draft privileged and confidential sony pictures entertainment and sony network entertainment:...

DRAFTPrivileged and Confidential

Sony Pictures Entertainment and Sony Network Entertainment:Strengthening and Differentiating the Sony Entertainment Network

November 18, 2011


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• Our goal is to take advantage of Sony’s common ownership of entertainment and network platform assets to differentiate Sony from competitors in the digital network entertainment space

• We’ve agreed on key points of differentiation

• We recommend further investment in a programmed video service including originals to drive usage

• We recommend addressing technical constraints in Sony hardware to facilitate differentiated business models

• We’ve agreed on “low hanging fruit” opportunities to drive traffic

• After reviewing prioritization in this forum, we should pursue key initiatives on a more formal, project management basis with clearly defined work-streams and milestones

Executive Summary


• We seek to better differentiate SEN, drive brand awareness and attract customers through:

– Programming: a carefully selected base of content that is regularly updated and targets the right demographic

– Exclusive content: original or exclusively licensed

– Earlier access to content vs. competing services

– Low barrier to adoption: include content that is free and encourages initial trial

– Ease-of-use: differentiated user interface with powerful easy search functionality that cuts across:

• Content type: video, music, games

• Business models: purchase, rental, ad supported / free

– Leveraging SPE’s creative experience and talent in marketing to this demographic

Agreed Desired Points of Differentiation

SPE and SNEI have identified a range of opportunities to drive these points of differentiation

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Strategies and Initiatives for Achieving Differentiation

Strategy Initiatives

• Combined marketing opportunities where SPE’s expertise can help inform the overall marketing message and create new marketing touch points

• Leverage SPE’s promotional and/or low-cost exclusive content

“Low Hanging Fruit”

• Take advantage of SPE programming and production expertise to drive traffic; business model should be free-to-consumer:

– Customer acquisition: free-to-consumer offering has the lowest barrier to adoption and attracts the most customers

– Cross-selling / monetization: new and newly engaged customers for free service will be cross-sold paid services and Sony hardware

– Budgetary consideration / competition: free-to-consumer services are still viewed as compelling with <$100MM of content; users count on paid services like Netflix having $1-2BN of content

Crackle Plus

• Take advantage of Sony devices’ unique characteristics:

– Updatable: in many cases cable and satellite STBs are not

– Secure: can feasibly implement security protocols faster than some competitors

– "4 screen“: can reach consumers anywhere they seek entertainment

– TV connected: more often connected to TVs in the living room than pure play services

– 3D: supports playback of 3D content

– Gracenote and new user-interface (UI): provides a unique capability to search across multiple content types and business models

Unique Transactional Models

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• “Low Hanging Fruit”: Leverage SPE marketing and existing base of content

– SEN branding / messaging on all SPE platforms (i.e., theatrical, home entertainment, TV)

– Early / exclusive access to red band / extended trailers and DVD extras

– Exclusive access to 3D versions of SPT shows

– Regular Discount Programs for VOD and EST

• Crackle Plus: Fund and launch Crackle Plus as a service exclusively available to Sony customers with an estimated annual content investment of ~$75MM

– Service highlights:

• Deeply integrated with and driving up-sell to SEN’s paid services

• Premium and differentiated from broader Crackle service

• Ad-supported / free-to-consumer to attract largest audience

• License exclusive film and TV avails (i.e., recent and library titles)

• Develop slate of original content: “TV quality” series

• U.S.-only launch with later international expansion

– Investment recouped through and helps support:

• SEN revenues: uplift in paid services (i.e., Video Unlimited, Music Unlimited, PSN Plus subs)

• SPE revenues: ad revenues and ancillary sales of originals

• Hardware revenues: incremental hardware sales

• Overall Sony / SEN spending on branding initiatives

Initial Categorization of Projects (1 of 2)

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• Unique Transactional Models: Launch transactional models that offer early content, greater ease of use for consumers and leverages SEN’s strengths relative to cable and satellite

– SEN as exclusive over-the-top provider for PVOD

– SEN to offer premium EST

– First-mover advantage for SEN and Sony Hardware to provide users with a cloud-based solution through UltraViolet

Initial Categorization of Projects (2 of 2)

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• Today:

– Review projects in more detail

– Discuss broad parameters for projects requiring Corporate funding, including Crackle Plus

– Discuss technical priorities for transactional models

• Ongoing:

