN, SET, and
Animax 14
Slide 15
Television Highlights Television EBIT ($MM) 15% CAGR Total
Television EBIT is expected to grow by $295 million (53%) over the
MRP period All TV businesses contribute to this growth; in
particular, Networks anticipates earnings of $503 million by FYE16
(CAGR of 23%) U.S. Production will have 29 shows on the air this
year with 11 shows in the U.S. off-net syndication window during
the MRP period U.S. Production current series annual profits are
projected to exceed $200 million in the MRP period Gross
distribution sales of SPEs library of content are projected to
exceed $2.5 billion by FYE16 15
Slide 16
Develop new content and keep SPTs domestic slate of original TV
series on the air to drive substantial syndication profits Focus on
maximizing operational efficiencies for networks and international
TV production Generate more international local language TV series
with the intent of creating a global hit Grow Crackles U.S. ad
business by increasing investment in its infrastructure Television
Strategic Priorities Strengthening economics of existing businesses
16
Slide 17
Television Strategic Priorities Pursue Growth Opportunities
Build on syndication success (The Dr. Oz Show) to expand with
A-list talent (Queen Latifah) Capitalize on opportunities with
emerging SVOD players (e.g., Netflix, Amazon, Hulu) to drive
incremental value for new and library product for film and TV
Expand in key markets with our branded networks, local and
international TV series, and production ventures Complete a
regional channel acquisition in India and pursue channel
acquisitions in other select markets Continue to invest in
international production companies that create content with
specific focus on the UK but also possibly in Scandinavia, Israel,
Australia and other content rich territories; in addition, identify
potential opportunities to expand into emerging markets with strong
TV growth potential where SPT does not currently have a presence
17
Slide 18
Become the primary ad sales organization across Sony Draw on
SPEs development, production and programming expertise to create
content for Sonys networked devices Leverage our significant and
expanding networks presence in India and Latin America to benefit
Sony as a whole Utilize our networks global reach to assist in
marketing initiatives Television Strategic Priorities Pursuing One
Sony Collaboration 18
Slide 19
Secured partnership with Harpo and successfully launched The
Dr. Oz Show Highest volume of primetime series in a decade; #1
producer of returning scripted cable series U.S. Production Current
Series New Series Returning Series 15 21 20 26 28 Highest volume
year in SPT history with 13 stand-alone profitable series More new
comedy series than any other studio Highest volume year in SPT
history with 13 stand-alone profitable series More new comedy
series than any other studio Rules of Engagement sold in
syndication 7 shows on 2011 primetime fall schedule Broadcast
programming on 6 of 7 nights of the 2011 fall schedule Rules of
Engagement sold in syndication 7 shows on 2011 primetime fall
schedule Broadcast programming on 6 of 7 nights of the 2011 fall
schedule 29 Community sold to SVOD and Cable 4 new series
premiering on all 4 major broadcast networks Community sold to SVOD
and Cable 4 new series premiering on all 4 major broadcast networks
35
Slide 20
Over 1,600 episodes including programming for top broadcast and
cable networks U.S. Production Current Programs 20
Slide 21
U.S. Production Current Series, Pilots & Development
Significant contribution from current series as they enter
off-network syndication Rules of Engagement sold to Netflix and
U.S. syndication market for Fall 2012 Community sold to Comedy
Central and U.S. syndication market for Fall 2013 launch. Already
sold to Hulu with an initial availability in FYE12 Build on our
syndication success with new Queen Latifah series for Fall 2013
Initial off-net syndication availabilities for Happy Endings, Last
Resort, Mob Doctor, Big C and Justified in FYE14 and Franklin and
Bash in FYE15 MRP Assumptions EBIT from Current Series, Pilots
& Development ($ in Millions) $73 $84 $120 $109 $0 $20 $40 $60
$80 $100 $120 $140 FYE13FYE14FYE15FYE16 21 Excludes Wheel of
Fortune, Jeopardy!, Days of Our Lives and Y&R
Slide 22
Wheel of Fortune and Jeopardy! are renewed through 15/16 season
The Young and the Restless is renewed through 12/13 season and Days
of Our Lives is renewed through 13/14 season Production cost
control and reduction efforts continue on all programs U.S.
