HD Network Analysis: Sony's Channel Strategy

SPT HD Network Analysis (DRAFT) December 19, 2007

Project Overview • Demand for New Channels • Factors Impacting Sony’s Channel Voice • Competitive landscape in HD and SD • HD user demographics and tastes • Sony internal capabilities • Recommended programming focus • Method of entry • Economics

SPT Engaged IBB to determine if SPT should launch a Linear Network and if so, what are some possible options in terms of genres, economics and carriage Questions Deliverables • What are the economics/ROI of HD channels? Does the ROI support launching one or more HD channels? • If yes, then… • What business model? (Advertising, Carriage Fee, Premium Subscription) • What demographics should be targeted? • What niche/genre/content? Where is the demand? What are the market gaps? • Where are SPT’s capabilities/strengths? • What capabilities does SPT need to develop? • Go/No-Go Recommendation for Launching One or More HD Networks • Recommendations of Target Demo, Genre and Business Model for Potential Channels/Networks • Projections of Potential Carriage Partners, Timing, and Expected Terms • Financial Model with ROI for Potential Network or Networks • Gap Analysis of Required Content Operational, Organizational, Technical Capabilities for SPT to Launch One or More Networks

IBB leveraged its own industry expertise and analysis, as well external research and interviews with a cross-section of SPT personnel HD Channel Strategy Analysis IBB External Research and Analysis Preliminary Financial Model Preliminary Financial Model Develop first cut of revenue and cost model for initial evaluation of multiplatform network (linear, VOD, broadband) Iterate upon model based on developing programming strategy Nielsen and and Magid HD Survey Preliminary Programming Options Criteria Screening of Options Recommended Programming Option(s) SPT Research on Demographic and Genre Gaps Filter and screen options against specific criteria such as potential audience, competition, advertiser/service provider needs, etc. Arrive at recommended list of programming/ genre options Based on inputs, determine preliminary list of options to consider for HD channel Internal Analysis of SPT/ Sony Assets and Capabilities Evaluate Market Entry Options Operations and Technology Gap Analysis IBB Industry Knowledge What capabilities, systems, processes and technology does SPT require in order to launch and operate a linear network? • Organic entry with DBS, MSO, and IPTV providers • Acquisition of existing network • Multicast broadcasting and must-carry regulations 3

Executive Summary Opportunity • New HD slots are creating opportunity with satellite and IPTV cos; but there is a limited window to act • Carriage with cable cos. and ultimately, long-term success, requires compelling content targeted at the right market Market Analysis • In HD, Young Men, Young Women, and Women overall are underserved • Overall, Young Men are underserved • Market gaps are more about underserved demo than underserved genres or content types Channel Voice • Recommend focus on young men as it meets Sony capabilities, current HD gap, and overall TV market gap Method of Entry • Focus on “Build” today; but explore creative alternatives (like acquisitions or multi-cast) in parallel Economics • Investment of X required, but creates attractive IRR of X% and could ultimately lead to Next Steps • Approach Sat Cos. In parallel with exploring acquisition opportunities

Overview of Market Opportunity Good News • New HD slots are creating opportunity • The bar isn’t particularly high for quality of content required to get carriage Bad News • Slots are filing fast and there are limited market gaps • Over the long-term, “HDTV” won’t be a differentiator, it will just be “TV” Implications • HD can be a hook to get carriage with Satellite and IPTV cos. Now • Carriage with cable cos. and ultimately, long-term success, requires compelling content targeted at the right market

Furthermore, developments in Cable MSO, DBS and Telco segments present a window of opportunity which SPT can leverage to gain carriage Available Slots and SPT Implications Drivers • Both launching new satellites in 2008 (DirecTV 11 to be launched in Q1 2008/ Dish in 2008-9 to expand HD offerings) • DirecTV > 150 national • Dish > 100 national • Negotiations should begin with DirecTV • IPTV architecture with fiber to the home or node inherently allows hundreds of HD channels with exact number depending on how far fiber extends toward the customer premises and whether MPEG-2 or MPEG-4 compression is used • Verizon FiOS extends all the way to the home, while AT&T U-verse has fiber to the node only • Verizon plans over 150 HD channels by 2008, capacity for > 250 in MPEG2 format and > 500 in MPEG4 format • AT&T currently facing pixelation issues but slots should be between MSOs and Verizon in number • Conversion of analog channels creates room for greater number of digital or HD channels (greater than one-to-one conversion) • Node splits also impact the number of channels that can be offered and MSOs shift node size on a market-by-market basis • Switched Digital Video (SDV) technology theoretically allows infinite number of HD channels – SDV implementation is based on demographics and competition on a market-by-market basis • MSO’s will need to be handled on a case-by-case basis • Most likely initial candidates would be Charter, Cox, Cablevision We believe that carriage with DBS and IPTV providers will be relatively easier. Negotiations with MSO may take longer – companion VOD and Broadband may help. 7

