Media Consumption Trends and Opportunities for Networked Entertainment Solutions

Sony Corporate DevelopmentSeptember 30, 2010

agenda /

key entertainment industry MRP topics

• analyze the key trends impacting the profitability and growth of Sony’s entertainment businesses

– shift from ownership to rental business models and from bundled content to disaggregated content

– new business models emerging due to proliferation of new access methods and the availability of cloud storage

– continued vulnerability of content to piracy

Sony’s opportunity

• address Sony’s opportunity to provide consumers with a complete networked entertainment solution across a family of home and mobile connected products

• need to treat consumer base as network of users

2

2010 global media revenue mix and growth forecast /Global media1 revenues by segmentsegment, percent of total

TV licensing fees2

Internet adv.

Video games

TV adv.

Out-of-home adv.

Filmed entertainment

Total media

Music publishing

Radio

Book publishing

Newspaper publishing

Magazine publishing

Recorded music

Global media1 2010-2014 CAGR by segmentpercent

(1) Market definition does not include internet access, B2B, or TV subscriptions and public TV segments(2) TV licensing fees include mobile tv, ppv, and video on demandSource: PwC, Global entertainment and media outlook: 2010 – 2014, Enders Music Publishing Forecast

Total Revenueapprox. $800B

3

Key entertainment industry MRP topics /4

entertainment industry trends impacting Sony /

5

there are three key trends that are impacting the profitability and growth of Sony’s entertainment businesses

shift from ownership to rental and from bundled content to disaggregated content

new business models emerging due to proliferation of new access methods and the availability of cloud storage

continued vulnerability of content to piracy

evolution of filmed entertainment consumption /as digital consumption increasingly displaces physical…

6

content bundles are

being disaggregat

ed

ownership is

shifting to rental

evolution of music consumption /as digital consumption increasingly displaces physical…

7

albums have been

disaggregated to single

tracks

shift from ownership to access

evolution of the changing economics of entertainment /

CDs

MP3 downloadsof singles (iTunes)

local storage: load

from PC to player

subscriptionmusic1

digital lockers1

streaming music on demand (Spotify)

continuum of music

consumption

new physicalbusiness models: Redbox & Netflix

VOD and SVODVHS / DVD

PPVin limited

window and show times

continuum of filmed

entertainmentconsumption2

digital sell through

local storage: load

from PC to player

$19.95 / album

$0.99 / single

$9.95 / month

“freemium”mostly free content

with a charge for premium content

VHS & DVD: $19.95 / $4.75

purchase/rentalPPV: $7.95

Redbox: $1.00/night

Netflix: $8.99+/month

iTunes: $3.99 (TV), $9.99 - 14.99 (Film)

Amazon: $2.99 (TV), $4.99 - $14.99 (Film)

VOD: $3.95 / 24hiTunes: $0.99 (TV)$3.99 / 24h (Film)Netflix: $8.99+ /

monthHulu Plus: $9.99 /

month

digital rental

internet radio (Pandora)

(1) Subscription music and digital lockers, while introduced a number of years ago, has yet to achieve widespread consumer acceptance(2) This evolution relates primarily to the home entertainment portion of filmed entertainment

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in the U.S. Home Entertainment market, while there was an overall increase in transactional demand, consumers continued to “trade down” to lower-margin rentals

Source: Screen Digest Aug 2010, Morgan Stanley Research

growing demand for low cost views is being met by new, more convenient rental options (e.g. Netflix and Redbox), driving

consumer spending out of the categoryNote:Netflix does not include digital streaming as Netflix licenses that content from the pay window

consumers are shifting to lower-margin rentals /

9

783 717

2,364

126 138357 418

2,296

0

400

800

1,200

1,600

2,000

2,400

2,800

3,200

3,600

4,000

CY2009 CY2010E

% Growth

% Growth

0%0%

+3%+3%

-8%-8%

2009 – 2010E home video sell-through and rental transactions

$17.36

$11.64

$13.00

$0.95$1.15$1.68$2.71

$0

$2

$4

$6

$8

$10

$12

$14

$16

$18

$20

Blu-ray

DVD EST

VOD

Bloc

kbus

ter

Netflix

Redb

ox

Rental

Sell through

average studio new release gross profit per transaction

8 Rental Transactions = 1 Sell-Through

Transaction

Physical ST Physical Rental EST VOD

+17%+17%

+10%+10%+15%+15%

+2%+2%

shifts in the consumption of music are challenging conventional digital economics /for the first time since their inception, the number of single-track digital downloads has decreased in the United StatesUS single-track digital downloads growth rate

percent

gro

wth

rate

Source: Nielsen Soundscan Report

10

the shift from ownership to access has continued to impact recorded music margins /

Sony Music

Sony/ATV

Sony Music revenues$B

Sony Music EBIT margins%

Sony/ATV revenues$M

Sony/ATV EBIT margins%

MRP

MRP

MRP

MRP 11

2010A2011B 2012 2013 20140.0%

4.0%

8.0%

12.0%

16.0%

10.2%1

14.1% 14.2% 14.4% 14.5%

2010A 2011B 2012 2013 2014 $-

$1.0

$2.0

$3.0

$4.0 $3.3

$2.8 $2.7 $2.6 $2.6

(1) Revenues and EBIT adjusted by removing revenue/contribution from settlements

new access models address piracy while adding potential vulnerabilities /

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digital lockers(music)

issues potentially exist with the uploading of illegitimate music content in exchange for

legitimate copies in the digital locker

digital cinemadistribution of digital copies of feature films to exhibitors creates new vulnerability, but digital distribution has not resulted in increased piracy

the market for content in developing countries is growing but is often made unattractive by the high level of piracy

early window

prior to DVD release, consumers can create a camcorder recording of a feature film in their

own homes; forensic watermarking may mitigate this type of piracy

while new access models promote legitimate consumption, thereby reducing incentives for piracy, these new access models may also create new risks

