A NEW WORLD AT SONY

By FRANK GIBNEY JR./TOKYO

The invitation said casual, although the occasion was anything but: dinner at the media moguls' summit, an annual gathering at which financier Herb Allen played host at his Sun Valley digs. Nobuyuki Idei was late and tired, and since he was still wearing a suit, he looked like the carbon-copy Japanese manager that Hollywood had taken to the cleaners in recent years. So the Sony Corp. president doffed his jacket and donned a Men in Black T shirt for his big entrance. "Just a little marketing gimmick," jokes Idei. "But the guests congratulated us." Idei got hoots of approval for Sony Pictures Entertainment's biggest film of the year from the likes of Disney CEO Michael Eisner, Intel boss Andy Grove, Seagram's Edgar Bronfman Jr., Time Warner's Jerry Levin and DreamWorks' Jeffrey Katzenberg, to name a few.

Idei, 59, is the first Japanese to crack this exclusive club, a symbolism not lost on Howard Stringer, president of Sony's U.S. subsidiary. "He is a player," exults Stringer, the former CBS network boss brought in by Sony to clean up the mess at its U.S. operation. "He is young, dynamic, and he is taken seriously by this crowd. It's in the ether now."

Idei's stature in America's "New Establishment" mirrors Sony's performance these days. Men in Black is just one of a string of hits this year that has enabled Sony Pictures (Columbia, TriStar) to fly past $1 billion in U.S. box-office sales in record time. In music, Sony's record division continues to churn out profits, even though the industry is downbeat. Sony's PlayStation game player has blown away Nintendo. And Sony still sells $23.28 billion worth of audio-video equipment. Its second quarter was a monster, with sales rising 20.6% to $13.6 billion and income rising 60% to $464 million, from the same quarters in 1996.

Those results, while only for one quarter, underline what is becoming a remarkable strategic and cultural overhaul of this $45.67 billion company, which by the way is America's most respected brand, according to a Harris poll. Strategically, Sony is taking the plunge into the digital, wired world. It had little choice. Sony got rich and famous by building a series of great gadgets--the transistor radio, the Walkman, Trinitrons--that took advantage of unique technical advances, like those in miniaturization. Although Sony still makes a ton of money on Walkmans, its competitive edge in such stand-alone products is fading in a world where music and video are increasingly being rendered in the digital language of computers. So Sony is making personal computers with Intel, Net-surfing hardware for Microsoft's WebTV and cell phones and pagers with San-Diego-based Qualcomm Inc. Sony factories are churning out a wave of digital-based products, from high-resolution videodiscs and video-game machines to passport-size video and still cameras that plug into a PC.

A far more radical change is taking place within the company's culture. Japan's corporations, for all their technical prowess, tend to be slow-footed giants whose conservative, consensus-driven managers can choke creativity and make a bad situation worse. In Japan, loyalty and longevity are still the paths to advancement. To compete in the digital world, marked as it is by furious speed in product development and dealmaking, Sony will have to be more agile, more aggressive and more--American.

To make that happen, Idei is rumbling through Sony's management ranks like a temblor. He has already brought down Sony's board of directors, reducing its size while adding three outsiders. Last week the company announced another restructuring, giving more heft to its broadcasting business and creating a new company called Digital Network Solutions Co. Catchy!

Idei's quest is for Sony to combine Japan's technical wizardry with America's creative panache and thus become the global multimedia entertainment company. "Something," says Idei, "like a Disney or Time Warner with our manufacturing base in Japan." That means bridging technology and entertainment, not to mention the cultural chasm between Japan and America. Ultimately, Idei aspires to create a global wireless network, a world in which satellite communications bring interactive entertainment to every living room and den. Says he: "Convergence is happening not only between audio and video but between computers and communication. There is a fundamental change in society, and this is our opportunity."

