Sony Group Corporation (6758) Earnings Call Transcript & Summary

Thank you very much for taking time out of your busy schedule to join us today. We will now begin Sony Group Corporation Corporate Strategy Meeting 2024. My name is Ishii from Corporate Communications, the moderator of this event. Today's event will last about 90 minutes, including speech and Q&A session. First of all, Yoshida, Chairman and CEO, will make a speech. Yoshida-san, please come up on stage.

Thank you all for gathering here today. I'd like to talk about the direction of our management. And then President, Totoki will talk about our mid- to long-term initiatives. Sony Group's purpose is to fill the world with emotion through the power of creativity and technology. In other words, our social significance is to create Kando and deliver to the world together with our partners. The keyword of our purpose is Kando. In recent years, we have been focusing on our entertainment businesses that move people's hearts, such as games, music and pictures. Currently, these 3 entertainment businesses account for approximately 60% of the group's consolidated sales. We also reorganized our group architecture in 2021. We believe that establishing a system in which each business is independent and equally connected has led to the acceleration of group synergies. Additionally, we have begun preparations for a partial spin-off of our Financial Services business, which is an important business for Sony. The Financial Services business aims to further evolve through independence with this spinoff. And we also would like to support the evolution of this Financial Services business through the utilization of the Sony brand and strengthening collaboration between each business. In addition to focusing on entertainment, another management direction is the creation shift. Sony has 3 main business layers: content, which is directly connected to Kando; products and services that create Kando; and semiconductors, CMOS image sensors that support creation. We have shifted our focus to the creation side in each of these 3 business layers. The starting point for the shift to creation was the acquisition of EMI Music Publishing in 2018. Since then, we have invested approximately JPY 1.5 trillion over the past 6 years to strengthen our content creation. The acquisition of Crunchyroll in 2021 was an investment in a distribution service that delivers Kando. Crunchyroll aims to contribute to the anime creator community by spreading Japanese anime to the world. In the products and services layer, we're also working hard to create entertainment together with creators. Currently, profits from creative related businesses account for more than 80% of the operating income in this layer. In the semiconductor layer, CMOS image sensors support creation by many people from movie creators to smartphone users across the globe. We have implemented capital expenditures amounting to approximately JPY 1.5 trillion in CMOS image sensors over the past 6 years. These CMOS image sensors also contribute to the safety of mobility, which we position as a new entertainment space. Creativity resides in people. And people live in the present. From here, I would like to touch on 2 creation technologies that we are focusing on, using real-time as a keyword. One is the CMOS image sensor technology that I just mentioned, and the other is the game engine, which is a real-time computing technology. In recent years, Sony has been expanding its product lineup for creators. CMOS image sensors within these products help creators capture the Kando moment. The Alpha 9 III, a mirrorless interchangeable lens camera released this year equipped with a full-size image sensor that use a global shutter system, is one such example. This camera was used by creators at the World Athletics Indoor Championships in Glasgow, United Kingdom in March of this year. By reading out all pixels simultaneously, even fast-moving subjects can be captured without distortion. Furthermore, flash sync shooting is possible at a shutter speed of 1 over 80,000ths of a second making Alpha 9 III, a true embodiment of the ultimate real-time technology. The 5G compatible data transmitter announced this year enables real-time transmission from filming locations, contributing to prompt news coverage and editing. In this way, Sony's real-time technology is also contributing to the delivery of sports Kando to the world. In film production, the use of our digital cinema camera, VENICE is expanding. Recently, it has been used in Godzilla Minus One and many other productions. In addition to film making, it was used in the halftime show of the Super Bowl in February of this year. We believe that it is of great significance for creators to capture the real world as it is. As it is means that the photograph was taken by a person or that a subject exists in reality. CMOS image sensors are also used to verify such authenticity. In addition to CMOS image sensors, game engines play an important role in the creative field. Games are computer graphics that are generated in real time in response to users' actions. The game engine, which is at the core of real-time computer graphics has evolved in recent years into a technology for creating video content. The Sony Group has also invested in Epic Games and is utilizing their Unreal Engine in various creation processes. Sony Pictures Entertainment's Torchlight makes it possible to simulate filming onset by using a game engine. The facility is being used by filmmakers to bring their creative vision to life, including for Venom, Kraven the Hunter and Karate Kid, which are scheduled for release. We hope to continue contributing to a wider range of creative communities with Torchlight. Virtual production utilizes the real-time technology of game engines linked with a camera to generate background images. This filming method allows both the director of photography and actor to check the footage on the spot. We believe that both Torchlight and Virtual Production are solutions that increase the value of creators' time. Game engines are also used to provide creators with an immersive creation experience. This system enables creators to create and edit while virtually overlaying 3D content into the physical space. In this way, we are expanding the creative space for creators. Additionally, in the live entertainment of sports, we are working to expand the fan base by tracking the movements of real-life athletes and converting these movements into 3D animation using a game engine. Currently, this technology is being used for games of the NFL professional football league in the United States and the NHL professional ice hockey league in North America. So far, I spoke about real-time creation using CMOS image sensors that capture real life and real-time creation using game engines. Game engines are real-time computing technology. AI, which has recently evolved significantly has been used for creation. AI can also be considered a computing technology. AI is not a substitute for human creativity. We position it as a technology that supports creativity. Creativity resides in people. We will continue to contribute to people's creativity through technology. Creativity develops communities. We are also working to create spaces where creator communities can gather and interact as well as to nurture the next generation of creators, and we intend to continue to promote activities that contribute to communities as a group. Over the past 6 years, the Sony Group has been working to strengthen creation efforts. We also would like to continue to value the real-time concept of the moment, which I mentioned today. In addition to real-time technology, the Sony Group has another strength. It is the diversity of its people and business. From here, Totoki will talk about our mid- to long-term efforts to enhance our diversity.