While providers vary in capacity to offer HD slots, DBS and IPTV providers have a structural advantage over Cable MSOs HD Channel Capacity by Platform (Directional Estimates Only) • Future HD channel capacity are estimates only – exact amounts will vary • Available MSO channels vary significantly based on market infrastructure (750 MHz versus 860 MHz) as well as degree of analog reclamation • SDV channel capacity will vary based on the popularity of the channels deployed (i.e. total number of channels deployed is influenced by the statistical likelihood of a subscriber in each node watching each channel) 8 Source: Morgan Stanley, IBB Analysis

While all HD Networks claim to offer HD programming, only HDNet and MGM HD broadcast in the best HD quality (1080i) Full HD Source: DirecTV; note that all HD channels are not included HD offerings will continue to proliferate – high quality and targeted content will be key for SPT 9

However, both established players, as well as new entrants are launching HD plays making it a very competitive environment for new comers HD Offerings As we look across the spectrum of HDTV networks, no gaping holes emerge as opportunity for SPT in terms of genre, demographics and programming 10

The strong demand around HD, both from the consumers, as well as Cable MSO, DBS and Telco services make this a great opportunity for SPT HD today is distinct and therefore provide a strong hook for carriage. However, we believe that over time, HDTV will become almost synonymous with TV Source: Jupiter, IBB Consulting analysis

Competitive landscape and weakness in existing players’ offerings provide an opportunity for a hip, sophisticated, Male-slanted HD Network Competitive Mapping Older Do an SD version and an HD version Potential opportunity with respect to male-slanted, original dramas Younger Female-Oriented Male-Oriented While channels focused on male demographics exist, non-sports competition is limited, particularly with respect to original dramas 13

However, research suggests that there is still a high degree of consumer demand for additional HD content focused on movies, drama, action Desire of HDTV Viewers for Additional Channels/Programming by Category Soaps Children Travel Movies Weather Concerts Sitcoms Play-by-play Sports Local news Big events Music Videos Reality Shows Drama or action Programs National news How to Programs Documentaries 15 Source: Magid 2007 HD Survey, Desire for Additional Programming by Category

Sports, movies, scripted dramas and documentaries are leading in terms of what consumers are watching in HD today How Often Viewers Watch Program Categories in HD 16 Source: Nielsen 2007 HD Phone Survey, Base=All Respondents (511)

While current HD viewers tend to be in the older, higher income demo, the next tranche of HD adoption will come from a younger, lower income households High socio- economic status Middle Low Socio- economic status 17 Magid Survey 2007: Index of household income, education and profession

Consumers in broad age/income categories cite better content and younger focused programming as a key driver to their HD purchase and adoption US TV HH % 18 Magid Survey 2007

SPT and Sony have various key assets that make a HD Network a natural extension to its brand and various businesses SPT Library • Feature film and TV episodes – rights windows can be exploited to SPT/network advantage SPT Production Capabilities SPT Broadband Networks • Long track record with high quality dramas and sitcoms • Recent success helping cable nets to establish brands/positions • Multiplatform systems and processes can be leveraged • Potential to leverage content from Crackle or other networks Linear Channel Play SPT Advertising Sales SPTI Assets • Linear networks and operational capabilities: SET, AXN, Animax, PIX • Dedicated ad sales group knowledgeable about SPT • Experience with ad sales for Mojo, Tennis Channel, Smithsonian Network Sony Electronics HD Ties SonyBMG Assets • Bravia HDTVs • Professional HD cameras and production equipment • Consumer HD cameras • PlayStation Blu-Ray capabilities • Concert library and capabilities to create original programming • Artist relationships that could be leveraged for programming The HDNA Campaign • Additional consumer resonance between Sony and HD following this campaign "We have an HD value chain that no one else in the business has. [This] high-definition value chain that starts with cameras and goes through projectors and television sets and ends up with the PS3. You can see an HD necklace with all the pearls connected." - Sir Howard Stringer 20