Production Library, Game Shows and Daytime Serials MRP Assumptions
Maximizing the contribution to EBIT from Core Programs $253 $248
$258 $271 EBIT ($ in Millions) 22
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Culver City Miami (Latin America & U.S. Hispanic market)
Bogota Rome Paris London (WW Production capacity) Hilversum Cologne
Moscow (Russian speaking market) Beijing Hong Kong (Asia market
excl Japan) Sao Paolo Dubai (Arabic speaking market) Beirut Cairo
International Production Operating Companies Production companies
in 13 countries around the world covering multiple regions; to
date, SPT productions have aired in 88 countries and 73 languages
23
Slide 24
Continue to exploit Who Wants to Be a Millionaire and develop a
stable base of other successful formats Make more focused and
sustained investment in development executives, producers,
production companies, and new content especially in the UK The
acquisition of Left Bank gives SPE a stronger foot-hold in the UK
Foster a more creative culture to develop intellectual property by:
Realigning the organization, including a new President and a
creative head Combining the print sales and format sales teams to
better serve our buyers Creating a strategically centralized
development fund Implementing a competitive incentive plan Simplify
administrative and operational processes International Production
Key Initiatives to Drive Earnings Growth The current MRP is based
upon more reasonable expectations for the volume of series and
margins that can be achieved with both internally developed and
acquired product 24
Slide 25
EBIT Margin (without monetization) 2%3%6%5% International
Production Financial Summary MRP Assumptions ($ in Millions) Who
Wants to Be a Millionaire continues to be a major profit
contributor with format license and ancillary profit budgeted at
$16 million FYE13 EBIT includes $11 million from Shine monetization
escrow funds Organic growth from existing operating companies is
supplemented by EBIT contributions from recent acquisitions Left
Bank and Silver River Revenue EBIT Shine Monetization FYE13 FYE14
FYE15 FYE16 25
Slide 26
Distribution Gross Revenue ($ in Millions) Secure long-term
deals in key territories Capitalize on opportunities with emerging
SVOD players across the globe Maximize value of TV series off-net
syndication (e.g., Rules of Engagement, Community, Happy Endings,
Last Resort, Mob Doctor) Distribution Continue to Grow Distribution
Sales MRP Assumptions Generate over $2.4 billion in gross revenue
in FYE13, of which 59% is from Motion Pictures product $2,408
$2,490 $2,443 $2,527 26
Slide 27
Networks Network Brands SET GENERAL ENTERTAINMENT AXN GENERAL
ENTERTAINMENT ANIME/YOUTH LIFESTYLE/MUSIC DIGITAL MOVIES PARTNER
NETWORKS Highly successful network brands benefiting from global
infrastructure 27
Slide 28
Networks Networks Worldwide Reach mobile 28
Slide 29
Networks Growth Opportunities Europe Asia / Australia Latin
America U.S. Italy Movie Channel True Movies UK acquisition AXN
Movies Central Europe SET Germany India regional channels
acquisition (Maa TV) Korean movie channel Asia drama channel
Australia channel Crackle Latin America womens channels TV Asia
U.S. Hindi general entertainment channel 29
Slide 30
Focus next 18 months on maximizing efficiencies in existing
operations Continue to selectively launch channels in new and
existing territories Increase investment in Crackle U.S.
