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Plummeting profit could help Howard Stringer turn Sony around

The CEO is using falling earnings and the dire economy as a rallying cry for his agenda to tear down traditions at the 63-year-old electronics and media giant.

January 30, 2009|Alex Pham

With the consumer electronics industry's eyes on him, Sony Corp. Chief Executive Howard Stringer was trying to show how the Japanese company planned to return to its past glory.

But, as he has found often during his time running Sony, the talent won't always follow the script.

Tom Hanks was invited to spice up Stringer's presentation at this month's Consumer Electronics Show in Las Vegas. Instead, the actor mocked Sony, belittled its technology and informed the audience that the teleprompter screens were made by rival LG Electronics.

Still, Stringer rolled with the punches and won back the audience. "I took a risk -- it failed," he said of inviting Hanks. "But we'll still be friends."

As with his CES keynote, Stringer has figured out ways to turn misfortune into an advantage. The CEO is using plunging profit -- like that reported Thursday -- and the dire economy as a rallying cry for his agenda to tear down traditions at the 63-year-old electronics and media giant.

"There is still too much old Sony and not enough new," Stringer said during a news conference last week, when Sony warned investors to expect its first annual loss since 1995 for the year ending March 31.

For its fiscal third quarter, Sony on Thursday posted a 25% drop in revenue, to $23.7 billion, and a 95% drop in profit, to $114 million. Sony executives attributed the declines to a slowdown in the global economy, the appreciating yen and the slumping Japanese stock market.

Stringer remains influential and respected within Sony, and investors continue to have confidence in the Welsh-born CEO, said Mukul Krishna, global director for digital media at Frost & Sullivan, a consulting firm in Mountain View, Calif.

Nevertheless, the financial results are a black eye. When Stringer took over Sony four years ago, he promised to reverse the company's eroding market share in its core consumer electronics business by radically restructuring the sprawling firm.

His efforts to trim head count have met fierce resistance in Japan, where workers believe established companies owe them lifetime employment. Spats between units continue. For example, Sony's PlayStation video-game division in December declined to lend its brand name to Sony Ericsson's phones.

"He's been trying to turn around a culture that was formed more than 60 years ago but isn't up to the demands of the 21st century," said Richard Doherty, an analyst with technology consulting firm Envisioneering Group. "He's now rallying the troops and saying, 'Hey, we need to move faster.' "

As a result, investors are looking to Stringer to "provide a road map for weathering the storm," Krishna said.

Last week Stringer outlined a plan to close five or six factories, lay off 8,000 of the company's 180,500 workers and outsource some tasks to low-wage countries such as India. Stringer also said he and his top executives would forgo bonuses, with some senior managers taking pay cuts.

"We can and will navigate through this," he said, "but it will not be easy."

Stringer's supporters point out his achievements. The company pared billions of dollars from its annual operating costs by streamlining factories and exiting unprofitable businesses such as rear-panel-projection and plasma televisions -- a departure for a company known for sustaining products well past their prime.

And he continues to push his vision of "connected entertainment." The idea: Sony's electronics are used to download and play all manner of digital diversions, including games from Sony PlayStation, music from Sony BMG and movies from its profitable Sony Pictures Entertainment group.

Last year, for example, owners of Sony's Internet-connected Bravia TVs were able to stream "Hancock" on their TVs before the movie was available on DVD.

Some of Stringer's efforts yielded mixed success.

Sony's highly profitable games division integrated Blu-ray players into its PlayStation 3 consoles, giving the next-generation disc format a crucial boost over HD DVD, a rival technology backed by Toshiba Corp. But the players added about $150 to the cost of each console, hurting sales. Though the business remains profitable, Sony has not dominated the market as it did with the original PlayStation and PS2.

The competitive landscape has also shifted for its electronics business, which contributed 68% of the company's revenue last quarter. The unit's sales fell 29% to $16.1 billion, and it swung to an operating loss of $175 million.

In the U.S., companies such as Microsoft Corp., Cisco Systems Inc. and Apple Inc. have eaten into Sony's share of the music player and home entertainment businesses. Its TVs now compete with products from low-cost Chinese manufacturers as well as South Korean companies -- including Samsung Electronics Co. and LG -- that sell their sets at Wal-Mart, Target and Costco stores.

As a result, Sony last year introduced a broader range of TVs that cover more price points, from $500 for a 32-inch basic LCD to $20,000 for a 70-inch ultra-sharp version.

"Sony has done a reasonable job of maintaining market share this year and perhaps even increasing its share," said Paul Gagnon, an analyst with DisplaySearch, a market research firm in Austin, Texas.

But he warned that 2009 would be a tough year for TV makers.

"For a company like Sony that has a strong brand, if they can reorganize and streamline, they can be well positioned for a recovery," he said.

--

alex.pham@latimes.com

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