2014 SPE IR Meeting Draft (11.13.14) 10am

CONFIDENTIAL DRAFT – NOT FOR DISTRIBUTION 11.13.14, 10am Page 1 of 13

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2014 Investor Meeting – Michael Lynton Speech

[TITLE SLIDE]

Thank you, Kazuo.

I am pleased to be here today to update you on developments across our entertainment businesses and

to report on the plans that I discussed last year. We will then have a time period dedicated to answering

your questions.

[SLIDE 2]

As Kazuo said, today I will be talking about Sony Entertainment, which includes Sony Pictures

Entertainment, Sony Music Entertainment and Sony/ATV.

While each of our entertainment businesses has a distinct focus, they all benefit from the simple fact

that content cannot be commoditized. Our businesses are rooted in creativity and the unique assets we

create have enduring value.

[SLIDE 3]

Let’s first turn to Sony Pictures. When I spoke at our last Investor Meeting, I told you about our strategic

growth priorities, including developing content with a focus on our most profitable formats and genres,

taking advantage of the global growth opportunities in our networks business and pursuing digital

initiatives that target more profitable models for our business. I also shared our plans to implement

additional financial discipline measures. Before I discuss how we are enacting those plans and the

progress we are making, I want to walk you through some recent financials.

[SLIDE 4]

On our latest earnings call last month, we shared updated guidance for our fiscal year ending March

2015, which is reflected in today’s presentation. When compared to our fiscal year ending March 2013,

a very strong year across all of Sony Pictures, we expect to experience a profit decline in the low single

digits. The revision was attributable to a number of factors, including: the underperformance of a

couple of films; economic weakness in India affecting advertising markets and revenues from our Indian

Premier League rights; ratings issues with our networks, particularly in India; and foreign exchange rates.

We are responding decisively to these issues. We are investing in additional premium content offerings

in India, and for those issues outside our control, like foreign exchange rates, we continue to mitigate

risk through diversification across territories and revenue streams.


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Despite these challenges, I am confident in the opportunities ahead of us, and firmly believe there has

never been a better time to be in the entertainment business. In the months and years ahead, Sony

Pictures will be releasing some of our most compelling films and television shows ever. We intend to

leverage them across the increasing global demand for premium content. We remain confident the

expanding proliferation of smart devices and broadband penetration will result in more people in more

countries having access to Sony Pictures’ content.

Let’s take a closer look at how each business within Sony Pictures is building for the future.

[SLIDE 5]

I’ll begin with our Motion Picture Group.

We have made important strides in delivering on the strategy of investment, innovation and reform in

motion pictures that I discussed last year.

[SLIDE 6]

And that work is already starting to show results. We have released many films over the past 12 months

that have resonated with audiences around the globe. In fact, our three most recent releases all

debuted at number one at the United States box office.

The latest installment of our Spider-Man franchise grossed more than $700 million worldwide.

22 Jump Street, the sequel to 21 Jump Street, performed very strongly. Its $57 million opening weekend

in the United States marked the second-highest opening of all time for an R-rated comedy. The film was

also a global hit, grossing more than $330 million worldwide. We already have 23 Jump Street in the

works, and have great hopes for this franchise.

[SLIDE 7]

Our upcoming film slate highlights our label strategy, which is key to ensuring that every year our slate

of movies is fresh, diversified, and appeals to a wide array of audiences.

At Columbia Pictures, which brings you the studio’s tentpole movies and event films, we have:

a contemporary version of the hit Annie;

Pixels, which features classic video game characters like PAC-MAN, Donkey Kong and Space

Invaders; and

two films based on successful book series, The Fifth Wave and Goosebumps, both of which we

believe have film franchise potential.


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In 2015, Columbia will also release the next installment of the James Bond franchise. The upcoming 24th

Bond film will follow 2012’s Skyfall, which grossed over $1.1 billion in box office globally.

Sony Pictures Animation is rolling out its next release, the sequel in the Hotel Transylvania franchise.