– SPE and SNEI coordination to execute against overall project plan

• Regular update meetings with:

– Corporate: Howard Stringer, Kaz Hirai

– SNEI Lead: Tim Schaaff

– SNEI Team: Shawn Layden, Mike Aragon

– SPE Leads: Michael Lynton, Steve Mosko, David Bishop

– SPE Team:

• Corporate: Jim Underwood

• Crackle Plus: Andy Kaplan, Eric Berger

• Transactional: John Calkins, Jason Spivak

• “Low Hanging Fruit”: As needed, depending on project activity

Recommended Process Going Forward

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Sony already owns a premium content network, among only a handful in the market

•Top ad-supported channel on key television platforms (Top 5 channel on Bravia, Blu-ray, and Roku)

•Mobile downloads in line with major networks, e.g. comparable to HBO Go

•Significantly broader audience reach as a free service than several paid services, including Hulu+ and Amazon Prime

•Recognized alternative to Hulu, Netflix, and Amazon:“People who’ve traded in pricey cable subscriptions for online alternatives like Netflix, Crackle, and Hulu have been a hot topic recently.

—“25 Ways to Watch Movies and TV Online,” PC Mag

“A host of sites, including Hulu.com, Crackle.com and Xfinity, offer free movies and TV shows streamable to your computer or TV.”

—“Not Netflix: Better Sites for Movie Bargains,” Wall Street Journal

“Crackle leads the way for free online movie content for a second week in a row. Hulu, et al, you better step up your game.”

—“The Best Movies to Watch this Weekend,” CBS Interactive

Crackle as a Platform to Leverage

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Video experiences optimized for the Sony networked device audience

• Free service creates largest user base and “out of the box” premium content experience

• Integrated upsell to PSN, PlayStation Plus, Video/Music unlimited (no 3 rd party services can do this)

• Highly curated experience run by experts who Program target audiences worldwide

• Premium TV caliber original series to differentiate the network

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Curated Film and TV ContentCurated Film and TV Content

Original ShowsOriginal Shows

Music and Live Events

Music and Live Events

Inside LooksInside Looks

The service Offers a selection of premium movies with exclusive content and TV quality original series

• Behind the scenes, movie and pilot premieres, new game releases, and coverage of most relevant pop culture gatherings (e.g., Comic-Con, E3, SxSW)– Cost: $2MM for video coverage

• Live concerts, music festivals, unplugged sessions with artists, “secret” shows– Cost: $3MM to for video streaming and licensing

• Two TV caliber series annually that leverage existing and related IP (e.g., PlayStation games) or build new IP for the company

• Differentiated and premium series to attract and engage consumers on a regular basis– Cost: $30MM per series for each season

• Leverage short avails of 2-3 year old movies in the Network window (free TV only) to have continuous current and driver titles

• Pick up select shows in syndication window– Cost: $10-20MM to license more content for variety and volume

Programmed Service

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Actions on Crackle Plus… …Drives Actions on SEN

Search: Gracenote drives discovery of paid content

• Watch Spider-Man as an ad-supported movie option

• Watch a sneak peek of the upcoming film

• Watch episode from prior seasons of Community

• Search also recommends:– Similar films for purchase or rental– Sign-up for PlayStation Plus to get

Spider-Man game content– Buy Spider-Man Shattered Dimensions– Listen to the soundtrack on Music

Unlimited– Purchase recent TV episodes

View original series

• Watch series on Crackle based on a PlayStation game

• Promotion spots encourage exploration on SEN– Buy the game– Sign-up for PlayStation Plus

View a collection • Explore themes tied to:– Game content

(e.g., “Assassins,” “Heroes” etc.)

– Music content (e.g., celebrity playlists)

– For sale / rental titles included in collection

– See related games on PlayStation Plus– Explore the artist on Music Unlimited

Watch a concert • Coldplay concert • Add Coldplay to your Music Unlimited favorites

Deep Product Integration Drives Up-sell

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Sony already owns a premium content network, among only a handful in the market

An Out-of-the-Box Premium Video Experience, exclusive to Sony Devices

• Newer, high-quality, more movies

• Premium TV Caliber original series

• Exclusive TV syndication window

• HD video delivery

• Fully integrated products driving up-sell to other SNE services (transactional movie, games, video / music subscriptions)

• Branded exclusively to Sony

A light version of the Network that provides network and marketing scale

• Smaller selection of movies

• No or second window original series

• Older, library TV

• Standard Def video delivery

• Marketing driver back to Sony from high-traffic platforms

• Keeps brand in competitive / mindshare space with Netflix, Hulu, Amazon, etc.