advertising and technical infrastructure Volatility of foreign
currencies has had a particularly harsh impact on Networks earnings
Networks Strong and Consistent Earnings Growth EBIT reaches over
$500 million in FYE16, growing at a 23% CAGR over the MRP period
EBIT Revenues MRP Assumptions EBIT Margin: 17.4% 16.7% 18.2%19.5%
Networks Revenue and EBIT ($ in Millions) 30
Slide 31
As a result of recent investments, North America and Europe
grow as a percentage of Networks EBIT from 24% in FYE13 to 36% in
FYE16 Networks EBIT by Region 31
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TV Trailers 32
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DIVISIONAL DETAILS Motion Pictures 33
Slide 34
Motion Pictures Industry Challenges In 2011, U.S. theatrical
attendance was down 4% vs. 2010 and 20% since the peak in 2002,
however this is offset by increasing ticket prices Changes in
audience tastes and composition continue to challenge slate
strategy 3D as a percentage of overall box office has declined
since its peak in 2010 International box office growth,
particularly in Russia, Korea, Brazil, and China, brings limited
benefit from ancillary revenues Home Entertainment sell-through
performance is down approximately 42% since FYE07 and is projected
to be off by 52% by the end of FYE16 Pressure exists on pay TV
output deals as channels focus more on original programming Slate
financing is less available due to uncertainty in financial markets
34
Slide 35
Motion Pictures Opportunities Big-budget franchise films
continue to perform well and are profitable for studios The Chinese
market now includes more foreign product and has better revenue
shares for distributors Average print costs continue to decease as
the digital screen roll-out continues Digital home entertainment
distribution has attractive margin and is growing, although it has
not offset the declines in physical sell-through Talent are open to
new deals that defer more of their compensation until after the
studio reaches break-even Genre films, including faith-based, are
benefiting from new media, such as social networking, to generate
interest 35
Slide 36
Industry Trends: Most major studios are decreasing their film
slates 2006 2012E Releases 31 23 14 14 37 17 19 14 17 19 Note:
Release counts exclude all specialty labels except Screen Gems and
its equivalents (i.e. New Line, Fox Searchlight, and Touchstone).
Source: Box Office Mojo, BMO 2012, and SPE Corp Dev analysis. 06
12E CAGR: (5%) Major Studio Film Slates Over Time 27 19 36
Slide 37
Industry Trends: The major studios are focusing on tentpole
films 06 12 CAGR: 11% Number of Tentpole Films (Production Budgets
Over $100MM) Source: the-numbers.com and Box Office Mojo, SPE Corp
Dev analysis. (1) Includes estimates for films with 2012 release
dates. % of top 20 Films over $100mm 12%17%20%26%21%15%17% (1)
37
Slide 38
Industry Trends: Franchises are at the center of each studios
strategy In addition, studios are achieving success with family
films and R- rated comedies 38
Slide 39
Forecast: Over the MRP period, North American admissions are
expected to remain fairly flat International admissions are
expected to grow, particularly in Asia and Latin America;
International box office is also expected to benefit from
increasing ticket prices Theatrical Market Update Global Box Office
and Admissions Update 2012 to Date: Year to date, North American BO
is about 4% higher than 2011 and admissions are up about 3% Average
ticket price has also hit an all- time high of $8.12 Source: MPAA
Theatrical Market Statistics 2011 Report, issued February 2012; SPR
Market Share Report as of September 17, 2012; Paul Dergarabedian.
Hollywood.com U.S. Box Office and Admissions Intl Box Office and
Admissions (Box office and admissions in billions) 39
Slide 40
Motion Pictures Emerging Market Box Office Performance
BrazilRussia ChinaSouth Korea 16%/yr 7%/yr 22%/yr 10%/yr 40%/yr
21%/yr 5%/yr ($Millions, % CAGR) Source: PwC Global Entertainment
and Media Outlook 2012-2016. 40
Slide 41
Chinas quota for films with U.S. studio revenue share has been
increased from 20 to 34 films per year 14 additional films must be
large format or 3D The revenue share cap for U.S. films has been
increased from 13% up to 25%; the cap for Sino-American
co-productions is 35%-43% The number of screens in China is rapidly
growing 1,500 screens in 2002 to over 9,000 in 2011 (22% per year
growth) Projections for 11,800 screens by 2012 and 20,000 by 2015
There are currently only 13 screens per million people in China vs.