With The Wedding Ringer, our Screen Gems label, which produces genre films for targeted audiences,

reunites with Kevin Hart, the star of its Think Like a Man franchise.

Our recently reinvigorated TriStar label will release Ricki and the Flash, starring Meryl Streep.

Just last year Sony Pictures Classics’ Oscar-winning film Blue Jasmine garnered numerous prestigious

awards and earned nearly $100 million at the box office. And again this year, the label is generating

positive attention from critics for several of its upcoming films.

[SLIDE 8]

Last year I told you about our commitment to building franchises. Since then we have implemented a

dual approach - investing more in licensing key IP and working more closely with our colleagues at

PlayStation to showcase their amazing and global game brands in a new way.

We are excited to be creating films based on PlayStation’s incredibly popular games “Shadow of the

Colossus,” “Gran Turismo” and “Uncharted.” These games have dedicated fans around the world and

will be important elements of our slate in 2016 and beyond. We are looking forward to this next wave

of One Sony projects.

[SLIDE 9]

In addition to having engaging and innovative content, it is also essential that we have the right

management team and the right partners in place to guide our film business.

We recently refreshed the management team leading our motion pictures business. We hired a new

President of Worldwide Marketing and Distribution, who has an impressive track record marketing films

of all genres. We also made several key changes in production, advertising and development to ensure

that the right people are in the right roles.

We are confident that we now have a team in place that understands the rapidly changing

entertainment landscape and will be pivotal in helping us compete and succeed, both financially and at

the box office.


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As you know, last August, we announced a deal with Tom Rothman, who is the former Co-Chairman of

Fox Filmed Entertainment. Tom’s movies will be released under our TriStar label, with the studio

retaining greenlight authority over these films. His upcoming projects include films with George Clooney,

Ang Lee and Meryl Streep.

More recently, we entered into a distribution deal with Studio 8, a newly formed production company

founded by Jeff Robinov, the former head of the Warner Bros motion picture group. SPE will release

Studio 8’s films through our distribution infrastructure for a fee, which is a low risk opportunity to cover

fixed costs in our business.

[SLIDE 10]

When we talk about film financing we are talking about agreements where investors make an equity

investment in our films. They share the risk that is inherent in the movie business and also have the

opportunity to share in the reward of a successful film.

This year we completed two film financing deals. We entered into a three-year, $200 million agreement

with LStar Capital. Village Roadshow has also agreed to participate in several of our films.

As I mentioned, these film financing partners help us manage the risk that is inherent in the movie

business. The partnerships also allow SPE to better deploy capital across the company in order to seize

on growth opportunities in the market.

Our ability to attract quality financing partners is a validation of our attractive business model and the

appeal of our planned slate.

[SLIDE 11]

Turning to Sony Pictures Television. As we told you last year, we are increasing our investment in

television productions and media networks. We anticipate that these businesses will become a larger

piece of our overall revenue.

[SLIDE 12]

Our television productions business has developed a strong portfolio of new and returning shows,

including a diverse array of dramas, comedies, game and talk shows.

Breaking Bad capped off its final season with acclaim from critics and audiences. The show won six

Primetime Emmy Awards this year, including Outstanding Drama Series.


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The Blacklist, which was last year’s number one new drama in the United States, returned for its second

season and continues to be a ratings success. The show is currently the number one series on NBC and

the number two returning drama in the United States.

The Goldbergs also returned for its second season this year, and is the number one scripted program in

its time slot.

Our medical drama The Night Shift was the number one scripted summer series on NBC this year and

has already been renewed for a second season.

[SLIDE 13]

Sony Pictures Television is producing many new shows for network, cable and premium channels as well

as digital and over-the-top platforms.

Our Breaking Bad spin-off, Better Call Saul, received a two season order. It will debut around the world

in 2015.

NBC’s series Marry Me delivered the networks best comedy premiere since 2012. The network has since

ordered five additional episodes.