Crackle Plus, Exclusive to Sony

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Unique Transactional Models


Premium VOD

OverviewOverview

DifferentiationDifferentiation

CostCost

Issues to AddressIssues to Address

• Provide SEN users with VOD offering in the premium window (e.g., ~60 days post theatrical release – will vary by market)

– Assumed deemed retail price of $20-$30

– Single view

– For a limited time, exclusive vis-à-vis OTT-only providers (i.e., iTunes, Xbox, Amazon, VUDU), but no exclusivity vis-a-vis cable/satellite providers (i.e., DirecTV, Comcast, SKY), even if such providers offer OTT services

– Number of eligible titles by territory to be determined

• During the period of exclusivity:• Only non-cable/satellite service offering PVOD• Ability to message a “digital exclusive”

• Limited, per transaction cost only; not a major investment– 80% SPHE share per transaction

– Costs to implement watermarking technology and other content protection measures

• Overall launch strategy and timing under review by SPE management– SNEI to have first OTT opportunity when strategy and timing is determined

• Water marking technology (i.e., Verance/Civolution) and additional content protection measures would be required

• Exclusivity available for a limited number of titles

• Subject to legal review; some product not available in all markets

Note: overall PVOD launch strategy and timing under review by SPE management

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Premium EST

OverviewOverview


CostCost

• Provide SEN users with an EST offering in the premium window (e.g., ~60 days post theatrical release; will vary by market)

– Assumed deemed retail price of $25 or $30

– Exclusive vis-à-vis all EST providers for a limited time

– Number of eligible titles by territory to be determined

• During period of exclusivity:• Only retailer offering EST in the theatrical window• Ability to message “exclusive EST” product

• Provides a clear and compelling path to UltraViolet (UV) as a first mover (see UV offer)

• Limited, per transaction cost only; not a major investment– 80% per transaction share to SPHE

– Costs to implement watermarking technology and other content protection measures


• Overall launch strategy and timing under review by SPE management– SNEI to have first opportunity when strategy and timing are determined

• Subject to legal review; some product not available in all markets, potential reduction in license fees under existing VOD/EST licenses triggered by grant of early window

• Water marking technology (i.e., Verance/Civolution) and additional content protection measures would be required

• Exclusivity available for a limited number of titles

Note: overall premium EST launch strategy and timing under review by SPE management

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UltraViolet (UV)

OverviewOverview


CostCost


• Provide SEN users with UV EST storefront which includes SPHE’s full EST catalog– Wholesale prices for UV EST retailers discounted vis-à-vis traditional EST retailers to offset

additional UV costs

– Joint marketing programs

• First mover advantage with ability to become go-to destination in living room for UV accessed through game consoles, connected TVs and connected Blu-ray players

• Leverage UV growth to drive SNEI adoption: – In the next few months, millions of physical units with UV tokens will be sold and consumers will

seek ways to access purchases in the UV cloud

– Consumers will also be able and looking to convert their existing collections (i.e., millions of discs) into UV lockers; SNEI can become the preferred destination for locker conversions with a PS3 sitting next to DVD/Blu-ray collections

• Creates stronger relationship with customers as they grow accustomed accessing the video they already have through UV locker access via Sony devices

• Per transaction UV fulfillment costs borne by SNEI or passed on to consumer– SPHE discounts UV wholesale prices in an effort to help SNEI and other UV retailers offset

such costs

• Some UV licensing costs expected, depending on role played by SNEI in UV ecosystem

• Hardware implementation of UV protocols

• Integration with UV coordinator

• Subject to legal review

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“Low Hanging Fruit”


Leverage SPE Theatrical, Home Entertainment, Television Marketing

OverviewOverview


CostCost


• Integrate SEN brand messaging into relevant SPE marketing assets where possible– Theatrical: one-sheets, field promotions, in-film digital billboards, promotion of PSN or SEN-

specific tasks in films’ Alternative Reality Games

– Home Entertainment: DVD/Blu-Ray inserts/packaging, sizzle/spot on head of product, sizzle/spot features on BD Live

– Television: In addition to off-air promotions, the Networks Group has committed media across channels

• On-air: SNE TV spots to air worldwide, SNE display and video messages to be featured on channel websites

