The untold story of how Sony is rapidly becoming an American company.

High over Manhattan in the AT&T building, in private club rooms with coffered ceilings and studded leather walls, the executives of a century- old engine of American commerce used to meet over the choicest food and the finest wines. No more. Now it's the Sony Club, in the Sony building, 35 floors above the Sony Arcade. Now, at parties, sake flows from a barrel labeled "Morita." Akio Morita, "Mr. Sony," is the scion of fifteen generations of sake brewers.

But this is no vintage '80s, tired scare-story of how Japan is buying up America. It is the untold story of how Sony is turning American faster than any of us are turning Japanese.

Sony's International Executive Committee meets not in Tokyo but in New York. The official language of Sony is not Japanese but English. If more than one gaijin (non-Japanese) is present in a company meeting, the meeting is held in English.

Since 1990, the US part of Sony has sold more goods than the Japanese part. And the gap has grown each succeeding year. Sony's assets in the United States last year topped US$14 billion, more than a third of its global assets. Sony Corporation of America, formed last year in a reorganization that put all US operations under one roof, employs more than 30,000 people, two-thirds of them in the US. It exports over half a billion dollars worth of products from the US per year – nearly a third of everything it builds.

If Sony Corporation of America were a separate company, it would rank 58th in the Fortune 500. Its chair, Mickey Schulhof, is American, as are most of the executives of the subsidiaries under him – except for Olaf Olafsson, the 31-year-old Icelandic novelist who heads Sony Electronic Publishing.

Sony has been manufacturing in the US since it opened a Trinitron plant in San Diego in 1972 – and by now many of the televisions that come out of its American plants are completely made in America. Of the 10,000 employees of Sony Engineering and Manufacturing of America (SEMA), only 170 are Japanese, and their numbers are shrinking, not growing.

"They ought to just re-register the corporation in Delaware," says Chuck Goto, an analyst with S.G. Warburg in Tokyo. "There would be a lot of advantages."

But this shift away from Japan is not really new. "Sony" doesn't mean anything in Japanese. The name was picked for its look in Roman letters, for the Latin sonus (or sound), and for the resonance with the happy English words "sunny" and "sonny boy."

Sony wants to bridge the gap between hardware and software, to become the first global company that builds both the boxes and what comes out of them. It is this desire that is shifting Sony's center of gravity away from Japan. As another Sony executive put it, "The US is where the future of the company unfolds."

Change is the Constant

Sony is moving more and more into businesses that are quintessentially American. In Los Angeles, the gaudy, modern slot-machine-style building of steel, glass, and marble that was the MGM Plaza is now the Sony Plaza. If you stroll across the street you'll enter the gates of what was the MGM Studio and the Culver Studios – now the Sony lot. You'll see Columbia Pictures (a Sony property), a Loew's Theater (another Sony property), as well as 24 sound stages to TriStar Pictures (yet another). The place never looked better: the buildings that manage to combine Southern colonial with chrome-and-glass Art Deco; the buff, powerful magnolias that somehow never seem to drop a leaf; the manicured lawns; the streets between the sound stages tarted up with false fronts and shops like a Disney movie theme park; all looking less gritty and more Hollywood-as-we-imagine-it than it ever did under its original owners.

And in San Jose, California, amid the vast empty spaces and orange groves north of downtown rises an enormous new building: Sony's new high-tech research center, with its four-story atrium as long as a football field. All glass in front, all white inside, all Sony gray slate flooring, it is as large as an airport terminal, unpeopled but for two receptionists, the galleries above and beyond them brimming with the engineers and programmers of Sony's rapidly growing presence in Silicon Valley.

The executives of Sony of America express a surprising independence from Tokyo: Although he is Japanese, Kunitake Ando, president of SEMA, considers it part of his mission "to make SEMA autonomous," and describes Sony units in Southeast Asia as "our competition." He says, "I'm not the typical salariman, I'm not afraid to fight Tokyo. It's a question of who makes the decisions. If you expect to win here, you have to make decisions here, not in Tokyo."

In the colonnaded Saturday-lunch quiet of the dining room of New York's St. Regis hotel, Kuni Ando suddenly pops a line from the musical New York! New York! into the conversation: "If you can make it here, you'll make it anywhere."

Vectors of Change

The reasons for Sony's shift to America are many.

