Entertainment Industry Trends and Opportunities for Networked Entertainment Solutions

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 entertainment1 revenues by segmentsegment, percent of total

TV licensing fees2

Internet adv.

Video games

TV adv.

Out-of-home adv.

Filmed entertainment

Total entertainment

Music publishing

Radio

Book publishing

Newspaper publishing

Magazine publishing

Recorded music

Global entertainment 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

subscriptionmusic

digital lockers

streaming music on demand (Spotify)

continuum of music

consumption

new physicalbusiness models: Red Box & Netflix

VOD and SVODVHS / DVD

PPVin limited

window and show times

continuum of filmed

entertainmentconsumption*

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/rental

PPV: $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 / 24h

iTunes: $0.99 (TV)$3.99 / 24h (Film)

Netflix: $8.99+ / month

Hulu Plus: $9.99 / month

digital rental

8

*Note: this evolution relates primarily to the home entertainment portion of filmed entertainment

internet radio (Pandora)

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 Rentals Transactions = 1 Sell-Through

Transaction

Physical ST Physical Rental EST VOD

+17%+17%

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

+2%+2%

digital music download growth trends /for the first time since their inception, the number of single-track digital downloads has decreased in the United States

US single-track digital downloads growth ratepercent

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

impact of new access models on piracy /

12

digital lockersissues potentially exist with the uploading of

illegitimate content in exchange for legitimate copies in the digital locker

digital cinema distribution of digital copies of feature films to exhibitors creates new vulnerability

global music and video digital piracy are expected to continue to grow as broadband penetration improves and the value chain is increasingly digitized

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

• new access models may actually reduce piracy in some markets by providing increased legitimate alternatives

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

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

14

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

15

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 /

16

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 /

17

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 /

18

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

Sony’s competitive advantages promote success versus key competitors /

19

already in consumers’ living

rooms

can offer unique viewing experiences

utilizing its own content

offer services optimized for its

products and ecosystem

the evolution of the TV viewing experience /

20

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 /

21

• 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, and social networking

customer profitability enhanced by continuing transactional relationship after hardware purchase /

22

• 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 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 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 57MM 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 AAA non-Sony entertainment content will become easier

23

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

capitalizing on Sony’s IPTV advantages /

• through aggressive marketing activities, Sony must educate consumers that its Blu-ray players, PS3s and connected TVs have IPTV capabilities (e.g. Qriocity)

– increase usage of Sony’s IPTV services within its network of connected households

– build Sony IPTV installed base

24

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

appendix /25

new digital access options and business models /music

26

Shift from current access models to…

Digital downloads / “side-loading”

Radio station streaming

sites

Spotify – instant listening to specific tracks/albums

• One of the leading music providers in Europe with ~7mm users

• Premium subscription available in the UK and other European countries for ~$16; there are more than 500K premium subscribers

• Launched an iphone app in 2009

• North America full internet service launch planned for 2010

Apple/Google – cloud-based storage for instant access across multiple devices

• Apple bought Lala which provides users access to music from cloud servers

• With Lala, Apple could enable users to buy cheap music streamed from the cloud and listen to it on any of their internet enabled devices • Google is developing a subscription-based cloud-based locker

• Consumers charged $25/year to store songs in the locker with accessibility on any internet connected device by either streaming or downloading

new digital access options and business models /film and television

Film and television studios have been experimenting with emerging digital models, sometimes segmenting product by

window to limit cannibalization of higher-margin product

“Early Window” Instant streaming film/tv content

• DVD release dates moved forward

• Films streamed to internet connected TVs

• Hulu is the leading online ad-supported destination for TV content

• This summer, it announced a premium subscription service ($9.99) providing more content and access on more devices (phones, tablets, TVs, blu-ray players, consoles)

• Netflix , though with limited content, has enabled an instant streaming service to PC, Mac, or TV through a Netflix ready device

• Over 60% of the service’s 15mm users have streamed content

27

portability of media content using the cloud /

28

popular entertainment services are increasingly moving content to the cloud so that streaming content is available on mobile devices anywhere, anytime

AppleTV and Qriocity /

29

• cloud-based (no storage) rental of streaming movies and TV shows (from ABC and Fox)

• Netflix streaming, YouTube streaming, photo streaming from Flickr and MobileMe

• “AirPlay” feature launching in November links networked Apple devices; allows users to stream content from an iPad, iPhone, or iPod to an AppleTV

updates to AppleTV were announced on September 1

all of these features are available in Sony’s Qriocity

• hundreds of box office hits from major studios have been available for streaming to Sony’s 2010 network-enabled BRAVIA TVs and BD players in the U.S. since April 2010

• “Music Unlimited powered by Qriocity", a cloud-based digital music service will be available by year end on Sony's 2010 models of network-enabled BRAVIA TVs, BD players, PS3s , and VAIOs