127 in the U.S., suggesting that there is substantial potential for
further growth Theatrical Market Update Growth in China 41
Slide 42
Motion Pictures Benefits of Digital Cinema 42 Total Variable
Release Print Costs for a Typical SPE Film Slate Assumes a constant
slate (19 films all 100 minutes: 12 Col, 2 SPA, 4 Screen Gems, 1
Acquisition) with a constant number of prints for each Dollars
(millions) Notes: Cost per print includes VPF,
printing/duplication, keys, and inter and intra country shipping;
Other print costs excluded from amounts above, such as trailers,
print preparation, mastering, and localization costs; Cost per 35mm
print are pre-rebate and advances; International print costs use
constant FX rate of 1.25 to $1.00. Source: SPE analysis.
Slide 43
Source: Sony Pictures Releasing Theatrical Market Update 3D
Films In the U.S., 3D as a percentage of total box office is
declining across most genres Family/animation has decreased from
about 55% in 2011 to about 40% in 2012; this decline is driven by
price sensitivity as well as children struggling with 3D effects
and glasses Live action/adult-oriented content is also declining
from about 65-70% in 2011 to about 50% in 2012; within this
category, action films are now at around 45% and rated-R/horror is
at about 60% Over the next year action is expected to remain flat
while family and rated- R/horror are more likely to decline a bit
further The international market is experiencing similar 3D erosion
to the U.S., but is tracking a few years behind; thus,
international percentages are still higher in most categories
Beyond market trends each title must be evaluated individually to
plan the optimal 2D/3D releasing pattern 43
Slide 44
The Amazing Spider-Man exceeded box office expectations,
successfully re-launching the studios most important and valuable
franchise 21 Jump Street was a success and will turn into a new
franchise for the studio. In addition, it is SPEs highest grossing
title on internet VOD + Electronic Sell-through Bad Teacher was
highly profitable and could be a model for a low budget,
risk-sharing approach to some of our films The Vow and Think Like A
Man (SG) showcased the upside potential for well-executed targeted
films Smurfs (SPA/Col) launched a new global family franchise and
created many opportunities for cross- Sony collaboration Courageous
(SPWA) highlighted the value of a faith-based strategy 44 Motion
Pictures Over the past 18 months, there have been bright spots
amongst all the labels
Slide 45
Despite being favorably reviewed, both Aardman films, The
Pirates! Band of Misfits and Arthur Christmas, struggled at the box
office The box office for Jack & Jill and Thats My Boy were
both significantly below historical levels achieved from past Adam
Sandler films Total Recalls worldwide box office results suffered
from a very crowded summer slate Men-in-Black 3 did not achieve its
aggressive box office assumptions. It had strong competition from
Avengers, which dominated the month of May, and did not get the 3D
lift internationally. Unseasonably warm weather hurt the European
openings Motion Pictures However, there were some disappointments
45
Slide 46
Motion Pictures Strategy Selecting the right product Ensure the
right volume and mix of titles which takes advantage of current
consumer preferences Making films at the right price Reduce
development spending Revamp the greenlight process, requiring
higher hurdle rates for approvals Continue to negotiate talent
deals that result in a participation interest at the point when the
film is profitable to SPE Reduce production costs, including the
continuation of shooting in locations with tax incentives/rebates
Look for alternative deal financing structures Reducing theatrical
marketing and distribution costs Includes leveraging the worldwide
releasing organization to support 3 rd party deals Reducing overall
overhead and cost structure 46
Slide 47
Motion Pictures Proper Mix of Titles Tentpole and franchise
films with significant profit potential Character-driven genre
films Lower budget films of varying genres (e.g., comedy, romantic