• Off-air: Sony Times Square billboard, Sony Spotlight newsletter, Sony Facebook page, Sony Twitter handle, Sony Cierge newsletter

– Cross-Divisional: Website (i.e., sonypictures.com)

• Increases awareness of SEN relative to its competition

• Little to no incremental cost

• Work closely with SNEI to develop appropriate branding, messaging and phasing for each avail• Subject to legal review• 3rd party marketing approvals

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Red Band, Extended Trailers and DVD Extras

OverviewOverview


CostCost


• Provide SEN users with additional content– Launch exclusive versions of a subset of trailers on SEN first:

• Red band

• Longer versions of trailers

– Feature value-added content such as outtakes, behind the scenes, cast profiles

– Prior to release of DVDs, make a subset of DVD extras exclusively available on SEN, subject to content restrictions and 3rd party deals that can vary by title

– Ensure SEN achieves parity with 3rd party vendors (e.g., when a trailer is first launched on Yahoo! the trailer is also available on SEN)

• Provides a regular flow of exclusive content that can be easily promoted

• Little to no incremental cost

• SNEI to check with legal on ability to show red band trailers; subject to SPE review of legal issues

• Secure content to the network (e.g., prevent user upload of red band trailers to competing outlets such as YouTube)

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Exclusive Access to 3D Versions of SPT Shows

OverviewOverview


CostCost


• Provide SEN users with exclusive access to 3D versions of their favorite TV shows – Film selected episodes of broadcast or cable network shows in 3D which will be featured

exclusively on SEN

• Current shows that fit SEN demo include Happy Endings, Community, Rules of Engagement, Breaking Bad, Franklin and Bash, Justified, Pretend Time with Nick Swardson and Boondocks

• 2D versions air on original partner network

• Network partner promotes availability of 3D version exclusively on SEN

• Provides a regular flow of exclusive content that can be easily promoted• Emphasizes SEN’s unique 3D capabilities and helps drive further 3D hardware sales

• Incremental production cost of $100K – $200K per episode for existing TV series, subject to Director and DP that accept SPT guidance on equipment and workflow

• TBD fee to buy-back exclusivity from the Network for an estimated 25%-50% of the license fee for the nonexclusive episodes

• Confirm broadcast or cable network will allow 3D version to be distributed off-network on an exclusive basis

• Requires identifying shows that both address the demo and have Director/DP support• Subject to legal review

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Regular Discount Programs for VOD and EST

OverviewOverview


CostCost


• Provide SEN users with regular (i.e., weekly/monthly) programs featuring discounted EST and VOD titles

• EST: focus on new release product

• VOD: focus on premium catalog product

– Titles to be identified on a mutual and periodic basis

– Stunts to be programmed around genres/seasons/events/holidays

• When possible, discounts only available to SNEI for the duration of the applicable program• Should be viewed as a complement to other licensing programs

• Title eligibility to be discussed on a market-by-market basis• Subject to legal review

• Limited cost, per transaction only; not a major investment

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Appendix: Strategic Considerations for Video Services


SVOD and AVOD: Strategic Considerations (1 of 2)

• Previous discussions have evaluated the launch of a programmed video service as a standalone profit driver, key considerations include:

– Investment in content and programming required to compete with leading services

– Number of customers likely to be acquired

– Revenue per customer

– Ongoing relationship with customers

• If a service is intended to be a standalone profit driver, the SVOD vs. AVOD decision depends partly on appetite for investment and risk

– SVOD can be a high risk, high reward proposition

• Significant investment in content required given heavy investment by many competitors

• Harder to secure customers for paid service

• But SVOD offers the potential for higher revenue per customer (e.g. ~ $10/month of subscription revenue) and an ongoing relationship

– AVOD can be a lower risk model, but with lower revenue per customer

• Success is possible at a lower level of investment; despite numerous competitors, investment in exclusive content for AVOD services has been more modest

• Easier to secure customers for AVOD services

• But revenue per customer is lower (e.g., ~$0.03 of ad revenue per view), and programming expertise is required to keep customers coming back

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SVOD and AVOD: Strategic Considerations (2 of 2)

• Sony’s existing revenue-generating services and connected device footprint give us the opportunity to evaluate the SVOD vs. AVOD decision differently

• If a programmed video service is viewed as a customer acquisition tool for other revenue generating services and hardware sales, strategic considerations change

– Strategic considerations include:

– Creating a compelling and competitive content offering with a reasonable investment