Sony co-founder Akio Morita and then-president Norio Ohga knew in the 1980s that the digital revolution was coming. In fact, with Philips Electronics, Sony created the audio CD. They talked about the revolution. And they set their engineers to work on digital products: audio and video recorders, televisions and broadcasting equipment. Still, the company's great innovators were backwinded by their own ingenuity. In the late 1980s, when Japan was riding high, Morita, who co-authored a book titled The Japan That Can Say No, began to spend as much time criticizing American management practices as he did running the company.

While Morita maligned his U.S. counterparts, the future of the electronics business was shifting rapidly to computers, multimedia and the Internet. Sony's competitors weren't going to be just electronics companies like Matsushita (Panasonic) but computer firms like Intel, Microsoft and Compaq Computer. Back in Japan, where in 1995 only 1.8 million computers were wired to the Web , there was no more than a faint understanding of the revolution going on in the States.

Sony's profits came under increasing pressure as harsh pricing and a strong yen battered electronics makers. No matter how many Walkmans Japan's best could sell, the idea that the company could make the leap from gadget producer to player in the multicultural, multimedia universe was considered, to twist an old Sony advertisement, baloney.

Enter Idei, the man who made Digital Dreams the mantra of Sony's revival. The golf-loving son of an economics professor, Idei is a Sony lifer who started in 1960, straight out of Tokyo's prestigious Waseda University. Waves of surprise rippled through the company when Idei was tapped for the top job in April 1995. He leapfrogged a dozen more senior managers, accomplished executives with nicknames like "Mr. Walkman," "Mr. Semiconductor" and "Mr. Camcorder," for their roles in Sony's engineering triumphs. Idei was quite different. He studied European history in college. He's fluent in French and English, and held a number of marketing jobs in Europe and Japan.

Sony didn't need a techno-whiz, it needed a global manager who could master the ever increasing complexity of the digital marketplace. "Right now, you don't need to be an engineer," says Ohga. "You have to have a nose, and if you don't, you can't run a company like Sony."

The nose is key. Digital technology has propelled the electronics business to light speed. Sony has to run with lithe computer giants like Compaq and IBM in the race to develop software, engage in complex battles over copyrights and industry standards in the entertainment business, and frame alliances and joint ventures before rivals intercede. The winners will be decided not simply by techno-vision but also by sniffing out the truffles in these daunting challenges and bringing them to market.

No place is more important for tomorrow's Sony than America. Although American customers account for less than 30% of the company's worldwide sales, they define Sony's goals in entertainment technology. And American software largely determines whether those goals can be reached. So Idei's first order of business as president was to regain control of the company's U.S. operations, which he likened to a car in which he couldn't find the accelerator or the steering wheel.

As far as Tokyo was concerned, Sony America president Michael P. Schulhof had come to personify a chaos and excess that threatened to drag the company down. A protege of Morita's and Ohga's, Schulhof was a 20-year Sony veteran, a physicist who in his early years as Sony America chief had been competent enough in overseeing its lucrative electronics and music businesses. The company's disastrous foray into Hollywood, however, "changed Mickey," as one Tokyo-based Sony director puts it. Schulhof's lavish spending to remodel Sony's Madison Avenue headquarters had already drawn grumbles in Tokyo. The studio, led by Jon Peters and Peter Gruber, had gone through money the way film runs through a projector. Meanwhile, Sony's hardware team lost faith in their leader.

The Schulhof question was one of a range of issues on which Sony chairman Ohga differed with his new president. Ohga had a soft spot for Schulhof, who was considered "family." In spite of that, he could not protect him. Idei told a friend he thought it would take him 18 months to get rid of Schulhof. It took half that time. Schulhof was gone by December 1995.

Idei was having none of the hands-off-of-America policy of his predecessors, who were worried about cultural and political implications. "I had been offering many suggestions to Mr. Morita and Mr. Ohga about the nature of the U.S. business," recalls Idei. At the new Sony, all top managers report directly to Idei, who has also staffed the Los Angeles and New York City offices with key Japanese lieutenants.