Hello, I'm Totoki. In our recent earnings announcement, we presented our fifth midrange plan covering the next 3 fiscal years starting from FY ending March 31, 2025. The theme of this mid-range plan is: beyond the boundaries, maximize synergies across the group. The IP that we have created and acquired until now continues to increase in value as opportunities for its use in areas such as distribution platforms and various facilities expand, and we intend to maintain our focus on maximizing the value of our IP going forward. Today, I would like to explain Sony's vision for the future beyond our current midrange plan and the initiatives we are currently implementing to realize this vision. I would like to specifically talk about the 3 points you see here. First of all, I would like to talk about a creative entertainment vision. Based around a purpose as a pillar, I wanted to plot out concrete, visualizable goals together with a more specific time frame. So for more than 2 years, I engaged in discussions with our diverse colleagues across the Sony Group, focusing mainly on the generation that will lead Sony into the future. This is a visual representation of the Sony Group's long-term vision, projecting social changes and technological evolution over the next 10 years or so. There are 3 phases to this long-term vision. The first is creativity unleashed. We plan to harness technology to unleash the creativity of creators around the world, transcending the physical, virtual and time dimensions. The second is boundaries transcended. We intend to connect to diverse people and values across boundaries to foster vibrant communities. The third is narratives everywhere. Together with creators, we aim to create exciting experience as rich and narrative that go beyond imagination, spreading them as new technologies for Kando around the world. The key message we are conveying through this long-term vision is our intention to create infinite realities. Together with creators, we aim to seamlessly connect multilayered world at the point where the physical and the virtual overlap, developing limitless Kando through the power of creativity and technology. Please watch a video portraying the future we envisage in this long-term vision. [Presentation]