* It's pushed from the center: For Sony, the shift outwards – and to the US – is not a change in direction but the culmination of an effort played out over five decades. President and CEO Norio Ohga has told Sony's global executives, "Don't think of what Tokyo says as the golden flag" (the battle flag of the shogun that all must follow).

* It's pulled from the edges: American Sony executives build their empires by pulling work and decisions here, into the world's largest single economy.

* It's forced by shifts in the yen: As the yen buys fewer dollars, it makes sense to shift as much work as possible to the biggest market and pay for it in dollars.

* It's propelled by shifts in labor costs and skills: Americans used to complain about competing with "cheap Japanese labor," but by the '80s the cost of Japanese labor equaled that of American labor. In the last few years, with the rise of the yen and America's ferocious competition on quality, American labor has become cheaper than Japanese labor in high-tech industries – as have American parts. And America has what Pradip Banerjee, a manager at the San Jose chip design center, calls "the talented people that we need to attract."

* It's driven by trends in markets: In the last two years especially, the American economy has recovered. While 1993 was a record year for the entertainment hardware business in the US, the Japanese and European economies have continued to wallow in recession. This year, the German economy is expected to grow by 0.6 percent, the Japanese by 0.9 percent, and the US economy by 2.7 percent.

And in some areas, the Japanese market is simply not as mature as the US market. It's hard to build the consumer end of the infobahn in a country where most homes aren't wired for cable.

* It's powered by the changing shape of the hardware business: As hardware becomes more and more a commodity business, characterized by the swift spread and imitation of new technologies, Sony is forced to rely on things that cannot be imitated: its particular sense of design, its aesthetic decisions, its service abilities, and eventually its software – the music, movies and games. Technical and research decisions are not specific to a culture or bound by geography, aesthetic decisions, and service capabilities.

Corporate power follows the work. "If you really want to build it here," says Ando, "you've got to design it here. If you design it here, you've got to have major decision-making power here. So this authority is shifting to the US."

With that shift comes a certain independence. In fact, American Sony units have carried out many projects despite Tokyo's disapproval, including for instance the entire "My First Sony" line. Headquarters didn't see the point – who would buy electronics in brightly colored cases with big knobs?

Tokyo also didn't see the point of the "Vision" project (an inexpensive teleconferencing box with a charge-coupled videocam, a microphone, and some special circuitry, made to fit atop your monitor). Ando says, "We talked to them for over a year. They didn't get it. So our factory in San Diego took it on." Within Sony, when Tokyo says no to something, it doesn't mean "Don't do it." It means "We won't give you the budget for it."

Tim Agnew, an executive at Sony's display systems group in San Diego, says, "The 'Vision' idea was a bit of a struggle, and there was some tension, but they didn't stop us." Brian Frohilich, of the same group, says, "All I really need from Tokyo are parts numbers. The rest I can scramble up here or somewhere else in Sony of America."

Sony Biz

Sony is in three main lines of business: consumer electronics (the Walkman, TVs, boomboxes), professional and business electronics (telephones and telecommunications, computer peripherals, semiconductors, broadcasting equipment, medical imaging, display systems, factory automation systems), and popular recorded entertainment (music and movies, movie theaters, CD- ROMs).

The first two have been on Sony's worktable since the company's founding in 1946. The third business is new, in part because the first two have gotten more and more difficult. The traditional engine of Sony was (1) inventing new technologies, then (2) turning them into products, and (3) marketing the hell out of them. But the increasing speed of change itself is making that an ever-riskier formula. "Fifteen years ago we had a two-year lead time over our competitors," says Schulhof. "Today it's two months. That trend toward making a commodity of electronics was one of the motivations to get into the entertainment business. If you have Jack Nicholson or Barbra Streisand, nobody can copy that."

For decades Japan has been king of electronics, especially consumer electronics. Ever since it introduced the first successful transistor radio in 1955, Sony has led much of that charge, with the first pocket-sized radio, the first AM-FM transistor radio, the first transistor television, the first home VCR, the charge-coupled device, the Walkman, the CD (with Philips), the MiniDisc, and other innovations.

Japan made the boxes. Americans, more than anyone else, made the boxes sing.

