Japan To Katzenberg: Ease Up

Disney boss Jeffrey Katzenberg upset a lot of people with last month’s wide-ranging 28-page memo, but none more so than the Japanese.

Several high-ranking Japanese entertainment execs have responded to Katzenberg’s claim that “the Japanese are getting into a business that is to some extent outside their cultural context.”

“We have no intention of interfering in the creative side of filmmaking,” says Seiichiro Niwa, the chairman of JVC Entertainment, a Matsushita, subsidiary that has invested over $100 million in Lawrence Gordon’s Hollywood film company, Largo Entertainment.

“Lawrence Gordon has complete control over everything. And we have a very good relationship with him. I don’t see the need for arguments. What Gordon wants he gets,” says Niwa.

Sony expresses the same sentiment. A senior executive explains: “If we began messing with Columbia we would be bound to fail. That is why we brought in [Peter] Guber and [Jon] Peters. We are leaving the business entirely to them. But software needs hardware. They can learn from each other.”

What rankles Sony and Matsushita is that while Katzenberg criticizes the Japanese, he does not hesitate to take their money. On Jan. 31, six Japanese banks and Yamaichi Securities agreed to give Disney $365 million to finance 60% of the production costs for 25 movies over the next 18 months; $180 million of this is in the form of a limited partnership between Yamaichi General Finance Co. and Disney. U.S. banks are chipping a further $55 million into the loan package.

“We entered the deal,” Morihiro Matsumoto, the deputy general manager of Yamaichi Finance, says, “because Disney is a very good company. We are not trying to make movies. We are in there to make money.”

Over the last four years more than half of corporate Japan’s acquisitions in the U.S. have been in the entertainment industry. A long list of Japanese banks and businesses has given financing to Hollywood pictures. Last year, the Japan Broadcasting Corp. (NHK) and two of the world’s largest banks, Dai-Ichi Kangyo and Sumitomo, set up a consortium, Media Intl. Corp. (MICO), to pour 100 billion yen ($770 million) over five years into foreign (mostly Hollywood) productions. In 1990 alone, Japan probably bankrolled more than $600 million of Hollywood’s production costs.

“Almost every month someone comes here asking us to invest in Hollywood,” says Hiroshi Hirata, v.p. for international development at NHK Enterprises in Tokyo’s Shibuya district. “Over the last two years we have been approached by MGM/UA, Qintex, Drexel Lambert and many others. We are still interested in buying into a studio, but we would not try to make American movies. We just finance them.”

No one is denying that moviemaking is a risky business. But the Japanese, apart from being flush with cash and needing somewhere to invest it, have a good reason for taking the risk. Since the mid-1980s, the Japanese Ministry of Finance has allowed investors to write off 90% of their investment in a movie in just two years. This is almost twice as fast as the IRS allows U.S. movie investors. Other generous tax breaks are given on the interest on money borrowed for moviemaking.

Japanese investors also are tantalized by the prospect of owning world rights for Hollywood pictures. Victor Corp. of Japan’s investment in Largo enables it to “obtain full rights to the motion pictures we make, such as those for video software packages, satellite broadcasting and high-definition tv,” says JVC’s Niwa.

Japan is the largest export market for Hollywood movies and videos (as well as the second-largest cinema boxoffice market). It sees a bright future in exporting U.S. movies to the rest of the world.

Katzenberg is not a believer in synergy, the concept of owning all stages of a product’s manufacture and distribution to maximize profits. The Japanese reply that the synergy already has begun.

“We are already seeing the benefits of buying Columbia,” a senior Sony official maintains. “[ Steven] Spielberg’s ‘Hook’ should reveal some of these benefits. Most of it is being shot on high-definition video and is then being dubbed on film. This makes the process more efficient and creative than the simple movie process. Our software people already have lots of ideas for our engineers to make new cameras and editing equipment.”

Sony claims its scientists are close to perfecting digital film, a breakthrough that could revolutionize the film distribution business. In 1989, Hollywood studios spent $600 million in printing and distributing movies, according to Kidder Peabody analyst Chris Dixon.

The attraction of a digital master disk is that it would never lose any of its quality – and perfect copies could be simply sent down a telephone line from Columbia’s Hollywood lot to movie theaters around the country and the world.

It is possibilities like this, says Sony, that help explain why the Japanese are in Hollywood, and why Sony paid nearly 100 times earnings for Columbia and Matsushita paid 40 times earnings for MCA.

Clyde Prestowitz, author of the controversial bestseller “Trading Places: How We Are Giving Our Future To Japan And How To Reclaim It,” argues that the Japanese understand better than anyone else the importance of “linkages.” By controlling movie libraries they obtain a vital advantage in establishing standards in new technologies, such as laserdisk video and HDTV.

Prestowitz believes HDTV may become the decisive battleground for the future world leadership of the electronics industry. It will not only provide new hardware for the entertainment medium but countless applications for industry, medicine and aviation, he says. Some analysts believe that the year 2000 HDTV will be a trillion-yen-a-year ($7.7 billion) business in Japan alone.

“In the 21st century, we will need close cooperation between hardware and software,” says Niwa. “What Sony and Matsushita are doing is right. You need the assistance of hardware. Katzenberg doesn’t want to listen.”

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