Sony’s opportunity /13

Sony’s opportunity /

for the first time, we now have the hardware functionality and service offerings to generate revenue from

our home electronics consumer beyond the point of purchase

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Sony’s IPTV services are already in the living room /

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must convince consumers, who already face box exhaustion, to

buy another box to bring internet-based entertainment

experiences to TV

rich IPTV services are already embedded in the Sony products that consumers use every day in

their homes

Competition Sony

Sony’s IPTV services are already in the living room /

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must convince consumers, who already face box exhaustion, to

buy another box to bring internet-based entertainment

experiences to TV

rich IPTV services are already embedded in the Sony products that consumers use every day in

their homes

Competition Sony

Sony’s services are optimized for its products /

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other service providers (e.g. Netflix, Amazon) face the challenge of

integrating with multiple third party electronics manufacturers

services are optimized for its products to create the best

consumer experience

Competition Sony

only Sony can utilize its own content to create unique viewing experiences for its consumers /

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Competition Sonyother services must license

content that is freely available to all competitors

from the major film studios and music companies

can offer unique, high quality experiences on a consistent

basisthat are only available to Sony

customers2008

one-time special event

2011

competitive snapshot /

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already in consumers’ living

rooms

can offer unique viewing

experiences utilizing its own

content

offer leading edge services optimized for its products and

ecosystem

Sony needs to assess “snap-on” acquisitions to remain competitive /

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offer leading edge services optimized for its products and

ecosystem

In order to remain competitive and to

rapidly enhance Qriocity’s capabilities, we need to evaluate

acquisitionsPotential candidates

the evolution of the TV viewing experience /

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True IPTVConventional TVGoogle TV

(browser experience)

Evolution of Internet-Connected TV

2000 2010 FutureCable Bill:

$100 (video) +internet access

Cable Bill: $85 (video) +

internet access

Cable Bill: internet access +

$? (video)

• 100% of entertainment services provided by conventional distributors

• most entertainment provided by conventional distributors

• some incremental revenue from apps or content provided using IP

• even larger percentage of entertainment provided using IP, not by conventional distributors

• bulk of conventional distributor revenue from providing internet access

the future of TV is interactive and social /

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• uses the internet to deliver video entertainment outside of conventional operators

sorting of content choices

based on popularity

among friends and

previous behavior

deep integration with social

networking (on-screen chat and recommendatio

ns, etc)

targeted marketing

a true IPTV experience is not simply an internet browsing experience on a television:

• over time consumers will migrate from cable / satellite to IPTV solutions because of greater choice, interactivity, community, and value

customer profitability enhanced by continuing transactional relationship after hardware purchase /

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• potential incremental revenue-generating services

– access to films in variouswindows

– channel subscriptions

– games / PS2 emulation

– advertising / placement

– monetization of consumer data

– applications / e-retail / peripherals

– music related purchases(video purchasing, concerts)

– extended warranty• potential incremental

annual revenue from above services: $50

illustrative potential profit from services

note: assumes MSRP for TV is $1,000 and profit margin is 5%; for services, assumes annual revenue of $50 at a 20% margin

Today

Future

Year 0 1 2 3 4Life-time

Hardware Profit $50 $0 $0 $0 $0 $50Profit from Services 0 0 0 0 0 0Total $50 $0 $0 $0 $0 $50Lifetime Margin From One TV Sale 5%

Year 0 1 2 3 4Life-time

Hardware Profit $50 $0 $0 $0 $0 $50Profit from Services 0 10 10 10 10 40Total $50 $10 $10 $10 $10 $90Lifetime Margin From One TV Sale 9%

Sony’s opportunity / • Sony needs to treat its consumer base as a connected network of

addressable users

– across its consumers’ network of enabled devices, Sony maintains relationships with more than 59MM connected users worldwide

– as consumer electronic products become commoditized, Sony now has a significant revenue source in networked products even after sale of hardware

– if we are able to position our consumer base as a network, licensing non-Sony AAA entertainment content will become easier

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Company

Number of Subscribers

(MM)Comcast 23.4DirecTV 18.7Dish Network 14.3Time Warner Cable 12.8BSkyB 9.9Beijing Gehua 5.0Oriental Cable Network 4.0Jupiter Communications 2.6Sky Deutschland 2.5

Selection of largest cable & satellite operators across the

world

it’s time that we leverage our strategic advantages / • through aggressive marketing

activities (backed by adequate resources), Sony must educate consumers that its Blu-ray players, PS3s and connected TVs have IPTV capabilities

• leverage its content companies to provide unique experiences and preferential windows of content for its Sony consumers

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over time, consumers will learn that Sony can liberate them from conventional cable and satellite operators while providing them

greater choice, interactivity, and value in home entertainment