Then, in the 1980s, Japan invaded Hollywood. In 1988 Sony bought CBS Records, and in 1989 it bought Columbia Pictures plus TriStar Pictures, Loew's Theaters, and a raft of smaller entertainment properties – and Wall Street and the entertainment industry snickered. What would a Japanese box-maker know about managing the mercurial, pyrotechnic, maddeningly personal, egomaniacal magic of Hollywood studios? Comics did takeoffs: Schwarzenegger learning to bow, Dolly Parton stuffed into a kimono. It couldn't work. Sony would hemorrhage money.

At first it seemed they were right: The savvy locals were taking the foolish Japanese for a ride. The $3.4 billion purchase price nearly doubled with costly add-ons, including $200 million to steal new studio heads Peter Guber and Jon Peters from Warner Brothers, then a half-billion to settle the suit Warners slapped on Sony for stealing them, then another $100 million to spruce up the bedraggled Culver and MGM lots Sony wound up with in the settlement. Then Guber and Peters went to town: Charged by their Tokyo bosses with gaining market share, they did it the way it is done in Hollywood. Money flowed like sake.

Then, as the global economy slowed in the early '90s, Sony's debt soared, and Tokyo began to put serious limits on the studio's spending. But they at least did what Tokyo had asked: They grew the studio by as much as 25 percent per year. There were disappointments on the way –Schwarzenegger's Last Action Hero, supposed to be the blockbuster of all time, lost the studio over $100 million in one quarter – and turmoil in the executive suites. In the spring of 1991, after only a little more than a year at the helm, Peters was eased out of the job into an exclusive production deal, leaving Guber solely in charge.

Yet despite the wrong bets, Sony's studios, taken as a group, have led the US industry box office race for the past three years, with films such as Basic Instinct, A League of Their Own, and A Few Good Men (all of which made over $100 million in the US market alone). In the process they pumped the US market share of Sony's movie groups from under 14 percent to just under 20 percent, with revenues last year of $920 million.

Something similar has happened in the music market: In 1993, Sony Music beat Time Warner music divisions out of the top market-share spot, gaining operating profits that have increased 235 percent since Sony bought the company.

How much of this is actual profit – or a reasonable return on investment, especially considering the debt Sony racked up to buy the business – is another question, one on which experts disagree. "They ain't making any money on the entertainment side," says Paine Webber analyst Chris Dixon. "That makes it difficult for them to find the capital they need to integrate their products across all the systems they are in."

A. Rama Krishna, of Alliance Capital Management in New York City, counters, "As long as your profits cover your interest expense, there is no such thing as an optimal capital structure."

Syn City

But the "S-word," the word that Sony has used for almost six years now to explain its entertainment spending spree, is not "solvency" but "synergy." The parts are supposed to interact in ways that make them far more valuable together than apart.

Sony executives point proudly to the ways that they are beginning to knit the pieces of the business together, using their broadcasting and electronics expertise in the business of producing films (see "Hot Tech," page 96), shoving the films into the satellite pipeline, and showing them in theaters – and turning them into computer and set-top games. Starting with Bram Stoker's Dracula, Sony detailed crews to film game sequences side-by-side with the movie sequences – on the same sets, using the same actors or stunt doubles – for CD-ROMs. And some flow has gone the other way. When Sony Electronic Publishing debuted its new CD-ROM game, Ground Zero Texas, it immediately got calls from the Sony studios, wanting to nail down the film rights.

Sony Electronic Publishing is another American growth story, a hardware- and-software group that produces Sony titles, produces other people's titles, and even does contract CD manufacturing for other people's productions. A business started from scratch, it makes half of all the CD- ROMs produced in the US. According to Olafsson, the division pressed its first in 1986, its millionth in 1990, its ten-millionth in 1992, and its fifty-millionth late last year – a steep curve. The curve will likely grow steeper if Sony succeeds with the 3DO-Nintendo-Sega-killer company it has recently founded in Japan to design and manufacture 32-bit, parallel- processing, CD-ROM-based set-top boxes.

In the pursuit of the holy grail of hardware-software synergy, Sony has poured its money, talent, and attention into the United States at an increasing rate – and the push has not been limited to the entertainment businesses. Even the traditional Sony box-making businesses have gained an American flavor as they expand into product categories where much of the action is: software, the infobahn, and high-tech helpers for the industries in which America leads, including:

* Computer-generated special effects, high-definition television (HDTV) post-production techniques, 3-D theater sound, point-and-click video editing, and multichannel digital uplink facilities for the movie, television, and cable industries.