Ironically, to pull off his strategy Idei needs American managers more than ever. That's why he kept Carl Yankowski, a Schulhof hire who knows consumer markets, to run the U.S. company's hardware division, and industry veteran Thomas D. Mottola at the controls of Sony Music. Although the chiefs in America report directly to Tokyo, Stringer is the chief visionary in the U.S. Stringer might take issue with being labeled an American manager--he is, after all, Welsh--but he qualifies by virtue of having run a U.S. television network. More important, Stringer is wired into the future. Prior to moving to Sony he was CEO of Tele-TV, a company organized by three Baby Bells to deliver new kinds of entertainment programming to people's TV sets via phone lines. Although the venture was comically unsuccessful--the Bells never figured out what they wanted--Stringer nevertheless got a firsthand look at the many ways that software might be distributed in the future.

Now Sony wants him, as Stringer puts it, to "connect the silos" of the operation, to make sure that the content providers and the hardware wizards are at least talking with one another. The goal is to make sure that Sony music and movies have a regular pipeline into American living rooms. Unlike, say, Time Warner or TCI, Sony has no cable service, and because it is a foreign company, it cannot own a U.S. broadcast license. In any case, analysts point out, the company might not need to shell out the mountains of cash a network demands if Stringer can help work deals to keep its programming flowing. "Stringer's job is to prepare for the future construction of the pipeline," says Idei. "That might mean an alliance, I don't know. But we need someone who knows the market."

The multimedia market, long dismissed by Ohga as a distant grail compared with Sony's surefire single-product profit machine, is coming into focus. "All of us are in a battle with Bill Gates for the living room," says Stringer. Even Ohga admits the company's cash cow today is in fact not the Trinitron TV set but a computer-based product, the PlayStation. It was born as an afterthought when Nintendo canceled Sony's contract to supply storage devices for its game machine. But it became an instant hit--22 million machines have been sold worldwide. PlayStation's parent company also offers a hint of the future: it is a separate subsidiary with considerable autonomy.

Sony's grand plans are met with some skepticism both here and in Japan. "That doesn't mean there is a clear picture of where they are going," says Koichiro Chiwata, a Tokyo-based analyst for Salomon Brothers. "But Sony is the only company we can trust to do something about it. That may be a strong statement, but people have faith in this company. They have shown they can change life-styles before, and more important, they are not afraid to change themselves."

The company's halfhearted effort to get into the PC business in 1981 divided the ranks of young technologists. When the program was suspended, a wave of engineers left in despair. "We weren't getting the support," says a Sony alumnus, who like so many others, now works at the Japan office of a top American computer concern. Idei, the executive who pulled the plug on the PC business, wasn't going to make that mistake twice. In 1995, even before his presidency was officially announced, he met with Intel's Grove.

From that came the VAIO, an Intel-produced, Sony-designed line of computers introduced last year that hasn't exactly wowed the digerati. Some analysts complain that Sony's PC offers too little value and is priced too high to compete with established makers like Gateway 2000 and Compaq. Sony contends that the VAIO is simply spearheading a long-term attempt to get a lucrative piece of the multimedia home computer market. For that, Sony has much to offer. "The next growth market is digital imaging for PCs," says the Tokyo analyst. "And connecting digital cameras and computers is one of Sony's biggest strengths."

The other important product battle is over the digital versatile disc (also known as the digital videodisc). DVD is being advertised as the answer to the CD, the videotape and the CD-ROM. DVD is also the focus of the biggest battle to create an international standard since vhs vs. Betamax (in which Idei was on the losing side). Sony and Philips had been working for years to come up with a video version of the CD that would replace videotape cassettes and take CD-ROM discs to a new level. But in 1993 Toshiba trumped Sony, at least in the segment of the DVD market that involved nonrecordable discs. Toshiba announced a different DVD standard for such discs that was supported not only by competitors like Hitachi but also by a major content provider, Time Warner. In January 1995, Matsushita, Sony's chief rival, threw its lot in with the enemy. By September, Idei conceded that Sony would adapt its technology to fit the Toshiba-Matsushita standard.