We intend to move forward towards the destination laid out in our creative entertainment vision together with everyone who shares our dreams and hopes for the future. Next, I will outline the initiatives that are advancing us towards the direction outlined in this long-term vision. Sony is already creating compelling IP in a variety of entertainment categories and nurture this IP by inspiring an energizing communities together with fans, creators and partners. Furthermore, through our IP 360 initiative, which seeks to extend IP beyond boundaries, we're engaged in measures to deepen engagement with fans and expand audiences in order to maximize the value of our IP. I will now highlight the current status in each category. First, we are working to promote IP creation in Japanese anime, which is one of our focus areas. Aniplex produces many high-quality works every year that are beloved by anime fans around the world. Additionally, Crunchyroll, which has over 13 million paid subscribers, delivers anime created in Japan globally. However, the significant growth in anime's popularity, the demand for new production is increasing, and we are working to improve the production environment efficiency and quality of our output. A-1 Pictures and CloverWorks, production studios and subsidiaries of Aniplex, are central to these efforts and are collaborating with engineers at Sony Music in Japan and across the Sony Group. Anime Canvas is a new animation production software currently under development that we aim to introduce on a trial basis within the current fiscal year and hope to be able to offer to other studios in the future. Furthermore, we are now exploring the launch of a project to establish an academy with the aim of nurturing anime creators in global markets. Aniplex and Crunchyroll are core to this initiative with collaboration from across the industry. One example of how we are fostering anime IP and culture together with fans is the Crunchyroll Anime Awards. This year marks the eighth time the event has been held with a record number of over 34 million votes cast. With it also being very positively received by the anime industry as a whole, I'm confident that it will continue to grow in the future. Next, I'd like to talk about the efforts to promote IP creation in pictures. As Yoshida explained, Epic Games' Unreal Engine has increasingly been adopted to enhance the production efficiency and quality of film and TV content due to its real-time rendering capabilities. Examples of its use include virtual production and advanced visualization. To accelerate adoption of such solutions, we plan to leverage the know-how cultivated at Pixomondo, a group company of Sony Pictures Entertainment, that enhance and expand the operation of Unreal Engine to nurture visual creators who can utilize these technologies working in collaboration with Epic Games. One of the ways we are developing IP in our game business is through television and film adaptations. Since establishing PlayStation Productions in 2019, we have been engaging in adapting game IP into film and television content, enabling the IP to become a part of pub culture loved by an even wider audience, thereby creating a positive cycle that enhances its value. Going forward, we are developing titles such as Horizon and God of War. Furthermore, we are now engaged in expanding our game IP into the area of location-based entertainment. In music, we're taking a unique approach to creating new IP. Born from a project to turn novels into music, YOASOBI's momentum shows no signs of slowing. Their song Idol became the first Japanese song to top the U.S. Billboard Global Chart and continues to enthuse fans around the world. Additionally, we intend to cultivate fandom artists such as Nogizaka46 and Stray Kids, whose passionate fans create new cultures, taking a global perspective and expanding fan communities. In terms of IP 360 initiatives in music, our production of biographical works focusing on artist, is a prominent example. For example, through the documentary Lil Nas X: Long Live Montero, which chronicles Grammy Award-winning rapper, singer and songwriter, Lil Nas X' first world tour, we're delivering IP to fans in ways that go beyond the boundaries of music. We are also embarking on new challenges in this area, such as the concurrent production of 4 biographical films that look back on the history of The Beatles from the perspective of each member. We're also accelerating our efforts to elevate community engagement in the area of sports using Hawk-Eye Innovations tracking system to capture data such as the players in-game skeletal information and converting it into 3D animation and real time. Using Beyond Sports technology, we're providing new forms of entertainment content. I have high expectations that these initiatives will contribute to the development of sports by increasing engagement, particularly among younger audiences. Until now, I have introduced our current activities to maximize IP value in each category. In terms of our cross-category initiatives, on the other hand, we are focusing on areas such as LBE and merchandising, where we can provide opportunities for fans to engage in physical interaction with our IP content. In the mobility space, where we anticipate further opportunities, LBE is a large market where we expect to see continued growth, including in developed countries. At Sony, we are already deploying our IP in locations around the world and aim to grow this business by combining such IP with our gaming, sensing, video and audio technology to provide immersive experiences that delivers the ultimate Kando. Merchandising not only increases fans' emotional attachment to an IP but can also contribute to acquiring new fans. We believe there is further potential for us to strengthen our presence in this area and we plan to accelerate these efforts going forward, including group-wide collaboration. In the mobility space, we are utilizing entertainment content provided by understanding the vehicle's occupants and surrounding environment through sensing data and vehicle data together with audio technology to transform the vehicle interior into a personalized entertainment space, enhancing the value of mobility experience. This is somewhere we intend to continue to collaborate with companies across the industry, including Sony Honda Mobility. So far, I have focused on measures to grow our own IP. But just as we have delivered IP from our partner companies to the world through brands such as PlayStation, our IP 360 initiative is not restricted to Sony alone. Recently, we have been proactively engaged in efforts to expand IP beyond our own library. This is