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After Michael Lynton’s Exit, Is Sony in for a Major Overhaul?

UPDATED: Three years ago, Sony Corp. CEO Kazuo Hirai made it clear that the need for improved results at Sony Pictures Entertainment was urgent. At the time, he vowed to become a more prominent presence at the studio’s Culver City lot and to exert his authority to ensure a drastic makeover of the conglomerate’s struggling motion picture studio.

That was in February 2014, when the Japanese corporate leader signaled he would no longer tolerate substandard performance at his American entertainment operation, which, under the watch of studio chief executive Michael Lynton, had faced a revolt, with an activist investor calling for Lynton’s head.

In the 35 months since, Sony has not been able to extricate itself from financial woes, management turmoil, and a string of movie flops.

Last week, Hirai was back in the news, this time with an even more resolute, pointed agenda: He was assuming a new title — co-chief executive of Sony Entertainment — and planning to take a second office in on the Sony lot. He vowed to further educate himself in the studio’s business while he searches for a successor to Lynton.

Though Lynton announced Jan. 13 that he would leave Sony Feb. 2, after 13 years, to focus on his chairmanship of the social media enterprise Snapchat, the signals from Japan made clear that his corporate masters were also ready for a dramatic change.

Lynton’s departure raised the likelihood that more dramatic — even epochal — changes could be coming inside the conglomerate’s American operations.

There is speculation that a major reorganization may be on Sony’s horizon. The conglomerate was said last year to be considering a shift that would put its successful gaming unit in control of its less profitable studio. Such a move could see Andrew House, head of Sony Interactive Entertainment, put in charge of the film and TV studio. The company denied that shift was being considered.

The fate of Tom Rothman, chairman of Sony’s Motion Picture Group, who Lynton hired two years ago to take on the studio’s movie division, is highly uncertain. Rothman has not yet turned the studio’s box office fortunes around, as evidenced by pallid results for films like “Ghostbusters,” “Passengers,” and “Billy Lynn’s Long Halftime Walk.” And he has rubbed many executives the wrong way. Some believe the bosses in Tokyo like his tough, bottom-line sensibility enough to want to give him more time but not enough to name him as Lynton’s replacement. His next boss will presumably help determine Rothman’s future at Sony.

With revenue stagnant, more cost-slashing could get underway as soon as next month, according to several sources inside and close to the studio. A $300 million cut in 2014 included the layoffs of 216 employees. Sony trimmed another 20 marketing workers in March. And a review of further expenditure reductions began last summer, following the hiring of a new chief financial officer, Philip Rowley, who had helped Lynton slash staff when the two worked for AOL Europe in the early 2000s. Pressure has escalated in anticipation of an earnings report in March, at the end of Sony’s fiscal year, that is expected to reveal bleak results.

This, and last week’s upheaval atop Sony, once again raised speculation (and likely the hopes of CBS Corp.’s Leslie Moonves) that the electronics giant would finally unload its U.S. entertainment assets — despite a statement from Hirai on Friday to scuttle such rumors. “We see our entertainment businesses as essential parts of Sony,” he said.

That didn’t stop some industry watchers and media analysts from hypothesizing. “My sense is a Chinese company could step up as a buyer, because some have already expressed an interest in buying a studio,” says Jason Squire, associate professor of the practice of cinematic arts at USC. “If they wanted one, it would most likely be Sony, because Sony doesn’t have the FCC-regulated networks under their belt.”

Longtime entertainment analyst Hal Vogel noted how much the studio hierarchy has shifted in recent years. “The world is changing very quickly,” Vogel says. “Hollywood studios really separated themselves into different groups. You’ve got Disney, Warner Bros., and Universal in the top tiers. Fox is in the middle, and Paramount and Sony are at the bottom.”

