Sony hacking highlights challenge to CEO Hirai's 'One Sony' vision

Credit: Reuters/Fred Prouser

An entrance gate to Sony Pictures Entertainment at the Sony Pictures lot is pictured in Culver City, California April 14, 2013.

The Japanese conglomerate is heading for its fifth net loss in six years, raising questions about its ability to hold on to businesses ranging from making television sets to movies. While activist hedge fund investor Daniel Loeb has given up his call for Sony to spin off its entertainment arm, others believe it should exit weak product lines such as TVs.

Bilingual Hirai is linked to both sides of Sony, having experience at both the video games and music businesses. He is therefore widely considered one of the company's few executives capable of bringing together the manufacturing and movie-making cultures of Tokyo and Hollywood.

But along with racial jokes related to U.S. President Barack Obama and disparaging remarks about top actors, leaked emails from Sony Pictures executives reveal tension between Hirai and the film studio.

The emails were leaked following a cyberattack on Sony's computer systems last month by a group demanding the company pull upcoming film 'The Interview', a comedy criticized by North Korea for depicting the assassination of its leader. They show Hirai ordered the film to be toned down and encountered resistance from the film's creators including co-director and actor Seth Rogen. Sony Pictures co-chairman Amy Pascal tried to mediate.

The emails also show film executives viewed Hirai and Chief Financial Officer Kenichiro Yoshida with trepidation ahead of cost cuts aimed at increasing profit margins.

Sony Pictures Chief Executive Officer Michael Lynton in October forwarded to Pascal an email from Yoshida, marked 'confidential' and seeking 'serious consideration to modifying the Entertainment executives compensation plans'.

'This is also what I am now dealing with,' he wrote.

Sony declined to comment for this article and Hirai was not made available for interview.

Company sources said Sony Pictures was taking the lead in the investigation and that Hirai was briefed frequently. People close to the investigation told Reuters the North Korean state is a principal suspect.

ONE SONY

The hack comes as Hirai is trying to prove Sony is better off with all of its businesses including cameras, films and insurance under one roof.

Last year, Loeb called on Hirai to sell part of the entertainment business to fund restructuring in its electronics arm. That, Loeb said, would also force the market to assess the value of the entertainment business more highly.

That business has recently been helping to partially offset weakness in smartphones. Last month, Hirai forecast sales at the Sony Pictures to rise to as much as $11 billion in three years, 36 percent more than current business year.

'The entertainment segment has maintained profitability for 18 years straight, and as a generator of stable profit, it is a major pillar of the Sony Group,' Hirai told investors on Nov. 18, days before the hack became apparent.

Sony shares have risen around 18 percent this year in recognition of Hirai's turnaround efforts. In September, however, Sony cut its outlook for the sixth time on Hirai's watch.

Many investors and analysts now believe Hirai should make more drastic cuts in its electronics arm.

Jefferies analyst Atul Goyal said Yoshida's appointment this year spurred change, such as an exit from personal computers. Goyal said Sony could eventually sell its TV set business.

Mitsushige Akino, chief fund manager at Ichiyoshi Asset Management, said Sony should also exit the commoditized smartphone market as well.

'Phones, TVs... It would be better to wind down those areas, and soon,' he said.

Sony should focus instead on highly-profitable products such as its image sensors which are used in smartphones including Apple Inc's iPhones, he said.

'There's no reason to do everything.'

(Additional reporting by Jim Finkle in BOSTON; Editing by Christopher Cushing)