confidential -- sony pictures entertainment work product sony pictures imageworks interactive fiscal...

CONFIDENTIAL -- Sony Pictures Entertainment Work Product

Sony Pictures Imageworks Interactive

Fiscal Year 2010 Business Plan

April 27, 2009


Executive Summary

page 2

• Continue third party business in FY10 but be more selective about where & how to compete

– Enhances the core SPE business through SPII developing new competitive advantage

– Incremental profit flows directly to EBIT

– Financial model shows upside in year 3, but results are extremely speculative

– Potential is unclear due to lack of trend data for existing 3 rd party business

• Develop third party business for non-film entertainment-related companies (e.g., broadcast & cable) taking advantage of group’s skill set and location

– Does not constitute the same challenge as film to internal TV or other SPE businesses

• Seek new opportunities within Sony Corp, and continue to compete in consumer packaged goods (particularly soft drinks) and in areas like fast food that closely align with the target demographic for most SPE films

– Develop SPII-specific site to facilitate 3rd party business development

– Pursue clients more selectively along digital marketing value chain

• Create structured approach to innovation to create new competitive advantage– Moderate risk exists for erosion of business due to proliferation of new media platforms

CONFIDENTIAL -- Sony Pictures Entertainment Work Product page 3

SPII’s strongest competencies in the digital marketing value chain are design/production & marketing ops (relatively weakest is strategy)

Key Activities:

Examples:

Marketing plan development & proposed execution

Media buying Campaign

planning

Immersive sites Splash, teasers,

micro-sites & portals

Maintenance, QA integration

Web analytics, market research and reporting

Ad, promotion Email/CRM

Ongoing support of existing executions

Development of new opportunities from existing relationships

WWDM sets an integrated digital marketing strategy for 2012

SPII designs & executes on WWDM strategy for 2012

SPII provides SPE digital marketing with analytics on performance of SPE sites as well as competitors

Digital infrastructure (hosting, bandwidth, etc) and programming/coding

SPII Comments*:

SPE does not typically use SPII for development*

Relatively weaker but improving capability

Strong design capabilities

Strong backend development

Dedicated resource for SPE and well-regarded capability in this area*; consumer insights for 3rd party less certain

Outsource + scalable internal CMS solution help make SPII price competitive*

Lack of AJAX or .NET capabilities are liabilities

Source: SPII, Mercer 2007, Corporate Development analysis * Note: Comments relate to internal surveys as noted **Note: Only one self-originated 3rd party client who was not surveyed

Internal clients appear mostly satisfied*

External clients’satisfaction is unknown**

SPII provides content management solution + hosting for internal clients

SPII manages and updates Sony Pictures sites and portals as needed

Legend Weak Moderate to Strong

Strong


Big Spaceship and other competitors have captured a significant share of SPE business (up to 60% annually) and have diversified client bases

page 4

Summary Overview Promotes full service capabilities

Recent SPE work: Quantum of Solace game, 2012 immersive site (used heavily by SPE)

Other clients: FOX, Disney, Coca-Cola, ABC, Nike, Nestle, LG, Target, Sony Corp, Adobe

Company

Promotes full service capabilities No SPE work Clients: Paramount, MTV, NBC-Uni,

Colgate, Comcast, Ralph Lauren, Office Depot, E-Trade, Holland-America Cruises

Key Differentiators Strong competency in marketing

strategy/ planning and design, particularly with immersive sites

Innovation center structured into business that has enabled them to diversify business

Base of strong entertainment and major retail/consumer brands

Business has a comprehensive site (http://www.bigspaceship.com)

Strong capacity in creative design Game and social media specialist Shanghai office gives them direct

access to low cost labor Business has a comprehensive site

(http://www.triggerla.com)

Stronger emphasis on consumer research & technology

Online video, social media and mobile specialist

Business has a comprehensive site (http://www.360i.com)

Promotes full service capabilities Recent SPE work: Angels &

Demons, 2012, Damages Other clients: CBS, Paramount,

Nike

Promotes full service capabilities Recent SPE work: Casino Royale,

Pursuit of Happyness Other clients: HBO, Anheuser

Busch, AT&T, Harley Davidson, Pepsi

Weaker in strategy but stronger in creative design

Solid backend execution with resident expertise

Business has a comprehensive site (http://www.whittmanhart.com)

Source: Company reports; Company web-sites; Secondary research, SPII, Corp Dev analysis


SPII’s overall success rate is 29%, generating $1.3MM in awarded business chasing $4.6MM from FY08-09

page 5

Not Awarded ($3.1MM)Not Awarded ($3.1MM)

FY09 3rd Party Business DevelopmentFY09 3rd Party Business Development

Source: SPII, Corporate Development analysis * Note: Sports is FOX Sports’ football/baseball fantasy game

Business Awarded ($1.3MM)Business Awarded ($1.3MM)

Projects: 11Projects: 11

$450K$450K

Cash Flows from Awarded Work (FY08-10)Cash Flows from Awarded Work (FY08-10)

$379K$379K

$527K$527K

Projects: 8Projects: 8

* Only wholly external business client


Market Revenue Opportunity

Aligned with Core Competency?