comedy) with higher ROI and potential for breakout success Films
targeted to proven movie-going demographics (e.g., baby-boomers,
families, women 17 to 34) Focus on younger, promising talent
Directors Lord and Miller, M Webb, R Fleisher, Nick Refn and Seth
Rogen Talent Channing Tatum, Andrew Garfield, Emma Stone, Seth
Rogen, Jonah Hill 47 Columbia will focus on a reduced number of
large productions and will supplement the slate with low-budget
films
Slide 48
Numerous titles are in negotiation, active development or
production with an eye toward release in the next few years
Spider-Man Ghostbusters White House Down Uncharted Mortal
Instruments Annie Invertigo Untitled Cameron Crowe Royal Wedding 21
Jump Street Amazing Spider-Man sequel is planned for FYE15, two
years after the reboot Skyfall and Bond 24 are included New
franchises, such as Mortal Instruments and 21 Jump Street 2, are
promising Motion Pictures Franchise and Targeted Films Continue our
focus on franchise films and films targeted to proven movie-going
demographics 48
Slide 49
Motion Pictures Production Spending Production Spending ($MM) *
* Excludes Film Financing Benefit Franchise/Tentpole filmsAll other
films $898 $858 $955 $927 $972 $960 Motion Pictures production
spending is more heavily skewed towards franchise/tentpole films
and we continue to generate cost efficiencies and minimize cost
overruns Utilizing technology to gain time and reduce costs Setting
lower cost targets for production; walking away if not met
Minimizing cost overruns by managing release date pressures 49
Slide 50
Project SpendingTerm Deals Controlling both commitments and
spending based on slate needs Limit new projects Continue to sign
one-step writing deals (i.e., separate writing deals for each
draft) or reduce rates where possible Continue to eliminate non-
productive term deals Target projects to specific slots in the
release schedule Development Spending ($MM) Motion Pictures
Development Spending $73 $61 $58 Investing in fewer productions
with a focus on both lower cost films and major franchise films
with an effort to decrease overall development spend 50 At $58MM,
development spending will be the lowest in over 10 years
Slide 51
Worldwide print and advertising expenses have been reduced by
$200MM over the MRP Period FYE13 has seen moderate growth in the
U.S. ad market (up 2% over the prior year) which negatively impacts
theatrical ad spending SPE continues to fully leverage our media
relationships and partnerships, increasing the number of
promotional deals over the past year SPE will continue to pursue
cost savings opportunities including the use of in- show
promotional time Smurfs integrated into Americas Got Talent,
interacting with the judges and introducing a clip of the film
Hotel Transylvania on Food Networks Cupcake Wars Here Comes the
Boom on The Ultimate Fighter Motion Pictures Managing Marketing and
Distribution Spend 51
Slide 52
APRIL MAY JUNE JULY DECEMBER JANUARY FEBRUARY MARCH AUGUST
SEPTEMBER OCTOBER NOVEMBER Captain Phillips $85 About Last Night
$45 Grown Ups 2 $135 Smurfs 2 [3D] $125 Elysium $125 Mortal
Instruments $60 American BS (Dom only) $40 By Dom Box Office $90MM
+= 6 Films $70MM - $85MM= 2 Films $45MM - $65MM= 3 Films $0MM -
$40MM= 3 Films Robocop $115 Battle of the Year [3D] $40 No Good
Deed $35 2 Guns (Intl only) Evil Dead $45 Columbia (8 films) SPA (1
film) Screen Gems (4 films) Motion Pictures FYE14 Release Slate
Acquisitions (2 films) After Earth $160 End of the World $75 White
House Down $150 52
Slide 53
Focus direct-to-Video (DTV) productions on sequels of recently
released theatrical or successful DTV product Increase volume of
theatrically released product with the majority from distribution
fee only deals Continue to focus on Faith based product and pursue
high-profile International all-rights acquisitions Acquisitions
EBIT ($MM) FYE13FYE14 * FYE16FYE15 Margin20%17%15% Acquisitions
Maximize Financial Contributions Able to maintain strong margins
despite greater competition and difficult conditions in the Home
Entertainment market *FYE14 includes a $10m operational challenge