* Advanced image storage and retrieval for medical use.

* Super-high-definition displays for air traffic control.

* Cheap vidoeconferencing modules for home computers.

"In some areas," says SEMA president Ando, "the US part of Sony is just plain better at it. The technical trends in the two countries are very different. The US is much more advanced, especially in telecommunications." With so much of its market here, Sony must move more of its work here because, Ando says, "we must shorten the cycle time on our products."

Though basic research, the kind that earned a Nobel Prize in physics for one Sony scientist, remains in Japan, applied research and development efforts in the US have multiplied like wild rabbits. Beginning with an advanced video group in Palo Alto in the late '70s, Sony has grown twenty research groups across the US. "Eventually," says Ando, "we will even be doing basic research here."

The Truly Global

This kind of center-and-edges dance has helped make Sony one of a handful of truly global companies. Most people's short list probably would include AT&T, IBM, Xerox, Sony's rival Philips, perhaps Proctor and Gamble, Asea Brown Bowery, and Glaxo Pharmaceutical. No other Japanese company appears on the short list – not Matsushita, a far more conventional company, and certainly not the car companies, which manufacture and design overseas, but maintain rigid control from the center. "Tell me how many American executives you have heard of at Matsushita or Toyota," Rama Krishna asks.

All these shifts – toward the edges, toward a distributed structure, toward the US – have roots in Sony's own history. Every organization has a "story," something between a culture and a soul, that powers everything it does. If we search for Sony's core, its story, we will find at least a part of it in the image of Morita stumbling off a Boeing Stratocruiser in New York City in 1953, in the land of the conqueror, eager to license the transistor from Western Electric. The seven-year-old company he had founded with Masaru Ibuka was then known as Tokyo Tsushin Kogyo Kabushiki Kaisha. He was only 32, naive about international business, awed by the sheer size of the United States, but determined to make "Totsuko" a force in the world. On that first visit he walked Fifth Avenue, imagining a day when he could put a showroom there. Only seven years later he founded Sony Corporation of America, and in 1962 he moved his family to New York for two years to get the new corporation going.

Morita recently suffered a stroke that, it appears, ended his working life, but the eager willingness he and Ibuka shared to move out into a world that the Japanese had traditionally avoided has become a part of the "story" that makes Sony atypical for a Japanese firm. Much more than American companies, Japanese companies tend to operate in lockstep, in yokonorabi. Philip Anderson of Dartmouth's Amos Tuck School of Business calls this quality "absolutely characteristic" of Japanese companies. "If Sony tomorrow set up an R&D operation in Zaire, the others would do it within six months."

"Sony is unusual," says Anderson, "in that it has no ties to any of the keiretsu, the great industrial combines such as Mitsui, Mitsubishi, or Sumitomo." This makes Sony "the least Japanese of them all. The ties in the keiretsu [meaning, literally, systems connected] are all Japanese-to- Japanese, informal, and personal. It is hard for [those companies] to build a genuinely intimate relationship outside the keiretsu. It's a structural impediment to being anything other than a Japanese company with foreign outposts. Sony, on the other hand, is far more capable of forging those kinds of ties with non-Japanese."

At the core of Sony lies a kind of desperation to be first to the market (think Walkman) with something that strikes fire. For other companies, being second is much more comfortable: If you're first, maybe you've got the wrong idea – maybe the others won't follow your lead.

Within Japan, Sony is seen as somewhat disreputable, a little pushy, a little flashy, as, frankly, rather American. So even in Japan, Sony has long attracted the kind of people who are comfortable with the more open American style. As Ando points out, Sony people don't approach conflict in the closed, face-saving Japanese style: "We have open arguments. It's very different from most Japanese companies." The company deals with outsiders in a similarly nontypical fashion. Jim Fiedler, president of Sony Dynamic Digital Sound, the Sony company that produces a new 3-D theater sound system, used to be vice president of MCA, owned by Matsushita. He says, "I chose to come here, because Sony is open to ideas that were not necessarily invented here. Gaijin have an opportunity at Sony. That's not common in other Japanese companies. It wasn't that way at Matsushita."