Previous Business Development Success*

Sony Corp.

3 2 3CPG (including soft drinks, alcohol)

3 3 2Media/Entertainment*

2 4 1Apparel

2 3 0Auto

4 2 0Travel

3 2 0

Alignment analysis indicates aggressive pursuit of entertainment (broadcast, cable) & Consumer Packaged Goods (CPG)

Alignment between revenue opportunity, SPI competencies and previous BD success

Little to none Low Moderate High Greatest

0 1 2 3 4Source: SPII, Corporate Development analysis * Note: 92% of 3rd party work was generated from sub-contract


SPII comparatively lacks full capabilities and business diversification in closely-related industries, including entertainment

page 7

High

Hig

h

Large

Estimated Relative Business Size ($MM)

Small

Low

Robert Speiser | Vice President Marketing 310.482.4824 | [email protected]

Competitive Analysis: SPII vs. Selected AgenciesCompetitive Analysis: SPII vs. Selected Agencies

Robert Speiser | Vice President Marketing 310.482.4824 | [email protected]

Source: SPII, Corporate Development analysis


Benefits

Incremental Profits to SPDPIncremental Profits to SPDP

Reduces cost for SPE clientsReduces cost for SPE clients

Further benefits to SPEFurther benefits to SPE

Current core SPE businessCurrent core

SPE business

Higher level of internal service at lower cost,

incremental profits to SPDP

Higher level of internal service at lower cost,

incremental profits to SPDP

Higher rate of utilization to paying clients decreases SPII overhead allocation to rate card

3rd Party Business3rd Party Business

Pollination from other 3rd party projects allows the SPII team to further develop capabilities, including ideation, planning and creative design

Facilitates innovation on new platforms

Rationale for 3rd Party Business: Augments core SPE business, adds incremental profits to SPDP

Rationale for 3rd Party BusinessRationale for 3rd Party Business

Development of new competitive skill sets along the digital marketing value chain can lead to higher margin opportunities and more consistent revenue from ‘agency of record’ accounts

Gross profit for third party business flows directly to unit EBITRisk Factors

Demands from WWDMDemands from WWDM

Improves ability of SPII to recruit, cultivate and retain promising talent

FY10 budget calls for development to be accomplished within existing cost structure and no additional investment other than hiring of “ROP” employees to support the projects

Cost CreepCost Creep

FY 12 will likely require some level of investment beyond hiring ROP employees to sustain/expand existing business to realize upside (costs were factored into projections holding margins constant)

WWDM additional demands in FY10 could impair 3rd party business development efforts

Mitigation: Fixed and variable costs can be reduced though production scalability which has to be planned



Approach #3 creates the largest opportunity to grow, diversify the 3rd party business at low cost but presents higher level of complexity

Approach

Continue ‘As-Is’

Continue ‘As-Is’

1

Description

• Continue to target CPG (soft drinks), fast food (dining) as a full service digital agency

• Pursue other verticals opportunistically (New Mexico tourism, FOXSports.com)

Pros Cons

• Supports SPII’s focus on transition to full service, higher margin opportunities

• Relatively low cost

• Limited operational requirements and easier to flex based on SPE’s demands

Hybrid approach,

including TV

Hybrid approach,

including TV

• Best blend of past + newer approach to grow/diversify

• Reduces wasted/time effort outside of capability gaps

• Entertainment aligns well with existing SPE business/scalable

3

Focus on subcontracting

work within Sony

Focus on subcontracting

work within Sony

2 • Leverage relationships with retained marketing agencies for Sony Corp, using production/backend capabilities

• Pursue similar opportunities externally as they arise

• Easiest ‘fit’ relative to track record

• ‘Sony United’ play

• Lowest cost and lowest demand on internal resources to win business

• Builds on past/current success

• Relative lack of success in this track

• Difficult to win business because lack of prior experience

• May not be properly matched against competitive strengths/gaps

• Higher business development complexity may mean higher time commitment from principals

• External broadcast/cable opportunities will still require some degree of internal consultation

