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Sony's Moment of Truth

The electronics giant is looking to the head of its video game unit for salvation -- and it hopes shareholders will go along.

June 20, 2003|P.J. Huffstutter | Times Staff Writer

When Sony Corp.'s board of directors faces a ballroom packed with anxious shareholders in Tokyo today, two questions will be on every mind: Where is the Japanese electronics giant headed and how exactly does it plan to get there?

Sony's stock is hovering around a five-year low, down nearly 30% this year alone. Asian hardware rivals have cracked its traditional lock on the consumer electronics market.

Sales in Sony's core business of making televisions, portable CD players and digital cameras dropped 6.5% in its fiscal year ended March 31 from the previous year. Although consumer electronics accounted for 66% of overall sales, they contributed only 22% of Sony's operating income.

By comparison, Sony's video game business accounted for 13% of total sales and 61% of operating income.

That's why the future now rests on the shoulders of Ken Kutaragi, the unconventional leader of Sony Computer Entertainment Inc. and the driving force behind its PlayStation video game console -- a man Sony Chief Executive Nobuyuki Idei once called a "wild horse."

"Today, the company is focused on helping Ken Kutaragi and others give a new set of eyes to the electronics strategy," company spokesman Gerald Cavanagh said.

The Sony game plan hasn't exactly put investors at ease. Now, Nikko Citigroup financial analyst Kiyotaka Teranishi said in a recent report, Sony is facing so many problems that it must move aggressively or risk being left behind.

"Unless Sony can establish overwhelming competitive advantages in equipment platforms, we doubt it will be able to sustain or enhance its competitive advantage," Teranishi said.

Clearly, the electronics business needs help. Sales of Sony's once-lucrative line of Vaio personal computers and its Handycam camcorders are sagging under intense competition.

The company's share of the TV market has slipped from 55% to 45% and remains in a downward spiral. In the high-end market, Samsung Electronics Co. has shoved Sony off the shelves as the bestselling brand among TVs priced at $3,000 or more. Samsung recently said it would invest about $16.7 billion in a program to build flat-screen displays -- a move that would cut prices and further squeeze Sony's paper-thin profit margins in the consumer electronics arena.

"Sony's business condition is not satisfactory," Idei told analysts at a recent corporate strategy meeting. "We have started the overhaul."

Leading the charge is Kutaragi, one of Sony's brightest engineering minds. He took the mantle of corporate executive deputy president in March, charged with nothing less than saving the empire.

Part of his solution is to apply to Sony's consumer electronics group the same business model that made Sony Computer Entertainment such a success. In fact, the company hopes that some of the PlayStation magic will rub off on other products.

But it won't be that simple. In the world of consumer electronics, hardware is king. In the video game business, software, services and components rule.

Sony makes little -- if any -- money selling PlayStation consoles. But with every piece of hardware comes the opportunity to sell dozens if not hundreds of video games, each of which adds profit to Sony's coffers. The company also makes money selling peripherals such as memory cards and access to services such as online multi-player games.

It's a strategy akin to selling razors below cost and more than making up the loss by selling an endless supply of high-margin razor blades.

Whether the same approach will work for consumer electronics remains to be seen. After all, industry analysts ask, if camcorders and TVs are the razors, what are the blades?

Early attempts to create services that could drive sales for the lagging unit have been modest at best. Sony took some steps in satellite broadcasting, but only in its backyard.

The company partnered with Rupert Murdoch's News Corp. to invest $5 billion in its JSkyB offering. But after a series of mergers, Sony's stake in the satellite venture dwindled to a small slice in SkyPerfecTV, Japan's largest satellite broadcaster.

In Tokyo, Kutaragi is attacking the problem by blending PlayStation hardware with products from the consumer electronics group.

One of his first moves was to launch PSX, an all-in-one audio and video device aimed at capturing the future of home entertainment. PSX will combine the functions of a PlayStation2 video game console, a DVD player and recorder, a digital music player, a television tuner and a personal video recorder that can store 60 hours of TV programming.

The company also has announced plans to expand its presence in the portable entertainment market. Next year, Sony will release a combination game, movie and music player called PSP that will be about twice the size of a deck of playing cards.

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