We recently concluded a deal with ABC to produce a companion series to our Emmy Award-winning

show Shark Tank. The new series, Beyond the Tank, will focus on what happens to the entrepreneurs

after they have struck deals with the sharks on the original show.

Sports Jeopardy! airs on our ad-supported OTT service, Crackle. The show debuted in September, and is

off to a spectacular start, scoring more than two million streams so far in the United States. What’s

particularly good - close to half of those viewers were new to the streaming service. Sports Jeopardy! is

also being sold globally, where broadcasters can customize it around their territory’s most popular

sports.

We have partnered with Sony’s own PlayStation to create Powers, an exclusive television show based on

the hit comic book series. We believe that PlayStation is the ideal platform for this series, and look

forward to working with them to make the show a hit and a cross-Sony success.

[SLIDE 14]

There is more television product making its way to consumers thanks to the growing number of

networks and services available, including broadcast, cable and over-the-top networks.


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As a content creator, this competitive dynamic among networks, both linear and on-demand, is creating

new opportunities and new customers for Sony Pictures.

There are a growing number of networks and services to which we license our existing television and

film product globally.

There are also a growing number of companies looking to original programming as a way of

distinguishing their brands and attracting viewers in an increasingly crowded marketplace. We seized

this opportunity to create original content for new networks and SVOD services. With the development

of the show Bloodline, we became the first major studio to produce a new series for Netflix. We also co-

financed Netflix’s Emmy-award winning show House of Cards.

[SLIDE 15]

Turning from television production to media networks.

[SLIDE 16]

Over 20 years ago we began building our television networks business, primarily in emerging markets.

Our worldwide channels portfolio has now grown to include 78 networks, through 126 feeds, available

in 168 countries, reaching more than 1.2 billion subscribers worldwide. Popular channel brands include

AXN, Animax, and Sony Channel.

As I discussed last year, this is still a young television networks portfolio, which means that our

operating margins are lower than those of more mature networks. Right now, almost half of our

networks are no more than five years old. However, we expect that by FYE18, the majority of those

channels will be at least six years old, and our experience shows us that we can expect our margins to

increase as our channels portfolio matures. This is driven by capturing incremental viewers, and by

programming and operating costs becoming a smaller percentage of revenue over time.

[SLIDE 17]

India remains a market with many growth and expansion opportunities for SPE. The country has one of

the fastest growing television markets in the world and we plan to further invest there in both our

existing and new networks.

We invest in premium content that appeals to audiences and drives our advertising revenue.

We are also providing additional targeted networks in India that appeal to specific audiences

demographically and geographically. Regional networks will allow us to capture more rural viewers and

offer programming for the increasingly fragmented Indian audience.


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For example, Sony PAL, which began airing in September, targets Indian women with contemporary

content and shows that have empowering stories.

LIV Sports is a pure online play, offering a mix of sports, entertainment and analysis. The channel was

the official mobile and online broadcaster for the 2014 World Cup in India.

[SLIDE 18]

Not only are we deepening and broadening our networks business through investments in our current

channels, we are also pursuing strategic acquisitions.

In August, we closed our acquisition of CSC Media, one of the UK’s largest independent cable and

satellite TV channel groups. Following the acquisition, our networks became the number five

multichannel player in the U.K. market. That is quite amazing considering we entered the U.K. market in

2011 with just one channel feed.

CSC’s channels have increased SPE’s reach, enhancing our position in terms of distribution and ad sales

opportunities. The programming on CSC’s 16 channels also complements our current offerings,

expanding our content into the music and children’s genres. With the addition of CSC, we currently

have 20 channel brands in the U.K. market.

[SLIDE 19]

Over the last 10 years we have been in investment mode for our networks business, creating and

acquiring new channels, expanding our geographic reach, and growing our revenue.

In FYE05, almost 70% of our $300 million in networks consolidated revenue came from India and Asia.

Fast forward to FYE14 and it is evident that our investments have diversified our networks portfolio

geographically and in terms of content genre. This has led to meaningful networks consolidated revenue

growth of more than 400% over the last ten years.