When one critic said that Sony was willing to be the guinea pig for new market ideas, Ibuka sent live guinea pigs to all the company's top officers. Sony's goal, according to Morita, is "to make our products obsolete before somebody else does it for us." With each new idea (such as the CD, the 3.5-inch floppy, and the MiniDisc), it gathers partners much as President George Bush did before heading into Desert Storm. After hiring music-industry veteran Robert Sherwood to convince competing music companies that MiniDisc was a bandwagon worth jumping on, Sony sold 400,000 of them in the first year – twice the growth rate of CDs.

Sony Tarot

For all this, the future of Sony is not obvious. If its goal could be expressed in one word, it might not be keiretsu, "systems connected," but commretsu, "communications connected." That is, Sony wants to be the first communications conglomerate engaged in both ends of the information pipelines of the future, from silicon to Schwarzenegger. But because of the laggard Japanese economy, the rise of the yen, and its heavy debt, Sony's overall growth has slowed in recent years. Critics point to the $12 billion debt it has run up and claim that it will have to sell off the studio and music businesses to survive.

"We will see an exodus from Hollywood," says Makio Inui, of the Tokyo firm Kleinwort Benson. "They will be desperately trying to get out."

Others claim just as vehemently that, all things considered, they have done very well.

"Yes, they have a lot of debt," says Alliance Capital's Rama Krishna, "but if they sell some of it they will get three times what they paid for it.... I would rather be a shareholder of Sony than any other company that has gone into Hollywood."

Critics like Inui claim that these businesses never made much sense in the first place and never showed any of the vaunted "synergy" that Sony was looking for.

"The only possible reward for buying a studio is to dictate the next VCR format," says Inui. If that was the point, then the move seems hopelessly ill-conceived, given the myriad ways that movies and music will be delivered in the future.

But this is an extremely narrow view of synergy. Something broader is going on here. "Sony is a design company first," says Dixon. "They have an extraordinary international brand that represents high quality and great design. The issue is how you take that design sensibility of quality and service and make it work in all these disparate parts of the company."

A test of this synergy will come when Sony introduces it's competitor to 3DO, Sega, and Nintendo next year (see "Hot Tech," page 96). The CD-ROM- based game box is "incredible," according to an industry executive who has seen it. But it is yet another entrant in a crowded field, and it will challenge Sony's ability to draw together its expertise in hardware, software, distribution, and marketing.

Roaming its factories and offices, talking to scores of executives, engineers, and workers, one gets the distinct impression that Sony seems to have absorbed its deeply different acquisitions and begun the long process of mind-melding the hardware engineers with the creative types in Hollywood. The synergy is palpable in an orientation toward technological advances, technical excellence, and presentation.

Sony's deep draw toward its new businesses is likely to accelerate when and if it moves into the cable and telephone service business – as most observers expect it to. Schulhof has been meeting with potential partners, playing with the possibility of offering a telecommunications partner a minority share in Sony's music and film businesses. For Schulhof, the big question is "Who can give us an alliance in electronic distribution with complementary strengths?" He won't comment on the talks, but allows that the chiefs of every phone company in America have met with him. He is searching for a way to raise capital free of Tokyo's debt woes. But despite Sony's critics, he shows no sign of thinking that going Hollywood was a mistake and no willingness to get out of the movie and music businesses.

"They have lots of problems," says Dixon, "dealing with a core consumer electronics business in a difficult environment on an overleveraged capital base with a somewhat confused strategic vision." But he adds, "at the end of the day it comes down to brand."

In 1990, a study by San Francisco-based corporate image specialists Landor Associates matched people's awareness of a brand with their esteem for it. Sony showed up second on the list, with Coca-Cola, Mercedes, Kodak, and Disney among the top five. If that unity shows through in its new American ventures, Sony's commretsu could become a reality within a decade.

Hot Tech: What's Hot From Sony

HDTV: On the Sony Pictures Studios lot in Culver City, a simple nature scene - eagles, a canyon - runs three times on a screen the size you'd see in a multiplex. The first one is clearly video: the flat colors, the lack of detail. But the last two - one a traditional 35 mm film, the other high- definition video - are indistinguishable. Sony's HDTV unit does myriad post-production tasks for Hollywood, changing the film to video for editing, then turning it back to film. Last Halloween the same unit heralded a possible coming era of filmless film distribution when it beamed Dracula from Culver City to a theater in Burbank.