Besides, there remained a more important campaign to be waged--over standards for the much more lucrative market in rerecordable discs for computers. Last September, Sony set off a controversy by declaring that it had formed a consortium with Philips, Hewlett-Packard and Ricoh to produce a new format for the rewritable disc. "It has become very difficult to work out an international standard for anything these days," sighs Ohga.

While his engineers race to mix and match technologies, Idei has been forging as many business alliances as possible. Besides Grove at Intel, the Sony chief is spinning deals with Microsoft. Last April, Microsoft paid $425 million for WebTV Networks Inc., an Internet software provider that uses Sony hardware. IBM's Lou Gerstner could be a key partner in shaping a future DVD format. In May, through Idei's personal connections with Rupert Murdoch, another Sun Valley buddy, Sony announced it would cooperate with News Corp., Fuji Television Network and Softbank, the Japanese company that owns Ziff-Davis and the comdex computer shows, in a venture to start JSkyB, a 150-channel satellite broadcasting service in Japan.

This is convergence. Yet no one is really sure what it will lead to. Like its competitors in Japan, Sony is racing to build a better digital engine. At the same time, like Microsoft, Netscape Communications and Oracle, the company is struggling to position itself for a panoply of possibilities. Idei doesn't yet have the answers, but he has the nose. This is, after all, a man who loves music and movies, whose desk is piled high with video games ("They keep my reflexes sharp") and who collects cameras.

The nose led Idei to another realization as he was struggling to rebuild Sony America: the reorganization effort could not stop there. "The problems with Sony America were not just American," says Idei. "They were a mirror of the Japanese company." The more he sought advice from the likes of General Electric's Jack Welch and Eastman Kodak's George Fisher, the more Idei felt he had to ignite a management revolution at home. He embraced the American concept of "corporate governance"--the notion that the board of directors is supposed to represent the shareholders, not management. Declares Idei, with a hint of defiance: "Many Americans think the Japanese won't change, but we are. The government is changing; the companies are changing."

That thinking was behind the May board shakeup. In Japan the board is a gang of insiders--in the case of some banks, as many as 70 or 80 people--whose job is to rubber-stamp management's decisions. Idei announced he was trimming the Sony board from 38 to 10, and that the new panel would include three outside directors, with more on the way. In addition, he made it clear that top corporate officers' pay would be tied to the bottom line. "It was a masterstroke," says a consultant who follows Sony closely. "He left them their cars and drivers, but he cleared out the deadwood." Says Idei: "In the 1970s and '80s, this was a founder-driven company. What we need now is a good operating system, a good application system and a good management team."

The May massacre left no doubt in anyone's mind about who was in charge. Still, Idei faces a lonely battle if he wants any more than a cosmetic shake-up at Sony. In spite of its image as a global company, Sony remains, by Idei's own admission, a "purely Japanese" concern. Practically speaking, that means that although Calley and Stringer speak with the president directly each week, there are few others with whom communication comes so easily. Idei is determined to bring a younger generation of worldly Japanese up through the ranks. That won't be easy: Sony is steeped in tradition, which means seniority rules, and promotion still comes hard through the company's typically bloated management ranks.

For that matter, Idei himself remains somewhat ambivalent about just how far he wants to take the lessons of American business culture. Corporate America, especially in entertainment, still pays its executives too much for nothing, he has said. And often, rather than staking an honest claim to new technology, American companies just do a deal. "What Microsoft is good at," he chided once, "is politics." Yet if Idei didn't recognize the value of politics, he wouldn't have accepted the invitation to Herb Allen's Sun Valley retreat. The real challenge for Sony is to combine politics and dealmaking with its legendary technological prowess. If that is possible, then instead of scrambling to react to digital convergence, Sony will be driving the process, right into every living room on the globe.

--With reporting by Bernard Baumohl and Valerie Marchant/New York

With reporting by BERNARD BAUMOHL AND VALERIE MARCHANT/ NEW YORK