– Acquiring the greatest number of customers for the service

– Providing those customers with a reason to return on a regular basis

– Monetize by cross-selling these customers on paid services (i.e., Music Unlimited, Video Unlimited, PlayStation Plus) and hardware

– AVOD’s characteristics better satisfy these strategic considerations:

– Lower investment in content is required to be competitive

– Free-to-consumer positioning makes it easier to acquire customers

– A well-programmed service provides a reason for customers to return on a regular basis

– Service can be deeply integrated into other paid offerings, encouraging cross-selling and co-promotion

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DRAFTPrivileged and ConfidentialDespite Netflix’s highly publicized subscriber numbers,

standalone SVOD services have attracted fewer customers than AVOD services

• Largest SVOD players accumulated subscriber bases of 5MM – 20MM+ by bundling streaming service with other valuable offerings

21MM subscribers(1); until recently digital streaming bundled free with subscription to physical disc rental service

5MM subscribers(2); digital streaming bundled free with subscription to Amazon Prime shipping

• Standalone SVOD services, both pure-play and “de-bundled,” have struggled to accelerate and/or maintain growth

Struggled to reach 1MM subscribers(3) in first year

Concerns about slowing subscriber growth and defection with recent “de-bundling” of physical and digital subscription tiers

• Standalone, free-to-consumer services can more easily reach a larger installed base of regular users

7MM+ PC-based users and 10MM+ monthly unique users across all platforms

5MM+ Crackle app downloads in 6 months

#1 free app on iTunes for 4 weeks

161MM monthly unique users(4)

29MM monthly unique users(4)

“Bundled SVOD”

“Bundled SVOD”

Standalone SVOD

Standalone SVOD

AVODAVOD

(1) Includes “streaming only” customers and customers that subscribe to both streaming and physical rental per Q3 investor letter, released 10/11.(2) Source: Piper Jaffray research, 2011.(3) Source: Hulu Management Blog as of 10/5/11.(4) Source: Comscore Videometrix, 10/11. 26


And Competition for SVOD Services is Increasing…

…but similar lessons are playing out again

• Gaining traction, but offering is bundled with a full linear channel that customers have already paid for; no incremental charge

– 4MM+ app downloads(1) with participating distribution partners including Fios, Uverse, Google TV, Cox, Comcast, DirecTV, Dish, Suddenlink and Charter

• Apps getting traction and buzz, but like HBO Go, they are bundled as an add-on to a full fledged service after authentication

• Despite content from 3 studios, has had limited success securing distribution and customers for a ~$10 per month service

• Poor customer acquisition on cable has limited it’s ability to drive growth of the digital offering

– Linear pay TV network is available to 30MM+ subscribers through its current distribution relationships but has only managed to accumulate ~9MM(2) actual subscribers to date

TV EverywhereTV Everywhere

(1) Source: Time Warner Q2 earnings call as of 8/3/11.(2) Source: Industry reports as of 8/12/11.

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• Historically licensed under rev-share only

• Currently investing up to $100MM to producers as an enticement to launch original content channels, but still less than the SVOD services

• Currently expects to pay content providers $300MM(4) in CY2011

SVOD and AVOD: Content Investment

• While the ability to attract customers to standalone SVOD services at $10 per month is still being tested, the required content investment in these services remains high:

• Invested $1.2B in content in calendar 2010(1) with increases expected going forward

• Estimated that Amazon paid $200-300MM for Lovefilm(2)

– Lovefilm investing heavily in rights acquisitions

• Deals with studios have cost Amazon an estimated $350MM(3) this year. Note, at this level, WSJ says "Amazon appeared to be keeping the size of the catalog low”

– Continues to announce high profile content deals with major content providers (e.g., ABC, CBS, Fox, NBC, PBS)

• Value of network content contributed by owners not disclosed but assumed to be a multiple of Hulu Classic

– Media owners include NBCU, News Corp. and Disney

(1) Source: company filings dated 2/18/11.(2) Source: company filings and press releases. Note: Specific valuation for Lovefilm not publicly disclosed.(3) Source: Piper Jaffray, 2011.(4) Source: Hulu Management Blog as of 4/4/11.

• By contrast, AVOD services initially drove significant viewership with little to no content cost. Investment is increasing, but still well below investment in SVOD

SVOD

AVOD

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draft privileged and confidential sony pictures entertainment and sony network entertainment:...

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