• Difficult to diversify client base into bigger revenue opportunities as a lower cost tech specialist

• Foregoes competing for higher margin activities

• Target internal/external opportunities (CPG, soft drinks, fast food) selectively

• Continue subcontracting approach internally, externally as circumstances dictate

• Pursue broadcast & cable



Hybrid approach: Identify/execute on entertainment opportunities, focus on Sony Corp, continue approach with CPG & fast food

Business ExamplesBusiness Examples

Development OpportunitiesDevelopment Opportunities

CommentaryCommentary

SONY Corp BusinessesSONY Corp Businesses

• Broadcast shows at ABC, NBC, CBS and FOX

• Regular and pay cable programming (A&E, Bravo, FX, E!, HBO, Showtime)

• BD Live (online component for Blue Ray experience)

• Playstation Home (includes online content)

• Crackle: explore synergies between combined video capabilities of SPI/SPII & Crackle (at “net cost” service)?

• Deepen existing business relationships at Sony Corp, identify new activities

• New opportunities such as BD Live play to SPII’s strengths

• Focus on building successful relationships internally ensures business repeatability and growth of activity along the value chain (and higher revenues)

• SPII made significant progress in competition for major CPG brands (Fanta, Sprite) during the past year & should continue business development activity in this vertical

• SPII can better leverage existing SPE relationships to develop these opportunities (e.g., draft on theatrical’s meetings with prospective partners as the studio’s ‘internal resource’ for those wishing to utilize it)

Soft Drinks, Fast Food Soft Drinks, Fast Food

• Youth-focused brands:

– CPG: Fanta, Coca-Cola, Sprite, Mountain Dew

– Fast food chains that are smaller, local or focused significantly on the Southern California market: Jack-in-the-Box, Taco Bell, Carls Jr.

• Broadcast and cable is the most logical extension of the existing SPE business, assuming SPII can remain price competitive. This should be aggressively pursued given alignment with core competencies and geography

Broadcast & CableBroadcast & Cable



Financials: Base case model shows upside in year 3 but FY10 is key to establishing a higher success rate from larger accounts downstream

* Note: FY10 projections include business booked in FY09 **Note: Based on 20% margin (for detail, refer to Appendix) ***Note: Insufficient data for trend analysis Source: SPII, SPI Finance, Corp Dev Analysis, Jupiter Media, EMarketer

Projected Revenues by Type, FY10-12 – Base CaseProjected Revenues by Type, FY10-12 – Base Case

$1.02MM$1.02MM

$1.37MM$1.37MM

$2.57MM$2.57MM

Base Case

Total Awarded Projects

Total Revenues*

Gross Profit**

FY10 $917K $1.02MM $203K

FY11 $1.81MM $1.37MM $274K

FY 12 $3.31MM $2.57MM $513K

3 year total

$6.04MM $4.44MM $990K

*Note: Revenues for projects are paid multi-year (FY10 includes payments work awarded in FY09). Forecast assumption is two-year period.

Key Assumptions

Categories Total Bid Size per Category

Trend Data Bid Size Growth

Success Rates Cash Flow Margins

Sony, CPG, TV, Fast Food, Online, Other

Range: $200K to $1MM per category

18 months*** Range: 25%-100% per category

Range: Total average of 48% by FY 12 but ranges 10%-70% per category

50% of awarded bid over 2 years

Held constant @ 20%


Current Approach*

Current Approach*

Sony-sourced business only**Sony-sourced

business only**Scenario

SPII Gross Profit

% Margin

Lo

wL

ow

Me

diu

mM

ed

ium

Hig

hH

igh

$102K

20%

$89K

20%

$102K

20%

$102K

20%

$131K

20%

SPII Gross Profit

% Margin

SPII Gross Profit

% Margin

Proposed New

Approach

Proposed New

Approach

$178K

20%

$203K

20%

$241K

20%

Comments

Current approach may have a slight advantage in the low scenario based on higher costs to support 3rd party business new approach reduces margins.