Looking forward, we will continue to invest in emerging markets, which has been a successful strategy

for us. We are also pursuing focused opportunities in more developed countries, as evidenced by our

acquisition of CSC Media. This strategic and opportunistic approach will lead to smart and prudent

growth.

These are important long-term investments, and as these markets mature and our networks scale up,

we expect this strategy to further drive up our margins while delivering profitable growth.

[SLIDE 20]


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Our cable networks deliver dual revenue streams – advertising and subscriber fees. Having these two

sources of revenue helps mitigate business risk. We have a well-balanced mix of advertising and

subscriber fees globally, with an even split between those sources. In recent years we have also added

digital games revenue which comes from our United States-based network, GSN.

[SLIDE 21]

We are preparing for future success through the growth story that I just shared with you and also by

ensuring that we have a competitive and sustainable cost structure.

[SLIDE 22]

At our investor meeting last November, we announced plans to eliminate $250 million of costs by March

31, 2016. Since then we have taken significant steps to reorganize the way we do business in order to

boost revenues, cut costs and increase margins.

In light of some changes made early in calendar 2014, we were able to increase our targeted annualized

savings by $50 million to $300 million.

We undertook a comprehensive, companywide cost-cutting initiative, bringing in outside experts to give

us an unbiased perspective on where we could reduce costs.

We streamlined our workforce; we focused on where and how we spend our money, making changes to

our procurement process and other functions along the way; and, where appropriate, we are utilizing

joint ventures instead of owned operations for our marketing and distribution infrastructure.

As a result of these changes, we are on track to meet our goal of $300 million in annualized savings by

March 31, 2016.

[SLIDE 23]

Let me turn to our financial forecasts that are based upon the strategies and opportunities I just

discussed.

For FYE18, we are expecting Pictures to have revenue between $10 and $11 billion dollars.

• In the Motion Pictures division, growth will be driven by a sharper focus on tentpole films with

greater profit potential

• We will continue to grow our Television Productions division with additional investment in

development; we will also benefit from additional opportunities for syndication of current

television shows


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• And we will drive further growth in our Media Networks business by continuing to invest in our

existing channels as well as expanding our portfolio of channels

We forecast that our operating margin will be between 7% and 8%. And we expect our OIBDA margin

will be between 9% and 10%.

[SLIDE 24]

Let me now shift, and tell you about Sony’s Music businesses.

[SLIDE 25]

First and foremost, operating income of the Music segment is forecasted to increase from $448 million

in fiscal year ending March 2013 to $473 million in fiscal year ending March 2015. This represents a

compound annual growth rate of 3%, or a 7% compound annual rate of growth when looked at on a

constant currency basis. This growth is due to higher margins on digital revenues, lower costs and an

increase in equity income from our investment in EMI Music Publishing.

Our growth in operating income is particularly noteworthy given revenues have declined at a compound

annual rate of 5% or 1% on a constant currency basis. The decline in revenues is primarily driven by

continued industry contractions in physical and digital downloads not yet being fully offset by the

encouraging growth we have seen in streaming and Visual Media and Platform sales.

For this current fiscal year, our music segment has had a strong start to the year and is very well

positioned going into the critical holiday period.

[SLIDE 26]

The Sony Music segment has shown ongoing commitment to financial discipline and cost management.

Over the past dozen years recorded music has been laser focused on reducing costs and maximizing

efficiencies across all areas of our worldwide operations in response to the declining industry revenues.

Cost reduction initiatives covered all key cost areas from real estate rationalization, to process

improvements, global marketing efficiencies and reduction in supply chain costs.

Additionally, in music publishing, Sony ATV has successfully integrated EMI Music Publishing’s

operations, achieving synergies that resulted in headcount reduction of approximately 60%, overhead

cost reductions of 67%, integration of over 30 offices worldwide and full integration of IT systems.

As we look forward, we will continue proactive cost management, seeking for further efficiencies that

we can drive through all aspects of our global operations as well as initiatives we can take to align

ourselves with future trends.