53 FYE15 & FYE16 EBIT reflects lower fees on output deals due
to increased competition and a greater number of theatrical
releases (i.e., more P&A in the year)
Slide 54
Motion Picture Trailers 54
Slide 55
DIVISIONAL DETAILS Digital Productions 55
Slide 56
Digital Productions Key Strategies Develop high-margin,
family-friendly franchises Create diverse slate featuring high-end
CG-animated films and live-action hybrids with strong franchise
potential Reduce production budgets to offset home video erosion,
providing greater upside in success Maximize ancillary revenue
streams to enhance films core profitability by collaborating early
with other SPE divisions Maintain Imageworks quality while
continuing to reduce overall costs Serve as a resource for Sony
Corporation SPA continues to create characters used in Sony
Electronics marketing/promotions Provide 3D and VFX production
expertise to SPE and Sony Corporation Sony Pictures Digital
Productions includes an in-house animation company (Sony Pictures
Animation) and a special effects business (Imageworks) which
services SPE and third parties 56
Slide 57
Sequels to 2011s global blockbuster The Smurfs and 2009s
surprise CG animated hit, Cloudy with a Chance of Meatballs are
both in production Smurfs 2 is set to release on July 31, 2013
Cloudy 2: Revenge of the Leftovers is scheduled for a Fall 2014
release Producing 22 minute Smurfy Hollow as part of the home
entertainment release for Smurfs 2 to augment sell-through Follows
the success of The Smurfs A Christmas Carol, which utilized a
similar strategy Projects in priority development are either
well-known brands or have strong franchise potential; they include:
Alf, based on the popular 80s show still aired globally in 74
markets Popeye, based on the iconic property (Genndy Tartakovsky,
Hotel T, is attached to direct) Kazorn & the Unicorn (Kelly
Asbury, Shrek 2, is attached to co-direct) Digital Productions SPA
Developing Profitable Franchises
Slide 58
Digital Production SPA - Production Spending MRP Assumptions ($
in Millions) Production spending varies based upon the number and
timing of SPA releases o $74MM reduction from FYE13 to FYE14 driven
by more production titles in FYE13 (Hotel T, Smurfs 2, Cloudy 2)
vs. FYE14 (FYE15 TBD Animation, Smurfs 3) Measures taken to reduce
production spend: o Continue to plan film as much as possible in
pre-production (storyboards, pre-viz sequences) to execute in
production efficiently o Seek economies in assets and production
environments (e.g., reuse character models for background
characters; simply change colors of houses to create diversity in
scenes, etc) Annual development spending of $18MM is included in
all years of the MRP Production Spending 58
Slide 59
Digital Productions Imageworks Maintain Leadership in Quality
While Offering Market Competitive Pricing Serve SPA and Columbia as
dependable source of high-quality digital animation and VFX
expertise at lower cost: Completed production on Columbias
tentpoles The Amazing Spider-Man and Men in Black 3 Completed
production on SPAs Hotel Transylvania in less than a year In
production on Disneys March 2013 tentpole Oz: The Great and
Powerful Secure third-party work (Disneys Oz) as a means to reduce
SPA and Columbia production cost (shared overhead, shared R&D,
stronger talent pool) Continue to shift artists to the Vancouver
facility, leveraging 58.4% tax credit on labor to continue to lower
costs 59
Slide 60
DIVISIONAL DETAILS Home Entertainment 60
Slide 61
Home Entertainment Market Update Rental Decline in rental
transactions driven by significant reduction in brick & mortar,
including the bankruptcy of Blockbuster, partially offset by
increase in VOD However, lower margin rental models expected to
continue to gain share at the expense of higher-margin sell-
through models Sell-through and rental transactions are expected to
decline over the MRP period, but subscription VOD services such as
Netflix and Amazon are driving up overall consumption WW Home
Entertainment Market (Transactions 1 ) Trx (Billions) % Rental 71%
72%74% 75% 76%77% Source: Screen Digest (Fixed US$ exchange rate @
