Stringing along

Sony

Sep 29th 2005 TOKYO
From The Economist print edition

Timid reforms mean Sony's new boss is making two big gambles

ONLY three months after taking over as the new boss of Sony, Sir Howard Stringer—the Welsh-American media executive who had previously run Sony's American unit—announced his new strategy. But analysts greeted the plan, unveiled on September 22nd, with disappointment. So Sir Howard was forced onto the defensive. American-style business rationalisation, he argued, was simply not possible in the more consensual and less brutal environment of Japan. Resistance from inside Sony had prevented him from doing anything too bold. Alas, the markets were unsympathetic: by early this week, Sony's shares had fallen by 6%.

Sony's problems are most obvious in its core electronics business, which accounts for two-thirds of its revenues. Consumer electronics devices such as televisions, DVD players and portable music-players have come under fierce price pressure, and the firm that once wowed the world with the Walkman and the Camcorder has failed to come up with any trend-setting new gadgets to boost profits.

Sir Howard has already ruled out one step that would reshape the company fundamentally: he insisted earlier this year that he will never break up Sony by dividing its media division (responsible for hits such as the “Spider-Man” films) from its electronics business. For now, therefore, he is pursuing the same vague, steady-as-she-goes strategy as his predecessor, Nobuyuki Idei, in which a phalanx of cost-cutting initiatives is flanked by some wishful thinking and a pair of bold gambles.

Sony will shut down 11 of its 65 plants around the world and shed 10,000 jobs, or about 7% of its workforce. It will also stop making a few unprofitable products, although it has yet to say which. Overall, the firm says, this will cut costs by ¥200 billion ($1.8 billion) by March 2008. That, says Sir Howard, will help to raise Sony's dismal operating-profit margins in electronics to 4%. Even this modest boost, however, depends on Sony meeting an ambitious target of increasing electronics revenues by 5% a year.

That is where the wishful thinking comes in. Sir Howard still says, as Mr Idei did, that Sony's position as a producer of entertainment content will somehow help it to sell gadgets more profitably. Sony has not only failed so far to demonstrate this, but its attempts have often involved proprietary standards that make its gadgets overly complicated and reduce their appeal to consumers.

Sir Howard will need that pair of gambles, therefore, to save the day. He is betting that two new products—video-disc players based on Sony's new “Blu-ray” high-definition standard, and the third generation of Sony's PlayStation gaming console—will become big hits with consumers. The Blu-ray standard, which had already been backed by big PC-makers like Dell and Hewlett-Packard, gained more adherents this year. But Toshiba's rival HD-DVD format, which is also in the running to succeed DVD as the dominant video-disc standard, is cheaper, and received fresh backing this week from Microsoft and Intel. Attempts to unify the two standards earlier this year came to nothing, so a bitter standards war, akin to the battle 30 years ago between the VHS and Betamax video-cassette standards, now seems inevitable. Sony lost the Betamax battle.

The PlayStation 3 also faces stiff competition. It will be the most powerful games console on the market when it launches next spring. But Sony's reliance on raw power to attract buyers looks less sophisticated than the approaches being taken by its rivals. Microsoft is using several new ways to sell its rival Xbox 360 console, such as a co-marketing deal with Samsung; Nintendo, meanwhile, is using innovative controllers and simpler games to reach out to non-gamers, like elderly people who want to sharpen their mental faculties.

Sir Howard's timid reforms mean that he is, in effect, betting that either Blu-ray or the PlayStation 3 will ride to Sony's rescue next year. If these bets do not pay off, he will have to do something far bolder to address Sony's resistance to change.

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