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[SLIDE 27]

Recorded Music’s bestselling titles for the current fiscal year include releases from Michael Jackson,

Pharrell Williams, John Legend, Barbra Streisand, Kenny Chesney and the Foo Fighters. And, we are

excited by a strong line-up of titles that have been recently released or are still to come in the balance of

the year including One Direction, Garth Brooks, AC/DC, Olly Murs, Carrie Underwood, Kelly Clarkson,

and Japanese artists Kana Nishino and L’Arc-en-Ciel.

As discussed at last year’s investor meeting, our Recorded Music business has been focused on finding

and developing new talent and we are seeing very positive results as highlighted on the next slide.

[SLIDE 28]

So far this fiscal year Sony Music has achieved multi-platinum global success with ‘Happy’ by Pharrell

Williams, ‘Chandelier’ by Sia, and ‘Rude’ by new Canadian group MAGIC!.

Other breakouts include MKTO, George Ezra, Hozier, Bobby Shmurda, Fifth Harmony and Ella Henderson.

The success of these artists underscores the strength of Sony Music’s numerous creative centers in

identifying and developing new artists. All these artists show promising signs of becoming our next

generation of superstars.

[SLIDE 29]

Turning to our music publishing business, for the third calendar quarter for this year, Sony/ATV had an

industry-leading 31% market share of the Top 100 songs played on the radio in the United States.

This strength has been a consistent trend over the last year. In the United States, we controlled the No.

1 single on the Billboard Hot 100 singles chart in [38] out of the first [42] weeks of the year. [to be

updated again before November Meeting]

Our Hot 100 No. 1s include:

• Pharrell Williams’ ‘Happy’, which is the year’s biggest-selling download with [6.3] million units

sold just in the United States.

• Toby Gad’s ‘All Of Me,’ which was co-written with John Legend.

• Our brand new signing Iggy Azalea, whose hit ‘Fancy’ was #1 for 7 weeks on the Billboard Hot

100 , and was written with another one of our hottest new acts, Charli XCX, who had her own hit,

‘Boom Clap’ from The Fault In Our Stars soundtrack.

[SLIDE 30]

Sony/ATV not only represents the most iconic music of all time, it also represents the most acclaimed

collection of hit-making songwriters of our time, including:


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• Pop superstars P!nk and Lady Gaga as well as Taylor Swift and Ed Sheeran

• Urban icons Kanye West, Usher and Drake

• Breakthrough rockers OneRepublic and fun

• Latin crossover stars Pitbull, Shakira and Enrique Iglesias

• Country stars Miranda Lambert and Luke Bryan

[SLIDE 31]

As you can see on this slide of the top earning titles, our highly diverse catalog of songs covers all genres

and decades. Robin Thicke’s ‘Blurred Lines’ and OneRepublic’s ‘Counting Stars’ were among the top

earning songs from the past 12 months, as well as music from several current CBS television series like

NCIS, CSI, and from classic artists like The Beatles and Queen.

[SLIDE 32]

Now a bit about the music industry which is in the midst of another major transformation, from a digital

music model based on ‘ownership’ to one that is based on ‘access.’ As technology has made online

streaming more widely available, numerous digital music streaming platforms have emerged, including

free ad-supported and paid subscription offerings, digital and satellite radio services, and digital video.

Streaming services represent the second largest component of the digital music business, and it is

quickly catching up to downloads. We project that by the end of 2017, streaming services in total will

account for approximately 78% of the digital music business and over 60% of the total music industry.

As we talk about the growth of streaming globally however, it is worth noting the unique dynamic of the

Japanese music market. Here in Japan, physical sales of music remain the predominant model and the

streaming market is still in its early stages.

We are most encouraged by the growth and prospects of the paid streaming model. Revenues from paid

streaming services provide recurring and predictive revenue that is not reliant on the short holiday

consumer buying trends. We believe that by the end of 2017 paid music streaming services will reach

mass market with a significant number of people paying monthly fees to access music. Reaching mass

market in paid streaming services will be key in restoring overall top line revenue growth to the industry.

