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Consumer Electronics

Sony Is Still Feeling the Recession's Bite

The global recession continues to wreak havoc on Sony's earnings. On July 30, Sony (SNE) said it posted a $271 million operating loss for the April-June quarter, down from a $772 million profit in the same quarter a year ago, and that revenues dropped 19%, to $16.8 billion. That wasn't as bad as Sony had predicted. But Chief Financial Officer Nobuyuki Oneda said the company expected stiff price competition in the electronics industry in the coming months and was sticking with earlier forecasts for an operating loss of $1.16 billion in the fiscal year through March 2010.

Over the past few months, the financial crisis and economic downturn have dealt a setback to Chairman and CEO Howard Stringer's efforts at restoring the company to profitability. Oneda blamed the global slowdown as well as the yen's continuing strength against the dollar and euro. The strong yen has made the company's products less competitive and eroded the value of revenues earned in overseas markets.

Attention now shifts to whether Sony can halt the losses of its TV and video-game businesses. The losses are forcing Stringer, who has been at the helm for the past four years, to push through more reforms. In the latest quarter, Sony booked a restructuring charge of $357 million for the quarter. "Our target is to make [the TV and gaming] divisions profitable by sometime next year," Oneda told reporters in Tokyo.

Competitors Are Making Profits Stringer needs to restore Sony's fortunes soon. Analysts say the company's financial woes have distracted its top brass from devoting resources toward developing groundbreaking products, which are scarce at the moment. Sony ranks second globally in flat-screen liquid-crystal displays, behind Samsung Electronics, but analysts predict it will lose market share—from 14% last year to below 12% this year. Sony sells a mere one-sixth as many Walkman media players worldwide as Apple (AAPL) sells iPods, according to Credit Suisse (CS) estimates. Sony was a pioneer with its eBook Reader, but it now trails Amazon's (AMZN) Kindle, and sales of the company's PlayStation 3 gaming console lag behind those of Nintendo's (7974.T) Wii.

The most glaring difference between Sony and its competitors is in earnings. Unlike Sony, Samsung and Apple reported strong profits for the quarter. Samsung's operating profits surged 5% and revenues were up nearly 12% thanks to a weak Korean won, while Apple's profits jumped 20% on a 12% rise in revenues.

Stringer announced a management shake-up in February. The changes, which took effect in April, placed both cost-cutters and software guys in key senior posts. The hope was that a younger management team and a reorganization that put a priority on networked gadgets would lead to more internal collaboration and fresh ideas. In May, Stringer made another high-profile signing: IBM (IBM) tech guru George Bailey to the newly created post of chief transformation officer. Bailey, who had been a consultant to some of the world's biggest tech brands, could help Sony come up with technology solutions that simplify how gizmos connect to each other and tap Sony's huge library of video games, movies, music, and other digital content.

Aiming for a Better Hardware-Software Link Sony is working to shave more than $3.1 billion from its costs by selling off factories, revamping its supply chain, and centralizing the procurement of components for an array of electronics products. Oneda said the company continues to whittle down the number of suppliers. But the company isn't just cutting back; it's also bolstering its TV business by investing $715 million by April 2011 for one-third of a joint venture with Sharp (6753.T) to make liquid-crystal-display TV panels.

Still, Sony's biggest challenge is in improving the link between its electronics and digital content. One sign of progress: In May, the company began offering a free software download that finally gives Sony a content-management system to rival Apple's iTunes. Dubbed Media Go, the software organizes music, photos, podcasts, videos, and audiobooks for the PlayStation Portable gaming console and Sony Ericsson cell phones, and it syncs with Sony's online media shops. The release also suggests that Sony's software team—which traditionally has had far less influence than hardware engineers—is gaining clout.

How does that sit with Sony's critics? In a report last month, JPMorgan (JPM) analyst Yoshiharu Izumi applauded the Media Go release but said it was "not nearly as complete or extensive" as Apple's iTunes. "For instance, it does not yet link to a music download store," he wrote.

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