Can Stringer stop Sony malfunctioning?

Mar 8th 2005
From The Economist Global Agenda

Sony has ditched its chief executive and brought in the head of its American division to run the media and electronics conglomerate. But resolving the conflicting aims of its two main businesses may take more than a fresh face at the top

IN HIS efforts to revive the flagging fortunes of Sony, Nobuyuki Idei was widely credited with embracing western business practices. On Monday March 7th the giant corporation’s boss found himself on the wrong end of a western business practice that is rarely encountered in Japan. He was nudged aside, along with his deputy, presumably for his inability to improve the fortunes of a firm that has failed to make the various prongs of its business pull successfully in the same direction. During Mr Idei’s five-year tenure as chairman and chief executive, Sony’s share price fell by around 60%.

Mr Idei’s replacement is Sir Howard Stringer, the Welsh-born boss of Sony’s American operations. His appointment gives him a position in Japanese business unmatched by any other foreign national—indeed, some even speculate that it marks a turning-point for the Japanese boardroom. Sir Howard is likely to apply a far more powerful dose of American-style management to the ailing behemoth. But finding a way to align the competing concerns of the different parts of the Sony empire may prove beyond even the sharpest businessman.
Sony is essentially a firm of two parts: electronic goods and media content. It was founded in 1946 by Masaru Ibuka, an engineer, and Akio Morita, a physicist, and to this day the core consumer-electronics division, based in Japan, is still dominated by technically minded engineers intent on turning out whizzy new gadgets. But blockbuster new products have been in short supply of late, and the Sony name is no longer a by-word for up-market electronic goodies.

As consumers have increasingly turned to the competition—particularly Samsung, a South Korean rival, and at home Matsushita and Sharp—Sony has slipped from its position as the predominant force in consumer electronics. In the fiscal year ending March 2004, some 62% of the firm’s revenues came from its electronics division but that part of the business lost $339m. It may well suffer another loss this year.

Sony’s media division is prospering by comparison. In fiscal 2004, music and films contributed some 40% of group operating profits. Sir Howard won praise for completing two big deals recently: the merger of Sony Music with Bertelsmann Music Group (BMG), creating the world’s second-largest music company; and a deal to buy MGM, a famous Hollywood film studio. He is also responsible for some wrenching internal restructuring. Thousands of employees at Sony’s music division have been laid off. And Sir Howard brought new management into the movie division and enjoyed bumper worldwide success with the Spiderman films, among others.

Success in Hollywood can prove short-lived, however. The film business is a notoriously fickle paymaster. In 1994, Sony was forced to write down the value of its Hollywood film businesses by $3.2 billion after Columbia and TriStar, acquired in 1989, failed to produce any big money-spinning films. A few expensive failures in the movie industry can quickly turn profit to loss. The music industry is also difficult, and is currently going through a particularly bad patch.

Worldwide music sales have fallen every year since 2000. In the first half of 2004 (the latest period for which figures are available) the value of sales fell by 1.3% compared with the first six months of 2003, according to the IFPI, a recording industry body, largely thanks to piracy. Despite legal moves against individuals who share music files on the web, sales are set to fall again this year.

The nub of Sony’s problem is that its media arm wants to protect its content from piracy. Apple’s iPod, a stylish and desirable digital music player, has taken the world by storm because of the ease with which music can be downloaded. Since the American computer-maker produces no musical content of its own, unlike Sony, it does not find itself torn between protecting its copyright and making gadgets that allow music to be copied and swapped. Sony once dominated the portable-music market with its Walkman, but since the onset of digital music it has handed control of the market to Apple by refusing to support the MP3 format, the pirates’ favourite, in its players, and pushing its own proprietary format instead. Last year, Sony finally introduced MP3 support on its music players, since nobody would buy them otherwise.

As high-speed internet technology spreads, piracy will threaten the film business just as it has the music industry. Sony’s plans to marry its media content with a range of networked household electronic devices are fraught with a huge internal conflict that Sir Howard may struggle to resolve. Gadgets that cannot be used to copy films or burn CDs may be good from the perspective of copyright protection, but they are not what most consumers want.

And even Sony’s biggest success story, its games division, faces threats. The firm’s PlayStation is the world’s most popular console, and games sales contributed over half of Sony’s operating profit of $1.3 billion in 2004. The division shows that a happy marriage of content and hardware is possible, if managed properly.

Sony is gambling heavily on the success of the PlayStation 3, which is set for launch in 2006. It has even developed a new computer chip, jointly with IBM and Toshiba, to run the sophisticated graphics that today’s gamers demand. However, Microsoft’s new Xbox is set for launch a few months beforehand and thus has a chance of catching on before Sony’s product has even come to market.

Though Sir Howard's success in Hollywood may not qualify him to run a sprawling conglomerate that still derives the bulk of its revenues from electronics, a dose of foreign management might go down well at Sony. It worked at Nissan, where Carlos Ghosn, a Brazilian-born Frenchman, turned the struggling Japanese carmaker into a hugely profitable concern. Ultimately, Sony may have to decide whether it is an electronics firm or a media company. Rumours have abounded that Sir Howard is planning to spin off Sony’s entertainment division. That might not be a bad start.

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