As an industry, it is important that we convert non-paying listeners to paying subscribers as it can take

up to 7 times more streams on free ad-supported services to generate the equivalent level of revenues

from paid subscriptions. Of all the different revenue channels, paid streaming offers recorded music

companies the highest average revenue per user. Margins earned from streaming models are even

higher than those of physical sales due to the absence of physical supply chain costs. Paid streaming

services provide the highest value to a recorded music company and are the digital channel we are most

excited about in terms of growth potential.

In conclusion, we have a positive outlook for the future of the recorded music business. Overall music

consumption is increasing as people access music through many different channels and platforms. With


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continued growth of audio and video music streaming services and conversion of free users to paid

subscribers, the future for the music industry should be very bright. This outlook is shared by many

analysts following the industry, including one, who for the first time in over ten years, forecast a return

to growth in the recorded music industry revenues between now and 2020.

[SLIDE 33]

Taking a longer-term view, our expectations are that by the fiscal year end March 2018, the Sony Music

Segment will be able to deliver:

• Total revenues of between $4.8 and $5.2 billion

- For recorded music, growth of streaming, in particular paid subscriptions, will be enough

to offset or more than offset declines in physical and downloads.

- Music Publishing revenues will show marginal growth through continued exploitation of

our world leading catalogue and iconic songs.

- And, our Visual Media & Platform business, which includes our Solutions business,

Animations and Live Entertainment business, will provide modest growth, providing

support to our mature traditional music business lines.

• Segment operating income margins of 10.5% to 11.5%, and

• Segment operating income before depreciation, amortization and restructuring margin of

between 13.5% and 14.5%.

Our profit metrics for the fiscal year end March 2018 are expected to further grow from the current

fiscal year end March 2015 forecast. This will be achieved through higher margins on digital revenues

and continued cost efficiencies.

This is an exciting time of evolution and opportunity for the music industry. We are encouraged by

industry trends and outlook. Coupled with some of the best assets and top management in the music

industry, we are well positioned to be successful and deliver growth in profitability.

[SLIDE 34]

I have talked to you today about the separate initiatives and results of our Pictures and Music

businesses. However, these are actually all part of Sony Entertainment, the umbrella company under

which we are building a more unified entertainment business.

In May, we appointed Nicole Seligman to the newly-created position of President of Sony Entertainment.

Nicole previously served as Executive Vice President and General Counsel of Sony Corporation, and is

now helping to develop overall strategy and growth opportunities, identify and implement efficiencies

within and among the three Sony Entertainment companies, and expand the businesses' combined

global footprint and influence.


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We also recently announced that Kunimasa Suzuki will join Sony Entertainment as Executive Vice

President of Strategic Corporate Initiatives. He will work across Sony Entertainment to enhance our One

Sony business and marketing initiatives. We look forward to his focus on opportunities for Sony Pictures

and Sony Music to work even more closely with Sony Electronics.

I know that deepening collaboration among the businesses will help their results and will be an

important part of our One Sony strategy.

[SLIDE 35]

So, to wrap up, let me summarize some of the key things Sony Entertainment is doing to increase

revenue, profitability and value:

We are creating, acquiring and distributing the best content across our lines of business and

around the world.

We are focusing our investments on those opportunities that hold the greatest promise for

growth.

We are embracing new technologies in ways that allow us to expand our businesses in new

directions.

We are committed to strong financial discipline, focusing on achieving and maintaining

competitive and sustainable cost structures.

We are dedicated to the One Sony strategy, capitalizing on Sony’s unique ability to extend our

brand into the entertainment world of consumers around the globe.

Thank you for allowing me to update you on our newest developments, the future opportunities for

Pictures and Music, and the important role that the entertainment businesses play within Sony.

With that, we would be happy to answer your questions.

Documents

2014 SPE IR Meeting Draft (11.13.14) 10am