In addition to a possitive IRR, a US Linear Network also will provide various non-quantifiable strategic benefits and advantages to SPT and Sony Diversify Revenue Streams • Initial investment leads to relatively stable affiliate and advertising revenue streams New Outlet for Original and Library Programming Extend Sony Brand • Depending on branding and positioning of hypothetical network, Sony brand may extend into entertainment and also support Sony United Strategic Benefits • Network can be programming showcase • However, it must not be a “dumping-ground” for programming that cannot be sold elsewhere Expand SPTAS Inventory/Capabilities • Significantly expands linear inventory for SPTAS • Assuming baseline or aggressive play will be a reasonably large cable network client for SPTAS Depending on branding and execution, an SPT network can be a catalyst for Sony United 21

Facts and survey • Sony brand • What genres does the sony brand hit (per interviews)

SPT team members interviewed believe that a U. S. Linear Network is long overdue and that SPT has the capabilities to create a differentiated play Key Themes • “We should have had distribution [through a U.S. linear channel] ages ago. It’s crazy that we don’t.” • While most/all seemed confident that SPT could create a high-quality and popular network if given required resources and carriage negotiations are successful, nearly everyone questioned whether Sony management will support the startup and continued investment necessary to launch and sustain a successful network • Branding and Positioning of the network will be critical to success – if the network can stake out a differentiated position with branding that resonates, then SPT has a wealth of production capabilities and library assets that can be manipulated to fit the needs of the network Streamline; call out top 5 findings at a higher level Programming Thoughts • Original Programming is seen as a necessary differentiator by everyone • All agreed that a library play with the Sony name alone will not be sufficient • The network will require original programming and it must fit well with the designated brand and personality so that consumers and advertisers know what to expect from the channel • Despite many great assets across Sony, must be cautious of scattershot approach of all different types of programming on one channel – there is room for maybe 2-3 sub-genres but must be very careful to ensure they still fit overall positioning and brand • Several individuals believe there is a competitive gap in targeting/reaching men • ESPN and Spike are really the only male-focused channels, and Spike has more of a low-brow approach with ineffective original programming • Potential for a male-slanted channel with somewhat more sophisticated approach (Mojo-like in feel but original dramas instead of lifestyle programming) • Should be conscious not to forget women, but SPT library leans more toward mixed gender or male-slanted than toward exclusively female-focused content that is desirable in HD (i.e. non-soaps) 23

While the SPT team members believe that SPT possesses core capabilities that are needed to launch and run a network, certain gaps still exist SPT Advantages • Excellent communications/relationships between different groups within SPE – organization is less siloed than other studios • Only studio where all rights are handled by one group making it easier to manage rights strategically to SPE’s and the channel’s benefit • Substantial multiplatform assets and processes that can be leveraged immediately (e.g. encoding, transcoding, storing assets, etc.) • Potential content in other Sony divisions (Games, Electronics, SonyBMG, etc.) • Potential operational partners in GSN and SPTI Streamline; call out top 5 findings at a higher level SPT Challenges • Holding back or lowering the cost of rights: SPT processes and thinking are geared toward maximizing sale value for assets – while the channel must pay for content like any other network, there are instances where holding back rights or lowering the price for the channel will be for the greater good of SPT • Significant concern about the lack of “programming” experience and network affiliate relations – these skills must be developed or acquired • Need to develop/partner/acquire systems and processes for scheduling/avails, trafficking and distributing content, as well as advertising assets to distribution partners

Summary of Findings Unmet HD Today Underserved Demos in General Women Movies Dramas Young Women Young Men Plays well to Sony Strength

Our Programming Analysis began with SPE/Sony capabilities and assets and then filtered the options based on market demand and competitive gaps SPT Production Capabilities and Library Assets Other Sony Assets that Could Be Leveraged Demographic and Genre Gaps (i.e. External Demand) Big Enough to Support a Full Channel? Recommended Option or Options • One or more options that remain following this analysis • Findings based on internal interviews and IBB’s understanding of SPT’s capabilities and assets • What else does Sony possess that could be leveraged in a similar way to how Warner benefited from DC Comics? • Consumer Demand • Competitive Gaps • Advertiser Preferences • Service Provider Preferences • Can the programming concept support a full channel or is it only a block of programming? 27