underlined by initiatives, including Mobile RPG, Street Fighter: Duel published by Crunchyroll Games, and the use of our high-quality scan solutions, which enables real objects to be converting into high-quality 3D models to scan plastic Gundam models and display them in the Gundam Metaverse. We also intend to expand our initiatives to maximize the value of IP globally by supporting creators with diverse cultural background and strong regional appeal. For example, the India Hero Project launched by Sony Interactive Entertainment last year is an initiative to unearth and support promising game developers in India and help them bring compelling gaming experiences to the world. This incubator program has selected 5 game titles as its initial projects. Additionally, the Sony Innovation Fund: Africa, which we established last year in collaboration with the International Finance Corporation, is a corporate venture capital fund that supports start-up companies with the aim of developing entertainment business in Africa. Through such activities, we aim to be a brand that is trusted by creators and IP holders transcending the boundaries of companies, countries and regions. The key technologies that enable creators to engage in these initiatives to maximize the value of their IP in a high-quality and efficient manner, including sensing and capturing as well as real-time 3D processing, AI technology and machine learning. I will now share some specific examples of the strength Sony possesses in these areas. In terms of sensing and capturing, we can point to our volumetric capture studio. Multiple cameras cover the studio from a 360-degree angle, capturing images of moving people and objects and converting them into 3D data. These images can be stored as high-quality 3D assets, including motion data and used for various content production. This technology is being used for complex action scenes in movies and music videos due to the ease of photo-realistic reproduction and production flexibility it provides. Going forward, we plan to efficiently utilize the 3D assets accumulated by each of our companies cross-functionally through the group as a whole and explore potential external sales. With regards to real-time 3D processing, we are accelerating our collaboration with Epic Games centered around Unreal Engine and are also conducting exploratory activities. For example, the 3D CG used in the background of a music video from Indigo of Columbia Records, which is shot with virtual production, was repurposed to produce a game that takes place in the same role that was created. We also released a proof-of-concept CG short film using Unreal Engine where an actor performed as a Stay-Puft Marshmallow Man in real time within a 3D city environment, using motion capture. One example of how we are using machine learning related technology is Marvel's Spider-Man 2, which was released last year. Through the application of voice recognition software originally specialized for gaming, for certain languages, we were able to automatically synchronize the subtitles with each character's dialogue, significantly shortening the subtitling process. We are also conducting research and development in India using AI technology and machine learning, a multilingual society, into ways we can shorten the dubbing and translation process so that video content can reach more fans more quickly. Building on these initiatives, in the future, we aim to develop solutions that enable our IPs to be delivered rapidly and at a low cost to broader range of fans. In order to efficiently maximize the value of IP, we believe it is also important to develop a shared group network to support these efforts. In addition to supporting a wide range of payment methods and currencies, PlayStation Network auto scales to accommodate significantly changing user traffic in a short period of time, enabling it to realize both high-quality operation and cost optimization. PlayStation Network's data processing volumes have reached a level that places it among the top 10 consumer Internet services worldwide, while it is simultaneously achieving record-high operating rates. As such, it is established as a robust network service. By extending core functions based on this network infrastructure, such as accounts, payments, data infrastructure and security to the growing control service, we plan to develop it into an engagement platform for the Sony Group. Going forward, we intend to commonize IDs for services across the Sony Group, including [ Ikemoto ], operated by Sony Music Entertainment, which enables the use of various services with a single ID and contribute to the convenience of our customers while considering their privacy and make proposals that deliver even more enjoyment. Furthermore, we intend to use this engagement platform to support the development of new network services across the group in areas such as mobility and LBE, thereby providing convenience while also accumulating knowledge regarding the interest and needs of fans and the creative desires of creators. In the future, we aim for these technologies to be widely adopted across the entertainment industry beyond the boundaries of the Sony Group as a common platform specialized for fan engagement that reflects these accumulated insights. As I stated at this meeting last year, for Sony to achieve further growth and create value over the long term, we must also continue to evolve the diversity of our businesses and people. At Sony, we bring together diverse people of various nationalities, race, gender and values and place importance on having different backgrounds and experiences. This allows for the exchange of knowledge and experience and expands opportunities for growth. We have made -- having these different attributes and experiences our strength. In recent years, mergers and acquisitions have allowed us to bring in new ways of thinking and knowledge from the perspective of diversity of experience by increasing the number of colleagues we have specialized expertise, particularly in the entertainment business. And in terms of diversity background, we are increasing our ratio of foreign nationals in executive positions and women in management positions year-by-year. As outlined in our Creative Entertainment Vision, Sony aims to unleash the creativity of creators and realize the world where limitless Kando can be generated. Towards this future, we plan to work together with creators, fans and our partners to steadily maximize the value of our IP beyond existing boundaries while continually evolving the diversity of our businesses and our people to achieve further growth. Thank you for your attention. [Presentation]

