Why the reforms at Sony's games unit? Answer: Kaz Hirai

Posted by: Kenji Hall on April 19, 2007

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When executives at Sony’s video game division in Europe informed employees this week about possible layoffs and transfers, it stoked speculation about problems with the business. After all, since its launch late last year, the PlayStation 3 console has trailed Nintendo’s Wii and Microsoft’s Xbox 360 in sales worldwide. Sony Computer Entertainment—the games division—also continues to drag down the company’s earnings because of the PS3’s high development and production start-up costs.

So it seemed only natural that Sony was considering changes. But was the PS3 really behind the restructuring? According to some analysts, there’s another reason: Kaz Hirai, is asserting himself at his new post as the exec in charge of Sony’s video games biz.

Hirai has been unusually quiet since last December, when he took over day-to-day operations from Ken Kutaragi, the inventor of the PlayStation franchise. To some extent, that’s to be expected. Kutaragi has been the unit’s leader and resident visionary for the past 13 years. Nobody thinks he’ll loosen his grip on power immediately—even if he was given a big title and pushed out by Sony’s top brass after the unit’s independence had become a liability.

When financial analysts met him and Hirai on March 14, they instinctively looked to Kutaragi for answers. Some were disappointed by Kutaragi’s well-worn responses. “Management will shift to a team system, but Mr. Kutaragi himself is not thinking of stepping down,” wrote Yoshiharu Izumi, in a note to investors.

But the few analysts who bothered to reach out to Hirai later were rewarded. Fact is, Hirai seems to be putting his own stamp on the organization. He’s tightening the bonds between headquarters and worldwide studios, which create the software. This month, he will have hosted the first-ever gathering of regional heads and software studios’ execs. He’s also given regional heads more control over product inventory, letting market forces, not executive fiat, determine how many machines get shipped from factories to each region. And he’s pushing for greater collaboration with games creators and in-game advertisers. It’s the kind of shakeup that would never have happened under Kutaragi, who preferred a heavy-handed, top-down management style.

The reform of Sony Computer Entertainment’s European arm should be viewed in a similar light. According to the GamesIndustry.biz, a Web site that keeps tabs on the industry, David Reeves, the head of Sony’s European gaming unit, wrote a letter to the staff on April 16 informing them of the impending layoffs. Of the 1,900 employees based in Europe, about 160 jobs would be cut, to lower the business’s fixed costs and meet targets, it said. Sony Computer Entertainment officials confirmed the letter and the planned layoffs but dismissed the number of layoffs as speculation.

In an email reply to questions, Yoshiko Furusawa, vice president at the gaming division, said its worldwide operations were being reviewed, and that more structural changes (and layoffs from the ranks of its 4,500 full and part-time workers) would come, “if deemed necessary.” “Entering into the world of more networked and converged entertainment, we need to redefine the company position with the skill sets and structure to take a leadership role,” Furusawa added.

Says David Gibson, analyst at Macquarie Securities in Tokyo: “In my opinion, Kaz is telling regional heads, 'Guys, you now have budget and cost targets, and we've looked at headcount and earnings and now that we're distributing games electronically we need to think about cutting costs.'” In other words, he's realizing that the same hardware-centric group that Kutaragi relied on for the PS3 may not be the right mix as Sony forges more aggressively into online content and game downloads.

Given the strong European launch in March and the rave reviews about the PS3's soon-to-be-released “Home” virtual online world, there may be hope for an improvement of Sony's abysmal games earnings sooner than most analysts think. Last fiscal year through March, the unit likely racked up an operating loss exceeding $2 billion.

Still, plenty of challenges lie ahead. Japanese market researcher Enterbrain estimates that Sony is the laggard among the three next-generation gaming consoles, selling just over 2.5 million PS3 machines globally, vs. more than 4.7 million Wii consoles and 7.7 million Xbox 360s. It will need some killer games and other content to close that gap. Merrill Lynch analyst Hitoshi Kuriyama predicts a 20% price cut for the PS3 by October. Sony is rushing to miniaturize chips and other parts and to make them at a lower cost, but the discount will only prolong the time it takes to turn the business around. Kuriyama estimates that the unit will be in the red $590 million this fiscal year. Hopefully, Hirai is working on that one, too.

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