(Source: Reuters)
Company rejects proposals to break off its entertainment unit via an IPO

After rebuffing a top shareholder's breakup proposal, Japanese corporate conglomerate Sony Corp. (TYO:6758) turned a lean profit, swaying some that it had made the correct decision.

I. Entertainment Unit Rebuffs Spinoff Calls, Posts Profit

The company's entertainment units were a tale of two segments.  Sony Music Entertainment (SME) reported ¥112.0B ($1.131B USD) in revenue and an operating income of ¥3.5B ($109M USD).  The unit which was formed out of the 2008 split of the Sony BMG joint venture with Bertelsmann AG (FRA:BTG4), was boosted by strong sales of Daft Punk, Justin Timberlake, and P!nk's new albums.  Sony reports that its music unit benefited from equity earnings from its iconic sub-brand EMI Music, which it acquired in June 2012.

Meanwhile the movie unit, Sony Pictures, struggled.  It trimmed its losses from last year, posting a loss of ¥3.7B ($38M USD), however the true loss would have been ¥14.0B ($144M USD) were it not for the ¥10.3B ($106M USD) in income for selling off its music (soundtrack) catalog.

Daft Punk
Columbia Records electronic rockers Daft Punk channel some secret society mojo, helping power parent company Sony to profit in Q2. [Image Source: Reuters]

Leading the way to this loss were a series of high profile flops including "After Earth" (Production Costs: $130M USD; Global Ticket Sales: $236M USD) and "White House Down" (Production Costs: $150M USD; Global Ticket Sales: $116M USD).  The studio's lone major success for the quarter was "This Is the End" (Production Costs: $32M USD; Global Ticket Sales: $108M USD).

Together the two units were profitable, a win for Sony after it rebuffed a proposal by Daniel S. Loeb, billionaire hedge fund manager of the New York-based Third Point fund hedge fund.  Mr. Loeb, whose firm owns 7 percent of Sony's shares, demanded a spinoff via initial public offering, of the entertainment units, leaving Sony solely focused on electronics and finances.

For now, though Sony remains hesitant to accept the proposal that would take it away from its current monolithic strategy, which hearkens back to the zaibatsu of pre-war Japan.

II. PS4 Seizes Lead in Pre-Orders as Sony Spends Deeply on R&D

Sony's gaming unit losses soared 32 percent to ¥14.8B ($149M USD), as sales of the PSP, PS2 (yes, Sony's still selling it), and PS3 declined, producing a revenue of ¥117.9B ($1.191B USD).  Sony also spent deeply on research and development for the PlayStation 4, which launches later this year.  

It's unclear who has the upper hand in console preorders -- Sony or its arch-rival Microsoft Corp. (MSFT) whose Xbox One will vie with Sony's PS4 for market dominance this holiday season.

Despite controversies over digital rights management, which Microsoft in part changed course on to placate the public, Microsoft's upcoming Xbox One was reportedly in the lead in early spot-check based preorder estimates.

However, it appears Sony has since taken the lead as both Best Buy Comp., Inc. (BBY) (#1 in pre-orders versus #2 for the Xbox One) and, Inc. (AMZN) (#15 in overall "Video Game" section sales, versus #38 for the Xbox One):

Xbox One v. PS4

Best Buy Xbox One v. PS4
(Best Buy)

Sony's console is priced at $100 USD less than Microsoft's.  It has less voice controls and lacks the cloud-based computation offloading of the Xbox One, however the latter is a doubled edged sword, as Microsoft has said developers have the ability to use cloud computing in such a way as to make games unplayable offline, and in fact it encourages them to do so.

III. Xperia Sales Grow, LCD Unit Becomes Profitable

The Xperia-anchored Android smartphone unit also crept to profitability, turning last year's loss of ¥28.1B ($285.8M USD) into a profit of ¥5.9B ($60M USD) on a revenue of ¥389.0B ($3.929B USD).

Looking at Sony's other device units, digital camera sales were predictably down as the segment continues to be cannibalized by smartphone point-and-shoot.  

The television segment, though showed "significant improvement" owing to "improved product mix in LCD televisions and cost reductions" which allowed the unit to make a profit of ¥3.4B ($34M USD) compared to ¥10.0B ($101M USD).  That profit comes despite a "significant" drop in LCD TV unit sales.  Sony was among the LCD TV makers pitching 4K displays at the market this year.

Sony's is pitching 4K LCD TVs at the market.  The LCD TV unit obtained profitability in the second calendar quarter, despite a drop in unit sales. (55" XBR-55X900A (4K) pictured)
Overall, Sony made ¥3.5B ($35M USD) in profit on ¥1.712T ($17.3B USD), narrowly better than the ¥1.7T in revenue analysts expected.  The profit marks the second straight quarterly profit for Sony who last quarter reversed a long string of losses, earning ¥43B ($458M USD).  The second calendar quarter of 2013 is Q1 of Sony's fiscal 2013.  Sony shares were up 1.74% in today's trading.

Sources: Sony, Bloomberg [analyst estimates]

"So, I think the same thing of the music industry. They can't say that they're losing money, you know what I'm saying. They just probably don't have the same surplus that they had." -- Wu-Tang Clan founder RZA

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