Special Effects: At Sony Pictures Imageworks at the studios, the monitor shows a bit of In the Line of Fire – a news clip in which a young Clint Eastwood walks between Jack and Jackie Kennedy. How'd they do that? "We took a still of Clint from an early-'70s movie," explains Imageworks executive producer Bill Birrell.

"He was bruised, had a couple-day-old beard, longish hair, a wide-lapeled '70s suit, and a wide tie. We digitized the picture, got rid of the bruise, gave him a haircut, a shave." Similar magic can erase unwanted passersby from crowd shots.

Cheap Videoconferencing: The monitor in the corner of the conference room in the San Diego plant has something a little odd sitting on top: a flat bezel, the same color and design as the monitor, with a tiny video eye and a few microphone holes. Sony already makes US$100,000 videoconferencing units and $30,000 roll-around versions. But when Sony's T.C. Brown saw people duct-taping HandyCams to the sides of their monitors, he knew there was a market for something inexpensive. This unit will cost about $1,000 and will be followed by monitors with the capability built in.

GUI Video: "Want to make the bear growl? Okay, we'll drag that growl down here. Now we'll put in a fade." With the ease of word processing, a Sony engineer in San Jose, California, is editing a video clip by the click-and-drag method, all on one screen. It's Destiny, Sony's newest GUI desktop production video editing system, designed to be cheap and fast at mixing live feeds with images from disk and tape for "the ubiquitous electronic newsroom." What's cheap? About US$27,000. Cheap for a TV station.

Uplink Jukebox: Across the street from Sony Pictures Studios sits the prototype of a huge uplink facility Sony has built for Hughes' DirecTV digital satellite broadcasting venture in Castle Rock, Colorado. It's a massive computer-controlled jukebox that will feed all of the bird's potential 180 channels from one ground station under a single control. The robot arrays with their ranks of broadcast videotapes look like an industrial-strength version of cafeteria vending machines, but they are a vast improvement over "sneakernet," the usual practice of hand-carrying the tapes to the machines for broadcast.

Theater Sound: In a Sony Pictures screening room, there's Clint again, in a very quiet scene. When he walks, the scuff of his heels follows him across the screen – and actually off the screen – in uncanny realism. In a scene from Last Action Hero, Schwarzenegger's boots hammer on car tops, guns fire, sirens wail, helicopters whir overhead, broken glass crunches underfoot – each sound in the aural collage ringing separate and crisp. It's SDDS, Sony Dynamic Digital Sound, Sony's eight-channel entry into the next-generation surround-sound sweepstakes.

Sony Plaza: On a Saturday before Christmas, on the ground floor and in the basement of the Sony offices building on Madison Avenue, crowds of people play with an acre or so of Sony HandyCams, VCRs, wide-screen TVs, CD-ROMs, MiniDiscs, My First Sonys, and Walkmen set up in racks, in bedrooms, living rooms, even in a car hung on one wall – its little built- in video screen rises out of the shift console. People say things like: "Ooh, $400? That's worth it!" "Yeah, 27 inches is a good size for the bedroom." "Harry, you ought to put one of these total entertainment theaters in the basement."

Game Box: By press time, Sony was showing a 400-MIPS (yup, 400) game box to select analysts. This monster is Sony's long-awaited competitor in the CD-ROM-based game world, and it has Mario and Sonic more than a little rattled. Sony plans to release the product in the US in 1995. One industry executive who has seen it calls it "the hottest game box I've ever seen." No word yet on peripherals or software compatibility with NES, Sega, 3D0, or Atari software. However, Sony lacks infrastructure for developer support, compared with Sega's and Nintendo's well-oiled machines.

Luxury Labs: Sony several years ago set up the Research Center in Tokyo under the direction of Dr. Toshitada Doi. The Sony facility is famous among those in the Japanese research community for its size and the lavish fittings in the offices. Twenty research fellows and their support staffs work on building the future. Two areas of concentration: ubiquitous computing and speech-based computing with computer-generated interface that mimics the human face. What they are building now, the buzz in Japan goes, we will be buying in five years. Remember Apple's "knowledge navigator" video? At Sony's luxury labs, it's passe.