Sony's acquisition of MGM will create the world's largest film library, about 7,600 titles, and would appear to fit nicely into Sony's overall strategy of creating synergies between its consumer electronics and its movies, music and games.
A group headed by Sony Corp. of America has agreed to buy MGM, the 80-year-old studio that owns the James Bond, Pink Panther and Rocky movies, in a deal worth about $4.85 billion including the assumption of about $2 billion of debt.
Analysts and investors are worried about the potential damage to Sony's balance sheet and have doubts about when and how the synergies between movies and electronics will be achieved. But they say the reasoning behind the acquisition was sound.
"The MGM library is a rich source of content and potential profits for Sony," said Kiyoshi Yamanaka, a fund manager at T&D Asset Management.
Sony also announced on Tuesday that it had reached an agreement with U.S. cable TV operator Comcast to offer Sony and MGM movies over Comcast's video-on-demand systems and on new cable channels that it would form with the Sony group.
This means Sony will also be able to generate cash flow by selling the Sony and MGM library of films on cable TV, in addition to the revenues produced by retail sales of DVDs.
Sony does not provide a breakdown of its DVD sales, but the company's music division recorded an operating profit of $318 million (35 billion yen) in the previous business year to March 31, on sales of $6.9 billion (756 billion yen), or about 10 percent of the group's total.
Sony acquired Columbia Pictures in 1989 for $3.4 billion, which at the time was the largest ever acquisition by a Japanese company. That deal caused numerous headaches for Sony due to losses from large budgets and box office duds.
The MGM purchase could help stabilize earnings in Sony's movie division, and may also advance the company's cause in the battle to establish a format called Blu-ray as the industry standard for the next generation of DVDs.
"One of the important aspects of this deal with MGM is that it may help Sony prevail in the DVD format war," T&D Asset's Yamanaka said.
Sony knows how important formats are, having lost out to JVC in the famous fight over videotape formats more than two decades ago, with JVC's VHS system becoming mainstream at the expense of Sony's Betamax.
Sony's consortium is up against a format called HD DVD, which is endorsed by Japan's NEC and others.
Both HD DVD and Blu-ray technologies use blue laser light, which, with a shorter wavelength than the red light used in conventional DVD recorders, can read and store data at much higher densities needed for high-definition recordings.
Sony would also look to use its larger library to capitalize on the spread of broadband Internet access worldwide, UFJ Tsubasa Securities analyst Kazuya Yamamoto said.
"Delivering movie content to the home online could become a lucrative business in the future as broadband access expands. Holding movie contents will become more valuable in that light," Yamamoto said.