The departure of Lynton fueled long-running speculation about the fate of Paramount chairman Brad Grey. The studio, which has not been able to escape the box office cellar for four years, dragged down by costly flops like “Allied” and “Ben-Hur,” suffered its worst fiscal year since Grey assumed the reins 12 years ago.

While Sony’s television and music businesses — both of which Lynton has overseen — have produced solid results, the performance of its motion picture division has been largely abysmal. The studio has to look back to 2012 for a patch of clear sky. It was that year that Sony finished atop the domestic box office standings, with hits like “The Amazing Spider-Man,” “Men in Black 3,” and a winning James Bond installment, “Skyfall.”

The following year, Sony plunged to fourth place in domestic theatrical receipts, weighed down by flops like “After Earth,” “Elysium,” and “White House Down.” It has finished no better since, lagging in fifth place each of the last two years.

But it’s not just uninspired movies that have dragged Sony into prolonged crisis. In May 2013, activist investor Daniel Loeb — then one of the conglomerate’s largest shareholders — lashed out at the company’s low profit margins and overspending. Loeb slammed Lynton and then studio co-chairman Amy Pascal, saying they lacked “discipline and accountability.”

The studio had been known throughout the industry as being top-heavy with executives and rich producer deals. Hirai told Variety at the time that he took Loeb’s condemnation seriously. “I think it highlighted and provided an additional spotlight for those issues and brought it a public face,” he said.

Bad went to worse in late 2014, when hackers, reportedly tied to the government of North Korea, broke into Sony’s computer system and stole thousands of emails, possibly in retaliation for a comedy that parodied the nation’s supreme leader. When the emails were posted on Wikileaks, months of embarrassing revelations and spiraling security costs followed. For a time, the studio could not use email, and even when computers came back online, a sense of equilibrium was slow to return.

The scandal (along with poor film results) cost Pascal her job after some of the emails showed her making racially insensitive remarks. That was one of an avalanche of high-level departures from Sony’s executive ranks in recent years, including Sony Pictures Television chairman Steve Mosko, Sony Pictures vice chairman Jeff Blake, home entertainment head Dave Bishop, Sony Pictures technology president Chris Cookson, Columbia Pictures production president Michael De Luca, domestic marketing chief Dwight Caines, business affairs boss Andrew Gumpert, and the motion picture group’s other co-chairman, Doug Belgrad.

In early 2015, Lynton turned to former Fox studio co-chair Rothman to turn the ship around. Rothman brought with him a reputation as a smart operator who understood all aspects of the business, but he was considered prickly and domineering in a way that drove some filmmakers and coworkers to take projects elsewhere.

Lynton and the corporate officers in Japan were said to appreciate Rothman’s tough attention to the bottom line and his demand for high standards, but he also alienated many executives in Culver City. More than a dozen complained to HR and Lynton about his micromanaging and brusque manner.

With Lynton on the way out, there are rumblings that Rothman could also be on the firing line. One rumored scenario is that Jeff Robinov — the former president of Warner Bros. pictures group who is now based at Sony with his Studio 8 production venture — could be a candidate.

Along with insider House at the gaming division, another potential Lynton successor being bandied about is former Fox co-chairman Jim Gianopulos, though people close to the free agent say he hadn’t been contacted as of last week.

Similar rumors about former DreamWorks Animation founder Jeffrey Katzenberg are also not likely to amount to anything, according to several of his confidants. They say taking on another studio job is out of the question for the man who has admittedly tired of the movie and TV businesses and who just last year bagged a $400 million payday for selling DWA to Comcast in a $3.8 billion deal.

Another name that surfaced over the weekend was that of Imagine Entertainment co-founder Brian Grazer. It would not be inconceivable that Sony would acquire Imagine, which for years has produced the Dan Brown-inspired “Da Vinci Code” movies for the studio and has made hit TV shows elsewhere that include “Empire,” “24,” and “Mars.”

No matter who winds up taking the helm at Sony, they will be looking to not only create blockbusters, but to reinvigorate a studio that has lost its way.

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