We'd like to start the Q&A session from the press. [Operator Instructions] In the center, the person in white shirt in the front row.

Sam from Reuters. I have two questions. The first question, about your AI strategy, in the films, I'm sure that many of the film companies and other companies are increasing their budget, but AI may have to enable you to reduce the budget. Is your strategy to proactively introduce AI in your business?

Could you ask your second question, too?

So you consider acquiring Paramount. It's a historical -- studio with a history. So it's a rare opportunity in that sense. So Studio IP, I mean, are you planning to increase your studio IP? Is that your strategy?

Thank you for your questions. The first question is about AI. And the second question is about the acquisition of studios, opportunities for studio acquisitions. May I answer the first question, and then if there's anything that you'd like to supplement, Mr. Totoki. And the second question -- please answer the second question, Mr. Totoki. Now about the utilization of AI, we are a technology company, so we'd like to proactively utilize AI, that's our position. On the other hand, we're also an entertainment company, so as a creative entertainment company, we need to protect the rights of the creators. That's our position. So how are we going to handle AI? As Totoki mentioned today, we would be looking at when to -- for the subtitle or various language translations can be enabled by AI. And one of the biggest opportunities would be in the gaming area using computer technology. For example, in game development, the cost has become quite substantial. So given that backdrop, for example, creating 3D assets in the games, because the gaming world is becoming broader, the players who appear in the games can be generated using AI. And also quality assurance tests can be done by AI. So these are the areas where we can utilize AI. Also, in order to increase engagement, I think we can utilize AI. Gran Turismo Sophy, in that game and also in the racing area, you see cars racing inside the game. So the users, the gamers compete in the game. So you try to increase the users' engagement by utilizing AI. That's one example. Mr. Totoki, do you have anything that you would like to add on AI?

No, I don't have anything on AI. Let me respond to the second question. So we're not going to comment on specific reports in the media. Generally speaking, we are moving towards creative shift. We're looking at excellent IP libraries or, in music, it would be the catalogs. We're constantly interested in these assets. So the investment and return need to meet what we want. So that is our stance.

We would like to move on to the next question. On the right at the back.

My name is Sato. I have two questions. In the fifth midrange plan, maximizing synergy was a keyword in your plan. But I think you have always been doing this. So what is the difference in the fifth midrange plan in terms of synergy? Number two, in the fifth midrange plan, JPY 1.8 trillion for strategy. So if you see any good opportunities, will you be making the investment if you see a good investment, even exceeding the budget?

So first is about the synergy, and number two is about strategic investment, whether we will go beyond that. So just to give my point about synergy, we have been pursuing synergy from the 20th century. In 1988, we acquired music business. In '89, we acquired Columbia. And '94, we entered the gaming business. So seeds of entertainment were planted in the 20th century, and we have been working on synergy since then. But back then our main business was electronics. So we were focusing on synergy of electronics with something else. And as I mentioned earlier, we have changed our group architecture and we now have a smaller head office, and there is more linkage between businesses. So now IP synergy has come about. Personally, in 2022 February, the uncharted [ 400 million ] global box-office was attained. So that was a big hallmark for me. So Totoki-san, please.

