Sony stumbles in the digital age
Joel Dreyfuss Bloomberg News Monday, May 24, 2004
Missteps cost electronics giant $100 billion in market value
In a windowless room near Sony's headquarters in the Shinagawa district of Tokyo, shelves hold hundreds of versions of the Walkman - the portable cassette player that turned Sony into a global brand when it hit the market in 1979.
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Today, the Walkman Room is a shrine to Sony's past. The world's No.2 consumer electronics company - creator of the first transistor radio, the compact disc player and the PlayStation game console - is struggling in the digital age.
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"A 20th-century business model is no guarantee of success," said Nobuyuki Idei, 66, Sony's chief executive and chairman. "This is the biggest challenge, how to change."
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Almost two and a half years after Apple Computer unveiled its iPod music player, Sony announced its first iPod competitor, called the Vaio pocket, this month. The delay - and a yearlong lag in starting the Connect online music service after Apple's iTunes Music Store set up shop - reflects how hard it is for the 58-year-old electronics behemoth to adjust to new rivals.
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Howard Stringer, 62, Sony's vice chairman and head of the company's U.S. divisions, says executives were so concerned about music piracy that they couldn't agree with designers on the kind of player to create.
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"We didn't get there, and by that time, Steve Jobs was there," said Stringer, referring to Apple's CEO.
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In April, Apple reported that second-quarter profit had tripled from a year earlier to $46 million, after it sold 807,000 iPods.
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The plunge in Sony's stock price shows change is needed, said Nobuaki Murayama, an equities manager at Cigna International Investment Advisors K.K. in Tokyo. "The environment has changed," he said. "It doesn't take much investment to develop products anymore, and Sony is seeing more and more competition."
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Since Idei became CEO in 1999, Sony's shares have lost almost three-quarters of their value. They fell from a peak of ¥16,300, or $145, on March 1, 2000, to ¥3,920 on Monday. During that time, Sony's market value plunged to $33 billion from $138 billion.
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The "Sony shock" accelerated the decline. In April, 2003, Sony reported a fourth-quarter loss of ¥111.1 billion, triple what most analysts had expected. For two days, Sony shares tumbled by the maximum permitted by the Tokyo stock exchange, falling 27 percent to ¥2,720 - the lowest since 1995.
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When stereos and bulky televisions dominated living rooms, Sony held its own against two main competitors: Matsushita Electric Industrial of Osaka, Japan, the world's biggest consumer electronics company and maker of the Panasonic brand, and Amsterdam-based Royal Philips Electronics, Europe's No.1 consumer electronics company.
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Customers paid more for Sony innovations like the Trinitron TV, which used one electron gun instead of three to deliver a crisp image. The phenomenon became known as the "Sony premium."
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Now, Sharp leads Sony in unit sales of flat-panel TVs, according to fourth-quarter 2003 figures from DisplaySearch, an Austin, Texas-based company that tracks sales of TVs and computer monitors. Canon is neck-and-neck with Sony in digital cameras, according to Japan's Camera and Imaging Products Association. Dell, Gateway and Hewlett-Packard sell consumer electronics.
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In the past five years, Sony's annual sales have edged up an average of 2 percent and profit margins have stalled at 1 percent. Canon's average profit margin in the past five years has been 5.7 percent, according to data compiled by Bloomberg.
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Sony managed to eke out net income of just $851 million on revenue of $72 billion in the year that ended on March 31. Canon, which is the world's largest maker of copiers in terms of revenue and No.2 in digital cameras, after Sony, generated $2.6 billion of net income on $29.9 billion of revenue in 2003.
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Sony's problem is that it is too big and too unfocused, said Al Ries, an Atlanta-based marketing strategist. The electronics unit makes everything from image sensors for digital cameras to CD players, personal computers and headphones. The entertainment side creates movies, music and video games. The financial arm houses two insurance companies and an Internet bank.
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"It becomes virtually unmanageable once you go into so many categories," said Ries, chairman of Ries Ries, which advised Apple on marketing its Apple IIe computer.
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Idei is struggling to deliver on Sony's long-standing promise of melding the hardware and content from its disparate divisions to create digital entertainment devices.
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Sony is making progress toward delivering Idei's digital products with the Airboard, a wireless television. Sony dubs the device "location-free TV" and plans to introduce it in the United States this year.
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Idei wants executives to deliver 10 percent operating profit margins by fiscal 2006, when Sony turns 60. Sony plans to cut its worldwide work force by 13 percent, or 20,000 employees; trim factory capacity 30 percent by closing plants; and slash the number of different parts in inventory to 100,000 from 840,000. All told, Idei says, he will take ¥330 billion out of fixed costs by his self-imposed deadline.
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Murayama at Cigna says Idei isn't moving fast enough. "They say they've accelerated the efforts, but their business portfolio hasn't changed," he says.
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