Model hits greater returns due to success in establishing cable, TV and CPG business

Financials show incremental upside to SPII to new approach even in FY10

Business Model Opportunity by Scenario, FY10Business Model Opportunity by Scenario, FY10

New approach improves the overall success rate and allows for growth of bid size as SPII extends to more closely aligned businesses

*Note: FY10 Budget modeled one revenue outcome; **Note: Sony-sourced means work created solely through existing Sony-driven relationships Source: SPI Finance, Corp Dev Analysis

$119K

20%


To support 3rd party business development, initiatives to evaluate include re-branding & more structured approach to innovation

page 13

Initiative

Consider dropping Sony Pictures brand

for 3rd party business

Consider dropping Sony Pictures brand

for 3rd party business

Description

• Sony Pictures name often creates biases, causes confusion when soliciting potential business

Pros Cons

• Eliminates confusion as to SPII’s skill set/ability due to the Sony Pictures name

• Imageworks brand is neutral – neither adds nor detracts

Dedicate time for in-house innovation

Dedicate time for in-house innovation

• SPII’s cost competitiveness is more than likely not sustainable from a production standpoint; addresses building new capabilities to match expanded services

• Successful innovation reduces outsourcing to less desirable areas with lower margins

• Competitors with SPE business have in-house innovation centers

Build a site exclusively for

SPII

Build a site exclusively for

SPII

• SPII site would specifically tout its services, as well as a dedicated section for clients to improve efficiencies there

• Rectifies a major shortcoming – all competitors have a dedicated site

• Could serve as main vehicle for branding Imageworks Interactive with potential clients

• Legal issue may exist; possible solution may be DBA

• Requires investment of time/resources*

• Risk exists for making the wrong choice

• Requires investment of time/resources*

• Allot certain percentage of staff (and limited percentage of time) to product and platform innovation

• Areas identified include mobile platforms & open APIs from social media networks

*Note: Both resources investments are singled out in Slide 14 for further analysis Source: SPII, Corp Dev Analysis


Next Steps

page 14

• Refocus business development strategy on non-theatrical entertainment opportunities – principally broadcast & cable – and set-up meetings

• Identify specific project opportunities (rather than agency of records bids) to further expand business in CPG, regional fast food opportunities in the near term

• Arrange meetings with BD Live and Crackle.com to determine additional Sony Corp business development opportunities

• Determine specific costs, benefits with devoting resources to in-house innovation and develop plan to address

• Discuss scalability needed to realize revenue thresholds identified in this plan to improve margins as awarded bids size increases


Appendix


Consumer Products has the highest rate of growth in digital marketing spend among aligned third party business development opportunities

page 16

Online Media Buy Spending by Category, 2008-13Online Media Buy Spending by Category, 2008-13

Source: Jupiter Media 2008, Corp Dev analysis

FY08,09 Summary of 3rd Party Business Development

page 17

Category Company Description Awarded Status FY08 Recognized

FY09 Recognized FY10 Projected*

Sony Corp Sony Rewards Jeopardy Club $21,000 Awarded $21,000

SPE Publicity Site Redesign $266,640 Awarded $266,640

SPE Publicity Site Redesign $206,800 Awarded $63,631 $143,169

SPE Publicity Fall/Holiday Preview $21,120 Awarded $21,120

Sony Rewards Consulting Viral Games

$140,000 Awarded $140,000

SPE In-Flight Site Redesign $49,720 Awarded $49,720

Ghostbusters (SPE Global)

Creative & Site Development

$52,500 Awarded $52,500

Sony Music “Menudo” $3,900 Awarded $3,900

Soft Drinks Fanta Interactive Campaign

$328,200 Awarded $75,000 $253,200

Coke Zero Development $20,000 Awarded $20,000

Sports

FOXSports.com Fantasy Baseball / Football

$50,000 Awarded $50,000

FOX Sports.com Fantasy Baseball $28,500 Awarded $28,500

Not-for-Profit Stand Up to Cancer Development $147,500 Awarded (at ‘net cost’)

$107,000 $40,500

Subtotal, Awarded $1,356,280 $450,011 $379,069 $527,200

Source: SPII, SPI Finance, Corporate Development analysis

Legend Sony Soft Drinks (CPG)

Travel (Other)

Sports Fast Food


FY09 Summary of 3rd Party Business Development

page 18

Category Company Description Amount Status

Soft Drinks Sprite Europe Pan-European Campaign $1,350,000 Not Awarded

Coke Zero Europe Viral Video Campaign $550,000 Not Awarded

Powerade Viral Social Campaign $136,000 Not Awarded

Sports Los Angeles Kings Agency of Record $225,000 Not Awarded

Dining (Fast Food) Fatburger Agency of Record $300,000 Not Awarded

Sony Corp DADC Creative Development $150,000 Not Awarded

Travel (Other) New Mexico Tourism Interactive Campaign $550,000 Not Awarded

Subtotal, Not Awarded $3,261,000


Legend Sony Soft Drinks (CPG)

Travel (Other)

Sports Sports/Online Fast Food (Dining)