Our analysis indicated that SPT has the capability to serve a wide range of demographic groups and programming genres SPT Production Capabilities and Library Assets Other Sony Assets that Could Be Leveraged Potential Channels • Recent production successes with edgy male and female-oriented original dramas • Long history of sitcom success – production and library assets • Large film library that could anchor ad-supported movie channel • Soap Operas • FEARnet • PlayStation game titles, characters, properties • Sony Electronics tech insights • SonyBMG concert footage, archives • SonyBMG artist relationships (e.g. Foo Fighters) • SPTI anime rights/ relationships • General Interest channel combining many content genres and types similar to a broadcast network • Library Movie channel similar to MGM Network or Pix on MediaFlo • Male-Slanted channel utilizing original drama and comedy production as well as numerous applicable library assets • Female-Slanted channel utilizing original drama or lifestyle production and library assets (more limited) • Early-Adopter Lifestyle channel with voice similar to Wired magazine • Edgy Lifestyle channel utilizing SPE relationships with popular actors/ entertainers to star in programming

However, based on our evaluation criteria, a hip, sophisticated, Male-slanted HD Network seems to be the best match for SPT’s and Sony’s strengths Demographic and Genre Gaps (i.e. External Demand) Big Enough to Support a Full Channel? Recommended Option or Options • General Interest channel combining many content genres and types similar to a broadcast network • Library Movie channel similar to MGM Network or Pix on MediaFlo • Male-Slanted channel utilizing original drama and comedy production as well as numerous applicable library assets • Female-Slanted channel utilizing original drama or lifestyle production and library assets (more limited) • Early-Adopter Lifestyle channel with voice similar to Wired magazine • Edgy Lifestyle channel utilizing SPE relationships with popular actors/ entertainers to star in programming (e.g. Scripps with a twist) • General Interest –too much competition • Library Movies (e.g. MGM) – likely to receive weak carriage • Male-slanted, 18-40, differentiated by original dramas • Female-Slanted – too much competition • Early Adopter – primarily younger, tech-savvy males • Edgy Lifestyle – competition • Male-slanted, 18-40, differentiated by original dramas • Early Adopter – primarily younger, tech-savvy males • Male-slanted, 18-40, differentiated by original dramas 29

SPT’s value propositions around a hip, sophisticated, Male-slanted HD Network can be compelling for all industry stakeholders • Cross-platform offering: HDTV, VOD and Broadband • Compelling content for men • Action, drama, hip and sophisticated male lifestyle • Technology/gadgets based on Sony inside perspective of the latest innovations and products Why Would Consumers Tune in? Watch compelling and targeted content • Brand equity associated with quality, technology, media, consumer electronics • Ability to target valuable demographics – high-income, males 18-40; and secondarily females 18-40 • Multiple consumer touch points through consumer electronics, movie/TV releases, etc. • Potential for sponsorships to be affiliated with programming across platforms What’s in it for Advertisers? Access hard to reach demographics Why would Carriers be Interested? Gain an additional high-quality, full HD network • Quality programming from day one • Ability to market an all HD network and potential charter carriage opportunities with significant cross-promotion and PR for the initial carrier(s) • Channel would be attractive to advertisers, hence generate revenues for the carrier 30

Anticipated Programming Evolution Broaden thrid party Revenue Increase new programming, tap into other Sony family products Largely library with limited new programming

Project Overview • Demand for New Channels • Factors Impacting Sony’s Channel Voice • Competitive landscape in HD and SD • HD user demographics and tastes • Sony internal capabilities • Recommended programming focus • Method of entry • Economics • Next Steps

First slide: Pros and Cons of build, buy (G4), partner (with fins or strategics)

BUILD WILL REQUIRE INVESTING TO ENHANCE EXISTING CAPABILITIES AND CREATE NEW CAPABILITIES Network Operations and Technology Areas SPT Relative Rankings Content Production / Acquisition • Long history of producing content for other networks that should apply to supplying content to SPT network REWORK SLIDE Simple table? Research / Programming Affiliate Sales / Relations • Significant Research capability but some resources will need to be focused on SPT network exclusively • Programming skills/experience in terms of developing 24/7 programming wheel needs to be built internally • Excellent experience with affiliate sales of content assets • Need to develop resources/skills in relation to network affiliate relations (i.e. negotiating carriage and marketing of channel within affiliate divisions/regions) Advertising Sales Technology and Operations • In-house capabilities with ad sales for other networks (e.g. Mojo, Tennis Channel, Smithsonian) but staffing will need to be built out to handle a full SPT network • Broadband ad sales capabilities and experience exist as well in relation to Crackle and other digital clients • Licensing and Rights systems/software in place • Have systems/processes for encoding, transcoding, and storage of assets • Lack systems and staff for scheduling, trafficking, network operations, satellite uplink – may be able to leverage these capabilities from GSN or SPTI networks

