Posted by: Kenji Hall on November 26, 2009
It’s been a hard slog for Sony in flat-panel TVs. The business has lost money for the past five years, and is expected to do so again this year. In recent months, Sony’s global TV market share has slipped, even as market leaders Korean rivals Samsung Electronics and LG have held their own. And Sony has struggled with an inefficient supply chain and a less-than-ideal model mix.
Since April, it’s been Hiroshi Yoshioka’s job to fix the TV business. Yoshioka was appointed head of the Consumer Products and Devices division following a shakeup in the top management ranks. “I’ve been too busy,” he told reporters at Sony’s headquarters in Tokyo, on Nov. 25.
Yoshioka’s top priority is to make TVs profitable by next fiscal year, through March 2011. That’s no small feat. Citigroup Global Markets Japan analyst Kota Ezawa has forecast that the TV business will post an operating loss of $720 million this fiscal year, ending in March 2010. “We know we have to restore profit in our game and TV business,” Sony’s Chairman and CEO Howard Stringer said during a Nov. 19 news conference.
Cost cutting will be key. Sony now plans to outsource 40% of its annual TV output next fiscal year, from about 20% of the 15 million sets it expects ship globally this year. Taiwanese contract manufacturers Hon Hai Precision Industry and Wistron would mainly focus on producing Sony’s smaller sets, which consumers in entry markets can afford but earn razor thin margins. Those manufacturers have the machines for stamping metal sheets and resins and other materials in-house—not to mention a less expensive work force—to produce TVs for a lower cost than Sony can.
Yoshioka isn’t only taking an ax to his division. He’s also adding features to TVs. Next year Yoshioka says Sony will sell its first TVs capable of playing 3D movies and games. He predicts that up to half of all Sony TVs could be 3D-ready in 2013.
Sony is also getting the Hollywood studio it owns involved. Next year the company will launch an online shop for digital content that any of its products will be able to access. The iTunes-like shop would let Sony sell or rent movies, TV shows, and possibly games to anyone with an Internet-connected Bravia TV. "There are so many things we need to do," Yoshioka said.
Sony needs an online service to close the gap with companies like Apple and Amazon whose easy-to-use online services enhance their gadgets. The hope is that all of the online content available would differentiate Sony’s products from competitors. “Take LG or Samsung,” Kazuo Hirai, who heads networked products and services, said last week. “They have some great devices. No services.”
Last fall Sony experimented with the idea when it gave Bravia TV owners in the U.S. a chance to watch the Sony-made film Hancock, featuring Will Smith as a down-and-out superhero, before it was available on DVD. The company charged $9.99 for a 24-hour viewing period for a two week period. Sony will repeat the offer this year to test whether there was demand for movies after they had been shown in theaters but before their DVD release. Yoshioka wouldn't say whether Sony was negotiating with other studios.
Sony's TV output this year will be flat from the previous year. But Yoshioka thinks Sony can grab 20% of the global TV market, from around 13% now, by the fiscal year through March 2013. That will require a big jump in production and a push into emerging markets such as China and India--without new factories or equipment. "We don't have a plan to increase our in-house capacity," he said.
Market researcher DisplaySearch predicts that manufacturers will sell more than 200 million LCD sets in 2013. Sony's output would come out to around 40 million sets--or roughly 40% annual production growth over the next three years. Sony wouldn't give specific unit-sales forecasts. It's easier to boost market share than profitability, said Paul Semenza, senior vice president at DisplaySearch."The challenge for Japanese companies...is that the TV business is rapidly becoming commoditized," said Semenza. "So it is difficult to pick a niche and operate profitably in it. There are very few examples of this."
One reason for Sony's optimism: The company is overhauling its supply chain. A more disciplined system would prevent a pileup of TVs at factories or stores or anywhere in between. That might have saved Sony a small fortune months ago when it was struggling with rising LCD panel prices but falling retail TV prices--down nearly 30% from the previous year.
Sony seems to have learned from its missteps in product planning. Earlier this year, while Samsung and LG were offering a broad range of thinner, energy-saving TVs--with light-emitting-diode backlights--only Sony's top-of-the-line sets could compete. Sony's problem was that it didn't have the facilities to make the specialized sheets of glass. It was buying panels from Samsung or other suppliers and scrambling to find LED backlight manufacturers. The Korean TV makers were also benefiting from a weak currency which gave them a pricing advantage globally over Japanese manufacturers. By the time Sony recovered, Samsung and LG had won over buyers. To remedy the problem, Sony now plans to secure LCD panels featuring the latest technologies by investing about $780 million for a one-third stake in an LCD factory in western Japan that Sharp opened last month.
Analysts wonder if Sony can hit its targets. That's partly because other TV makers are counting on 3D and services to give their sets more cachet. "Considering Sony's rivals have similar strategies, we are not certain yet whether Sony will be able to achieve its goals," JP Morgan analyst Yoshiharu Izumi wrote in a Nov. 20 report.
And while outsourcing more TVs might help Sony rein in costs, it won't solve everything. By not having its own panel making facilities, Sony might be slower in getting new technologies to market, said Sweta Dash, TV analyst at iSuppli. The danger: not being first to the market with the latest cutting-edge products that can wow consumers and build brand loyalty.
Yoshioka would agree. He thinks it's crucial that Sony has its own unique TV technology. The company makes superclear organic light-emitting diode TVs but only for 11-inch sets because of the tough technical hurdles to mass produce them. Yoshioka said Sony engineers are already at work developing something new. When asked to explain, he smiled and said: "Next time."