I would like to respond to the second question. The fourth midrange plan, which was completed, JPY 1.3 trillion was a strategic investment, excluding share buyback. And 60% of that was allocated to entertainment. So that was the past. So these are large-scale directions. The main direction will not change. JPY 1.8 trillion for the fifth mid-range plan, this includes a very flexible share buybacks. So that is included in this JPY 1.8 trillion. So whether we will go for good investments, even if we go beyond our budget, we don't have that in mind. In the 3 years, we would like to look for good opportunities within the range of the budget.

Let's go to the next question. On the right-hand side, the person in black suit, the third row from the front.

Toyoshima from TV Tokyo. Mr. Yoshida will have this question. So popular IP, I think, will continue to generate profits. But in the entertainment area, I think your revenue will be impacted by popularity. What do you plan to do about such risks? The second question about the synergy of contents, game IP, visualization and so forth, well, I think you're already doing that, the games being made into a visual media. But I'm not sure the gaming, the PlayStation type of success hasn't been achieved. So what do you plan to do about that?

I think the first question had to do with IP that is in sync with popularity. The second question is about PlayStation. Thank you. So I'd like to respond first, and then Totoki will try to add some more points. So IP entertainment is driven by hits. But we have diverse entertainment. We have games, anime, music and films. So the synergy of these diverse entertainment, I think, can bring about a very stable growth for us. They're all different industries, but it's looking at focusing on creators and customers. So I think each business can learn from each other. About PlayStation, well, in the current generation console game, I think PlayStation has been very successful as the current console. Mr. Totoki, do you have anything to add?

Yes, that impression, last year, I think we sold 25 million last year. Well, I think in the end, it was like 21 million. The original 25 million was like the tailwind from the pandemic. So based on that forecast, we came up with 25 million as an aggressive case. But now, at the moment, the reaction is much steadier. Well, the aggressive goal that we ourselves had planned is based on the sales of the consoles of the industry as a whole, our share is very high. So the sales of the current generation and the expansion of the share, I think we are quite satisfied with the results.

Next question, in the middle, first row. Second from the right, please.

Umegaki from Toyo Keizai. I have two questions also. So I would like to hear both from Yoshida-san and Totoki-san, about the anime industry. So what is the significance of Sony itself fostering anime creators? The anime industry has always had a shortage of creators. So as the Sony Group as a whole, why are you starting to foster the anime creators? And the second question is mainly for Totoki-san. The relationship between creation shift and the midrange plan. In the operating profit, you are going to grow 10% CAGR. So how will that relate to creation shift? So how much cost and how speedily do you intend to grow your business?

Thank you. About the first point, about the anime industry. So what is the significance of Sony developing such creators by themselves. And next is relationship between creation shift and midrange plan. About your first question on the anime industry. Anime is really expanding globally. It's an entertainment which is becoming increasingly global. Before, anime was more niched, but now anime is becoming an entertainment industry, which is really global. And we want to contribute to that, especially in creation. And also to expand Japanese anime outside Japan, we want to really do that through Crunchyroll. And in Crunchyroll, we share the viewership data with the creators so that we can feed back the viewers' opinion to the creators. So our intention is real contribution here.

The second point about the relationship between the midrange plan and creation shift. The Pictures segment, the growth driver of the next mid-range plan for the movie business is the growth of Crunchyroll. The growth rate and profitability both are very high. So we want to really focus in this area, so that is our basic thinking. And to that end, Crunchyroll is a distribution platform, so we need excellent content, a large volume of good content, and that needs to become a global hit, and that will lead to contribution to the anime industry in Japan. So supporting creators will indirectly link to growth of our business. But supporting the creators is something done for the entire industry. So we don't want to be closed here. We want to make this -- so we want to really build an environment where the excellent anime works will be created as the anime industry as a whole.