However, based on various market conditions, the economics can vary. SPT may consider few steps to reduce cost and mitigate risks Suggestions Potential Issue(s) • Take a more conservative approach to programming costs in the initial years since break even time is not affected significantly • Consider outside equity partners to supplement programming and reduce SPT investment requirements. Partners can be: • Other content providers (such as Lionsgate) • Financial investors (such as Private Equity shops, Dubai Holdings, etc.) • Cable MSO/DBS Services (such as Comcast or DirecTV) • Consider using cheaper sources of content and new content formats (such as User Gen pods that Current TV uses). Perhaps Crackle can play a role in this. • Consider cheaper ways to market the shows and build momentum leveraging on-line sources (similar to VuGuru, PromQueen, etc.) • Good quality original programming (which may come with higher cost) can help establish the network earlier on and set it apart • Other partners may want control • Financial partners may want an exit event earlier than otherwise expected • Partnership with MSO(s) may alienate the DBS players and vice versa • The bar for such content needs to be set very high. Also, the quality/format of programming needs to fit with the network’s personality • This certainly can’t replace traditional branding and marketing – specially earlier on. 35

The Magid 2003 brand survey commissioned by Sony has many insights that might still be relevant Key findings from Magid 2003 Survey Potential Implications • The Sony brand is perceived to stand for: quality, movies, technology, and media centric – it will set the bar for the channel quite high • A Sony channel is seen as being a logical service for the company to provide • Focusing or branding the channel on young, wired, connected adults would alienate a significant number of potential viewers • A programming slate of re-runs, marginally interesting content resulted in low scores and contrary to the image of Sony as a brand • The Sony name was a definite plus for respondents – however, respondents didn’t want the channel to become an infomercial for Sony • Quality of programming will need to be very high and compelling to keep in synch with the Sony brand perception • This further suggests that a “Sony” channel is long overdue • Channel positioning should not necessarily focus on young, wired, connected adults – although content offerings specific to this demographic might be compelling • While library content is essential and practical, compelling original programming can make or break this network • The programming and ad sales team will need to be careful about the amount and nature of Sony oriented contents and ads We recommend working with a branding expert to refresh the market research, particularly with the Male-slanted focus, and finalize the brand strategy 36

Baseline FY09 FY10 FY11 FY12 FY13 Sattelite and IPTV are the most likely near-term candidates for carriage and should be approached immediately DirecTV: Premium AT&T: Standard Dish: Premium Cox: Premium TWC: Standard Verizon: Standard Charter: Standard Comcast: Standard Cablevision: Premium

First slide – EBITDA line chart (baseline case only) (with cume cash flow written below) and Subscriber and Ratings growth line chart • Second slide – Revenue stack bar next to Cost stack bar chart

Project Overview • Demand for New Channels • Factors Impacting Sony’s Channel Voice • Competitive landscape in HD and SD • HD user demographics and tastes • Sony internal capabilities • Recommended programming focus • Method of entry • Economics • Next Steps

We believe that SPT should aggressively embark upon a multi-pronged effort to pursue the various network options • Agree on network economics and genre • Finalize channel economics through discussions with extended group (finance, SPTAS) • Work with content, production and distribution groups to gain consensus on genre • Determine availability of content • Work with SPT content group (Chris Elwell) to determine availability of specific titles for selected genre • Determine windowing options for each title • Prepare sample programming wheels for consideration • Once decision made to go-ahead with network launch and content availability is determined, initiate immediate discussions with the potential carriage partners, particuarly DBS companies (DirecTV, Dish) and IPTV (Verizon) • In parallel, evaluate alternative network launch options • M&A viability (G4, MOJO) • Multicast broadcast network • After content and genre agreed to, engage a branding agency to update existing market research, determine network brand and positioning 41

HD Network Analysis: Sony's Channel Strategy

HD Network Analysis: Sony's Channel Strategy

Presentation Transcript

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