CY11 annualized rate) Notes: 1. Does not include Netflix streaming
61 Rental Sell-Through
Slide 62
Home Entertainment Market Update Over the MRP period, a
continued decline in sell-through consumer revenues will be
partially offset by higher rental consumer revenues A continued
decrease in transactions and price erosion are driving a 31%
decrease in sell-through consumer revenues from CY11-16 Rental
consumer revenues (excluding subscription VOD) are expected to
increase by 7% from CY11-16 due to the growth in the higher margin
VOD WW Home Entertainment Market (Consumer Revenues 1,2 ) Dollars
(Billions) Rental Sell-Through 35% 36% 37%38%40%42%45%47%49%
Source: Screen Digest (Fixed US$ exchange rate @ CY11 annualized
rate) Notes: 1. Does not include Netflix streaming 2. Beyond
decline in consumer sell-through revenues, studio economics are
being further pressured on underlying wholesale margins 62 %
Rental
Slide 63
Home Entertainment Initiatives SPHE is focused on maximizing
margins and maintaining flexibility Maximize performance across a)
physical and digital formats and b) sell-through and rental
transactions, with a focus on higher margin models Continue to
scale the business for efficiencies, while shifting resources to
areas with the most profit or growth potential SPHE will pursue
success via four key initiatives: Refine Global Organization:
continue to optimize territory operations, while developing
executive capability and talent Grow Digital Ownership: Capitalize
on growing consumer demand, build on strong relationships with
distribution partners, and emphasize higher-margin models Build a
better ownership model through enhancements such as UV and
increased interactivity Develop the White-Space: leverage awareness
from theatrical marketing during the time that has traditionally
existed between theatrical and home entertainment releases Reduce
Overhead: use a variety of measures including reorganizations,
conversion of certain territories to licensing territories, salary
freezes and other 63
Slide 64
Digital Physical 69% 31% $1,071 $1,382 $1,237 $1,246 30% 70%
Worldwide MRP Contribution ($MM)* * Contribution includes WW New
Media and Traditional VOD; excludes SVOD Home Entertainment
Contribution by Format The percentage contribution from Digital
remains flat over the plan period as Motion Pictures is releasing
titles that skew more heavily towards sell-through 28% 29% 72%71%
Motion Pictures film slate mix and timing impact the year-over-year
changes in the total Home Entertainment contribution 64
Slide 65
Home Entertainment - Digital Capitalizing on the growing demand
for digital Industry CAGR % (2011-15F)*Digital Market DynamicsSPHE
Approach Residential VOD (e.g., Cable, Satellite) 10.7% Already at
scale; competing for time with other digital models Main levers
have already been pulled (e.g., day & date, HD) Electronic
Sell- Through 20.7% Continued growth in demand Increased number of
tablets and connected devices which stimulates digital consumption
Continue to define the right price and window for EST Improve EST
product features, including improving/expanding Ultraviolet
Internet VOD (e.g., iTunes) 26.5% Fastest growth model, driven by
being the lowest cost / highest convenience consumer offering
Capitalize on growing demand, e.g., retailer and territory
expansion Establish new high-margin models (e.g., premium VOD)
Continue to support by using aggressive marketing tactics to secure
placement Note: *Consumer Revenues from Screen Digest (Aug 2012)
65
Slide 66
Home Entertainment VOD Market Growth Source: Rentrak OnDemand
Essential, Screen Digest, SPHE Commercial Planning &
Innovation. Average Per Title VOD Revenue for Top 20 Titles
Millions +71% 66
Slide 67
Flow / Library Contribution ($MM) Physical contribution is
expected to decline at a 6% CAGR from $70M in FYE13 to $58M in
FYE16 Digital contribution is expected to grow at an 8% CAGR from
$34M in FYE13 to $43M in FYE16 Home Entertainment Contribution from
Flow/Library Product 45% 48%37%44%43%42%43%44% Margin: Although
contribution from flow/library product has declined from peak
