Game On for Sony PlayStation's New Chief

Kazuo Hirai will have big shoes to fill—and a lot of competitive ground to make up—when Ken Kutaragi steps down this later this year

by Kenji Hall

Sony's new video games chief might best be described as the anti-Kutaragi. On Apr. 27, the Japanese electronics and entertainment giant tapped Kazuo "Kaz" Hirai to take over Sony Computer Entertainment after founder Ken Kutaragi says his final sayonara this summer. The promotion of Hirai, a marketing whiz who got his start in the music business, underscores how Sony (SNE) is steering the gaming unit away from its roots as a semi-independent startup run by the autocratic Kutaragi.

But when he assumes the gaming unit's top post, Hirai will have one of the hardest jobs at Sony. Since the launch of the PlayStation 3 console in November, Sony's ultra-high-tech machine has trailed the competition from Microsoft (MSFT) and Nintendo (NTDOY). Lately the gaming unit's cost overruns and ongoing technology investments have hurt Sony's bottom line. They have also caused a headache for Chairman Howard Stringer, who has spent the past two years pushing through reforms and selling off assets aimed at turning around the company's key electronics division. The game division's bigger-than-expected losses appear to be the impetus behind Stringer's reshuffling of the unit's management last November.

JPMorgan (JPM) analyst Yoshiharu Izumi reckons Sony's gaming business lost $2 billion last fiscal year (which ended in March), with operating profits expected to come in at just $635 million. Results are expected to improve this year, but to realize substantial improvement, Hirai will have to figure out how to make better use of the division's assets—and do so without the deep technological knowledge that was the key to Kutaragi's success.

Smooth Operator

No doubt, Hirai, 46, will run things far differently than his predecessor. Analysts and industry executives describe him as affable and articulate. Born in Japan, Hirai speaks English fluently, thanks to his education at the American School and the International Christian University in Tokyo. He has spent the bulk of his 23-year career at Sony in the U.S. and is widely expected to refashion Kutaragi's Japan-centric empire into a more global organization.

Analysts and former colleagues say Hirai is both a deft administrator and an expert at finessing ties with distributors, game software developers, and others. In fact, it was Hirai who signed many key U.S. developers to create games for the iconic PlayStation machines, which made them a must-have among hard-core gamers. He also led Sony's tough negotiations with Wal-Mart Stores (WMT) to sell consoles through the discount retailer's extensive network.

That ability to land deals will be crucial as he rethinks how Sony can boost the PS3's appeal with more games and other killer content. "I think he is far more in touch with the U.S. [game] publishers, and probably in a good position to enlist their support for PSP [the handheld PlayStation Portable], PS2, and PS3," says Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles, Calif.

Tough Act to Follow

Contrast that with Kutaragi, 56, whom one industry executive described as demanding and "a very difficult person to do business with." Others say Kutaragi's need for complete control had become untenable as the division mushroomed into a $9 billion operation. "Kutaragi likes to decide everything himself," says Yuji Takahashi, a former senior Sony music executive who worked with both Kutaragi and Hirai. "That worked in the early days of the video game business. But in the next phase Sony needs someone who is a better listener."

But the biggest question facing Hirai is whether he—or anyone else—can truly fill Kutaragi's shoes. Though he's no Mr. Personality, Kutaragi has been the driving intellectual force behind Sony's gaming business.