“The Interview” shows the value of political risk analysis

“The Interview” shows the value of political risk analysis

The latest Hollywood film by Sony Pictures generated a small fraction of the forecasted box office revenue because of disruptions and threats by the North Korean government. This example demonstrates that political risk should be an essential component of all business ventures, both at the domestic and international level.

“The Interview”, a comedy film produced by Sony Pictures directly referring to the CIA-led assassination of North Korean leader Kim Jong-un, has escalated tensions between the U.S. and North Korean governments.

Since June, the North Korean government threatened Sony and the U.S. government, claiming that the film’s release would be considered an act of war and there would be retaliation. Indeed, relations between North Korea and the U.S. have deteriorated since the film’s limited release on December 25th.

Since the release, Sony suffered a cyber attack on its internal computer server and more recently, its PlayStation network.

A preliminary political evaluation of North Korean government behavior would have concluded that such a film could lead to an escalation of tensions between the two nations and essentially, pose a national security threat to the U.S. government.

The controversial film produced by Sony Pictures generated about $1 million in box office revenue in its first days in theatres. While the revenue figure is impressive considering its limited release, the film fell very short of the $20 million forecast for the first days of the release.

Sony resorted to releasing the film on internet platforms such as YouTube and Google Play, where it has generated another $15 million in revenue. Although Sony has recovered a third of the film’s budget with online streaming, it is difficult to ignore that the entire production was jeopardized because the political risk was simply overlooked. Even with the spectacular volume of online streaming, the film fell short of its forecasted revenue.

Not meeting the anticipated return is worrying, but it is not the worst part—Sony Pictures was hit with a massive cyber attack, which shut down two-thirds of its computer servers. Recalibrating the company computers and retrieving all of the stolen information will be extremely costly and time-consuming for the company.

Even if North Korea did not orchestrate the cyber attack, it is clear that the film angered the regime’s leadership and after a series of repeated public swats between the White House and Kim Jong-un, it served as a catalyst for destabilizing the already fragile relations between the two countries.

Because of a disregard for political risks, a leading company in a field far removed from geopolitics has now been struck a sizeable financial blow and now risks a potential dip in investor confidence. Without a doubt, this case is a reminder that in today’s interconnected and tense global political scenario, companies should invest in political risk analysis. This entire episode between Sony Pictures and the North Korean government could have been avoided with proper preliminary consultation from expert sources.

Like all risk, political risk is calculated and although the field is far from exact, it has progressed in the past decade as a byproduct of the expansion of corporate risk and due diligence firms.

For example, in the case of Sony Pictures, a preliminary political risk report might have pointed out that the North Korean regime perceives light-hearted public mockery of Mr. Kim Jong-un as an act of war. The North Korean regime cares about its international perception and has frequently behaved belligerently as a response to offhanded remarks by international public figures.

The bottom line is that political risk is entirely relevant when engaging in transnational business activities as well as domestic ventures.

Particularly, the advanced technological capacity of unconventional non-state actors and state actors pose a serious threat to western companies in many sectors. Technological improvement has facilitated access to information, which means that any action by a company may be digested at a global level.

With this said, political risk analysis is more important than ever before and a disregard for the political context surrounding each transnational business decision unnecessarily increases the overall risk.

By any standard, 2014 was a tumultuous year. Companies in multiple sectors face tacit threats from non-state and state actors and most times, they do not have the necessary information to account for political risk. Traditionally, the oil and mining sector is the most prone to political risk because their production usually takes place in vulnerable and unstable political environments.

The increased outreach of multinational companies into unstable parts of the global south, however, places a new element of risk in industries that previously did not have to worry about operating in a destabilizing political environment.

Categories: Asia Pacific, Politics

About Author

Daniel Lemaitre

Daniel is a GRI Senior Analyst. He has worked in policy research centered on the political economy of the Andean region in the public, NGO, and private sectors. Daniel holds an MSc in Comparative Political Economy from the London School of Economics, concentrating on Latin American markets.