years, SPHE forecasts it can maintain contribution above $100M per
year through the MRP period 67
Slide 68
FINANCIAL SUMMARY 68
Slide 69
Revenue EBIT 7% CAGR 13% CAGR EBIT Margin 5.8% 6.1% 6.9% (1)
Net Cash Flow (1) 45% CAGR (1) Net Cash Flow excludes strategic
investment spend for the MSM India and GSN Buy-Up Financial Summary
Consolidated Revenues, EBIT, & Net Cash Flow ($ In millions)
69
Slide 70
Financial Summary Overhead Reductions Establishing the Asia
Pacific shared service center to support SPE and Sony Electronics
Asia Pacific Major modification to the employee medical plan
Imageworks is further expanding the utilization of its Vancouver
facility which benefits from a 58% tax rebate on labor Salary
freeze or cuts in Home Entertainment and Motion Pictures HE
converting Greece and India to licensing territories HE
reorganizing the operations team HE shifting resources from
physical to digital and/or integrating between physical and digital
where appropriate Motion Pictures and Home Entertainment continue
to identify opportunities to use joint ventures for distribution
Transitioning Sony Global Treasury Services (SGTS) to SPE European
and Asia Pac shared service centers Continuing to reduce the
overall real estate office footprint Evaluating the outsourcing of
residuals and U.S. payroll Continuing to identify further
opportunities to outsource or relocate other U.S.-based Corporate
functions to our Poland and Asia Pacific shared service centers
Excluding two areas of strategic growth, TV Networks and Intl TV
Production, total G&A expenses decrease by 0.3% over the MRP
period as a result of continued cost reduction efforts $38 $60 $70
Annualized Overhead savings by Year ($ In millions) 70
Slide 71
Financial Summary Operating Income by Division ($ In millions)
71
Slide 72
Financial Summary Major Changes to EBIT from Prior Plan ($ In
millions) 72
Slide 73
($ In millions) Financial Summary Television Operating Income
Summary 73
Slide 74
($ In millions) Financial Summary Motion Pictures Operating
Income Summary 74
Slide 75
Financial Summary Digital Productions Operating Income Summary
($ In millions) 75
Slide 76
Financial Summary Consolidated Net Cash Flow ($ In millions)
76
Slide 77
Financial Summary Consolidated Net Cash Flow Pursue film slate
financing opportunities and tax credits Aggressive collection of
receivables Employ strong cash management efforts Factor
receivables as necessary SPE continues to aggressively pursue all
opportunities to improve cash flow 77
Slide 78
Financial Summary Initiatives to Increase U.S. Taxable Income
SPE Finance and Sony Tax are actively involved in identifying
opportunities to increase SPEs U.S. taxable income For tax
purposes, changed to a straight-line method for amortization of
film cost which will allow SPE to accelerate U.S. taxable income
U.S. taxable income for each of the next 3 years will be
approximately $1 billion higher than it would have been under the
alternative film cost amortization methodology Will facilitate
Sonys utilization of existing NOL and tax credit carry-forwards
before they expire Legal entity rationalization project, starting
with Europe, to reduce administrative costs and reduce risk by
simplifying the overall legal structure Project is also anticipated
to provide the opportunity to reduce foreign withholding taxes by
approximately $20 million per year Since a lower amount of foreign
tax credits will be generated, it increases Sonys ability to
utilize existing tax credit and NOL carryforwards Actively
monitoring transfer pricing agreements to maximize pre-tax income
in the U.S. 78
Slide 79
CLOSING 79
Slide 80
Closing Summary Despite market challenges, SPE has maintained
strong operations TV is driving two-thirds of studio profit and has
great potential for further growth The film industry is faced with
the challenges of shifting economics and changing consumer tastes,
but SPE has the right strategies in place to navigate the
transition By investing in key growth businesses, SPE will continue
to generate increasing EBIT and cash over the MRP period and beyond
80