Financials show modest revenue gains from FY10-12; upside exists if business is successfully extended to 3rd party entertainment/CPG in ’10 (TO BE MODIFIED)

page 19

Base CaseTotal Bid Projects


Overall Success

Rate*

Revenue Cost of Sales Gross Profit Margin***

FY10 $2.25MM $917K 40.1% $1.01MM ($812K) $203K 20%

FY11 $3.75MM $1.80MM 48.4% $1.37MM ($1.09MM) $274K 20%

FY 12 $6.73MM $3.31MM 49.2% $2.57MM ($2.05MM) $513K 20%

3 year total $12.73MM $6.04MM 47.5% $4.95MM ($3.96MM) $990K 20%

3rd Party Business Plan Financials, FY10-123rd Party Business Plan Financials, FY10-12

Low CaseTotal Bid Projects


Overall Success

Rate*


FY10 $2.15MM $720K 33.5% $893K ($714K) $179K 20%

FY11 $2.75MM $1.10MM 39.4% $911K ($728K) $182K 20%

FY 12 $4.58MM $1.81MM 39.4% $1.45MM ($1.16MM) $291K 20%

3 year total $9.53MM $3.62MM 38.1% $2.75MM ($2.60MM) $651K 20%


* Note: Success Rate is projects awarded/projects pitched; **Note: High Case assumes higher success rate due to extension to broadcast/cable accounts and a higher growth rate in projects pitched due to greater agency of record accounts ***Note: Set margin was used to develop costs of sales numbers


Financials show modest revenue gains from FY10-12; upside exists if business is successfully extended to 3rd party entertainment/CPG in ’10 (TO BE MODIFIED)

page 20

3rd Party Business Plan Financials, FY10-123rd Party Business Plan Financials, FY10-12

High Case**Total Bid Projects


Success Rate*


FY10 $3.2MM $1.30MM 40.5% $1.25MM ($964K) $241K 20%

FY11 $5.65MM $2.75MM 48.7% $2.02MM ($1.62MM) $405K 20%

FY 12 $10.30MM $5.10MM 49.3% $3.92MM ($3.14MM) $784K 20%

3 year total $19.15MM $9.13MM 47.7% $7.15MM ($5.72MM) $1.43MM 20%


* Note: Success Rate is projects awarded/projects pitched; **Note: High Case assumes higher success rate due to extension to broadcast/cable accounts and a higher growth rate in projects pitched due to greater agency of record accounts ***Note: Set margin was used to develop costs of sales numbers


P&L, FY10 Budget ($000)

page 21

Budget MRP Var to MRP Q4 Forecast Var to Forecast

RevenueAmazon.com Referral Revenue $0 $0 $0 $4 ($4)Afterworld 0 0 0 20 (20)Sony Rewards 0 0 0 143 (143)Fox Sports 25 0 25 71 (46)Stand Up to Cancer 0 0 0 94 (94)Epic Records 0 0 0 15 (15)Coca-Cola [A] 150 0 150 100 50Unidentified Third Party 325 500 (175) 0 325

Subtotal Revenue 500 500 0 447 53

Cost of Revenue (398) (399) 1 (367) (31)

Gross Profit 102 101 1 80 22Gross Profit % 20% 20% 18%

SPE Internal Product Operating Expenses (20,350) (21,811) 1,461 (18,637) (1,713)Imageworks Operating Expenses (267) (267) 0 (350) 83Total Internal Product Operating Expenses (20,617) (22,078) 1,461 (18,987) (1,630)

SPE ReimbursementImageworks 0 0 0 0 0Film Domestic 8,624 8,570 54 7,290 1,334Film International 4,707 4,730 (23) 4,157 550Sony Pictures Television 4,370 4,732 (362) 3,897 473SPT Digital Networks 125 105 20 111 14SPT/SPTI Mobile Sales & Product Support 112 112 0 100 12SPHE Marketing Domestic 3,499 3,264 235 3,120 379SPHE Marketing UK 132 140 (8) 125 7SPHE Marketing Japan 0 0 0 (8) 8Sony Pictures Classics 90 90 0 80 10AdamSandler.com 158 151 7 135 23Sony Online Entertainment 22 24 (2) 20 2Slauson Bldg Facilities 11 10 1 6 5SPE IT 0 168 (168) 0 0Japan Theatrical/SPHE 0 0 0 2 (2)CTMG Creative Media Fall/Holiday Preview Kit 0 0 0 2 (2)mySPHE 0 16 (16) 14 (14)Japan Corp Communications 0 0 0 5 (5)Japan TV 0 0 0 4 (4)AXN & Animax domain names 0 0 0 7 (7)

Subtotal Reimbursements 21,850 22,112 (262) 19,067 2,783

EBIT $1,335 $135 $1,200 $160 $1,175

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