Sony Hack: Ripping the Veil Off Hollywood’s Secrets

Sony Entertainment Chief Executive Michael Lynton once stunned a New York audience with a remarkably candid assessment of the Internet: “I’m a guy who doesn’t see anything good having come from the Internet. Period.”

It was 2009, and Lynton and his generation of executives were battle-worn from the movie industry’s long-running struggle with piracy. Big, expensive blockbuster movies like “The Dark Knight” were leaking onto the Internet before their theatrical debuts, and millions of viewers around the world were watching unauthorized versions of TV shows.

Lynton is no Luddite — he once ran an Internet company. But to him and many of his peers, the Internet’s unbridled, unrestrained nature was a threat. It’s difficult to know if his thinking has evolved. He did not respond to multiple requests for an interview. But as the events of the past few weeks have shown, he couldn’t have been more right.

An unprecedented cyber attack on Sony Pictures Entertainment’s computer systems in late November has led to the spilling of the company’s private information — embarrassing emails, salary information, details of confidential business deals and digital copies of unreleased movies — onto the open Web. For a town that has held technology at arm’s length, it was a sober reminder of how vulnerable Hollywood is to forces beyond its control.

There is no lack of examples of Hollywood’s uncomfortable relationship with technology. “Who the hell wants to hear actors talk?” Warner Bros studio founder Harry Warner said in 1927 when sound made its debut in films. Jack Valenti, the eloquent former head of the Motion Pictures Association of America, once equated the VCR with the Boston Strangler. And more recently, Rupert Murdoch’s News Corp labeled Google a “platform for piracy” — a step up, perhaps, from the media mogul’s 2009 description of the company as a “parasite.”

As recently as Friday, a plot hatched by the MPAA and the six major Hollywood studios to launch a concerted assault on “Goliath” — a code name that is believed to refer to Google — was uncovered in the stolen Sony emails, according to The Verge. The MPAA declined to comment, and Re/code has not independently confirmed the veracity of the documents.

Asa Mathat Michael Lynton, Sony Pictures Entertainment CEO

Although Sony is hardly alone among big businesses to have suffered vicious cyber attacks, it does hold the distinction of being a frequent target, including a 2011 break-in that led to theft of some 77 million customers of Sony’s PlayStation Network service.

A history of pursuing hackers and enthusiasts has made Sony the whipping boy of cyber criminals. Remember the time the company went after the programmer who shared that software that made the Sony Aibo robot dog dance? Or that time in 2005 when Sony secretly installed software on the computers of people who purchased Sony BMG music CDs to thwart piracy?

Even as Sony races to clean up the most recent mess, entertainment business executives we spoke with say the repercussions of the massive attack will be felt for years to come.

“The dirty little secrets are going to be potentially far more of an issue than the cost of cleaning up,” said one former television executive.

However provocative it was to learn that Lynton actually earned twice as much as his boss, Sony CEO Kaz Hirai; or to read the racially insensitive banter between Sony Pictures co-chair Amy Pascal and power producer Scott Rudin joking about which films starring African-American actors that President Barack Obama might like; the more damaging revelations lie in the mounds of spreadsheets, correspondences and contracts that have been disclosed, and the reams yet to come.

The individual documents that have been cited by other news organizations and also seen by Re/code could not be independently verified. But, if true, they will likely have enormous impact on Hollywood. Sony has declined to comment, saying the stolen material is part of an active FBI investigation that has yet to identify a culprit.

What is clear, however, is that the Guardians of Peace, the hacker group that claimed responsibility for the attack, is doing more than just embarrassing movie executives. It is destroying the opacity with which Hollywood has conducted its affairs with every daily dispatch of Sony Pictures’ secrets.

Executives say these stolen documents could bring renewed attention to Hollywood’s byzantine accounting system, whereby films that look like box-office blockbusters miraculously fail to turn a net profit. There’s even a term for this system: Hollywood accounting.

These confidential emails, budget details and contracts could provoke Sony’s partners to take actions to seize greater shares of profits — or could undermine future deals now that everybody knows how much everybody makes. Try to imagine how Sony’s upcoming negotiations with local TV stations seeking to carry such shows as “Seinfeld” or “Jeopardy” will play out.

Now  you see it, now you don’t

In the land of smoke and mirrors, Hollywood’s biggest illusion actually is not on-screen: It’s how it makes the profits disappear. One book about a profit dispute between the late humorist Art Buchwald and Paramount Pictures is titled “Fatal Subtraction.” Buchwald sued the film studio in 1990 for breach of contract, over a pitch that resembled the Eddie Murphy movie “Coming to America.” Buchwald and his producing partner collected $900,000 after the judge ruled that the movie had been inspired by the columnist’s two-and-a-half-page treatment — and deemed aspects of Paramount’s profit formula “unconscionable.” Even though the 1988 comedy had reaped $289 million in worldwide box-office revenue, it was unlikely to return net profits under the studio’s calculations at the time.

Among the trove of emails leaked by hackers are documents that purport to disclose the closely guarded actual profit figures of such 2013 films as “American Hustle,” “Captain Phillips” and “This Is the End,” once these movies concluded their theatrical run and distribution into homes, the Hollywood Reporter reported.

“If I were a profit participant, I would be looking at those things closely to see if they match the information that I’ve received from the studio,” said Devin McRae, a Los Angeles attorney who represented comic book artist Michael “Tony” Moore in a lawsuit with “Walking Dead” co-creator Robert Kirkman over profits from the television show.

“If those documents reveal there hasn’t been full disclosure, or inconsistent disclosure, that could be problematic,” said McRae, who has not reviewed the Sony Pictures documents.

Another big issue is the disclosure of deal details that show that not all business partners are created equal. “Forget about the accounting stuff. That’s always been bullshit,” said one former Sony executive. “This is about competitive information and the impact across all avenues of business. Production costs, distribution revenue — it’s all out in the open.”

Already, the leaked documents appear to show Sony’s TV deals with local stations and with Netflix (though those contracts have been amended and superseded — so perhaps of less value to competitors). Netflix declined comment.

Among the leaked files is a contract with television-station owner Tribune Broadcasting, which agreed to pay $37,500 per week over the next three years to carry “Seinfeld” on nine of its stations, BuzzFeed reported. Just one CBS-owned TV station will pay slightly more — $4,500 a week — to offer the same show to viewers in Seattle. Expect CBS to be on line two shortly. Tribune and CBS both declined comment.

Saturday’s seventh data dump by the hackers appeared to disclose even more — thousands of pages of information on the deals Sony has struck with its partners. Expect this to continue for the foreseeable future.

Rival studio executives probably enjoyed the competitive intelligence. But that euphoria was short-lived. In a town that revels in schadenfreude, the Sony Pictures attack has evoked a rare emotion — pity. Pity and trepidation, to be more precise.

That is why the IT departments of the major studios are furiously exchanging information on what happened and how to prevent that from happening to them, according to several people with knowledge of these discussions.

“It’s worse than you could possibly imagine,” said one studio executive. “I suspect you’ll find everyone at all media companies is panicked.”

All this reminded me of a discussion I had with Lynton years ago in his spacious office in Culver City, Calif. The Internet, according to the one-time chief executive of AOL Europe, was not “disruptive,” but “destructive.”

And as long as a generation of Hollywood executives continues to harbor such notions, the worst is yet to come.

Representatives of Sony, Sony Pictures and Lynton declined to comment for this story.

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