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In TVs, Sony is Attuned to Market Shift

Posted by: Kenji Hall on May 14, 2008

The prospect of a global economic downturn should make Sony nervous. After all, you can’t expect consumers to be out shopping for giant flat-screen TVs and other pricey consumer electronics if they’re paranoid about losing their jobs. A drop-off in TV sales, particularly in the U.S. and Europe, would do more than dent Sony’s earnings outlook. It would also dash Chief Executive Howard Stringer’s hopes of ending the losses that have plagued the company’s TV business for several years.

But on May 14, the Japanese electronics and entertainment company predicted a big jump in unit sales of flat TVs. The company, which reported full-year earnings, forecast sales of 17 million of its Bravia liquid-crystal-display sets this fiscal year, which ends in March 2009. That’s 70% more than the 10.6 million it sold globally in the just-ended year through March 31, and nearly three times what the company sold two years ago.

The forecast also beats those of its most formidable domestic rivals. This year, Sharp is expecting to sell 10 million LCD TVs, while Matsushita Electric Industrial is betting on 11 million flat-panel sets. LCD TVs are expected to top 100 million units this year and to come within reach of 125 million in 2009, according to iSuppli.

But on closer inspection Sony’s gains aren’t as significant for the bottom line as they might have seemed at first glance. One telltale sign: Despite rising unit sales, LCD-related revenues this year are expected to stay flat at $1.25 billion. The figure is also 7% less than sales two years ago. Sony execs say they are working to make the division profitable.

The combination of higher volumes and lower revenues reflects a harsh reality in the TV business. Until now, companies like Sony, Samsung Electronics, Philips, Sharp and Matsushita have been mainly concerned with producing bigger TVs more efficiently. To do so, they have been investing billions of dollars every few years to build more sophisticated plants that could pump out the giant sheets of specialized glass that are cut to make TVs. Theoretically, bigger glass sheets make more TVs.

They haven’t only been competing with each other; they have also been trying to stay a step ahead of low-cost manufacturers in China and other parts of Asia. That meant discounting their TVs so the low-cost brands didn’t lure away all but the wealthiest of buyers. It also meant finding small ways of continuously lowering costs so that profits didn’t get decimated by rising materials and energy costs and falling TV prices, which have been sinking at roughly 25% every year. Not many companies have been successful at doing that.

Now, faced with an economic slowdown, Sony is shifting gears. Instead of focusing mainly on big screens with all the bells and whistles, which bring in higher profit margins, the company is making more so-called entry-level models. These are TVs with screens in the 40-inch range and smaller that use proprietary LCD panels from Sony’s joint venture with Samsung but come without top-of-the-line stereo speakers and image-processing chips that reduce picture blur.

The move highlights how Sony is paying closer attention to changing TV-buying patterns—and making fast changes to its product mix. Sony execs say this shows they are shedding the traditional if-we-build-it-they-will-buy mindset. “Over the past two years, we’ve gotten better at responding to what consumers want in a timely fashion,” says Sony CFO Nobuyuki Oneda. “And it’s starting to pay off.”

That’s in sync with a market trend toward smaller, basic, less pricey sets, says Gartner analyst Paul O’Donovan. It’s why a no-name manufacturer such as Vizio came out of nowhere to challenge the big TV brands in the U.S. Sets of sizes 42 inches and smaller are likely to account for 94% of all LCD TVs sold globally, according to Gartner data.

This fiscal year, Sony expects to post overall operating profit growth of 20% to $4.32 billion on a 1% uptick in sales to $86.5 billion. The gains seem impressive but pale in comparison to last year’s quadrupling of operating profit to $3.6 billion. (Still, the results missed Sony's own forecast in January of $3.9 billion) That came thanks to a 7% rise in sales and a one-off windfall from the sale of part of the company’s headquarters complex, part of a Japan-based chip-making factory, and property in Berlin.

Sony has begun selling its pared-down models through giant U.S. retail chain Wal-Mart, and it’s also selling the sets at electronics-specialty stores Best Buy and Circuit City. “A few years ago Sony executives told me they would never sell their TVs at a discount or at Wal-Marts and other big chains and, as a result, they lost out to Samsung, LG and Philips,” says Gartner’s Donovan. “If Sony sold only premium products now their market share would shrink phenomenally--and they’ve only just gotten it back.”

The company may introduce the models in other markets. Oneda didn’t specify where, but the natural choice would be fast-growing countries such as the Brazil, Russia, India, China and Vietnam. That’s exciting news for consumers who were dying to get a Sony but couldn’t afford one.

It’s harder to judge whether Sony’s brand image will suffer. Sony execs dismiss the idea. But some analysts think it’s inevitable since TVs are such a big branding tool for consumer-electronics companies and Sony will be leaving out much of the innovative technology has so far won it such a huge following. Automaker Toyota Motor sells its luxury cars under the Lexus brand to maintain their prestige, and Sony should do the same, says Carl Gessum, founder of London-based market researcher Premonvision. “The Bravia brand will take a major hit.”

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