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What Is Sony Now?


Sir Howard Stringer remembers when 2011 was going to be wonderful. “This was the first year of the payoff,” he says, “and next year was going to be the second.” As chairman, president, and chief executive officer of Sony (SNE), Stringer had spent six years trying to return the Japanese icon to its former glory and open a new era of growth. Sony expected an annual operating profit of at least $2 billion, its best in three years. A batch of new products was headed for store shelves, including its first tablets, a compact 24-megapixel camera, and a portable PlayStation player. Sony was also preparing to launch a global network that would connect the company’s movies, music, and video games to all its televisions, tablets, PCs, and phones—an iTunes-like digital platform. “I honestly and truly thought I was going to have a year to remember,” he says over breakfast in his 14th-floor apartment on New York’s Upper East Side. “And I did, but in the wrong way.”

The feeling of imminent triumph ended abruptly on Mar. 11. Stringer was in New York, having flown in from Tokyo the night before for emergency back surgery. Around 4:30 a.m., he opened a text message: An earthquake followed by a tsunami had devastated eastern Japan.

He considered returning to Tokyo but decided against it. “They didn’t need me there,” he says now, taking a sip of tea in his Fifth Avenue pied-à-terre. Stringer doesn’t speak Japanese and concluded that he’d be more hindrance than help. On the phone with deputies, he learned that nobody from Sony was hurt and that employees had dived into rescue efforts. Workers at the company’s technology center in Sendai fashioned boats from foam shipping containers and used them to save victims and ferry supplies. Stringer was so moved that he wrote an essay in the Wall Street Journal extolling the Japanese spirit of fukutsu no seishin, or “never give up.”

The earthquake and tsunami forced Sony to temporarily shutter 10 plants, disrupting the flow of Blu-ray discs, batteries, and other items. The disaster also meant a big charge against earnings—and that $2 billion in operating profit Stringer looked forward to announcing turned into a net loss of $3.1 billion, the company’s largest deficit in 16 years. Sony’s misery had only begun. A hacking attack forced the shutdown of the PlayStation Network. The strong yen battered profits, the sluggish global economy hurt sales, a CD and DVD warehouse burned in London riots, and floods in Thailand shut component plants.

By fall, Kazuo Hirai, Sony’s executive deputy president and Stringer’s heir apparent, was speaking publicly of “a sense of crisis” at the company. Sony predicted a $1.2 billion loss for the fiscal year ending next March. Its share price recently hit a 24-year low; its $17 billion market cap is half of what it was when Stringer became CEO.

There’s more to Sony’s problems than acts of God and currency traders. The maker of the Walkman and the Trinitron hasn’t driven pop culture for years. Sony thrived in an era of stand-alone electronics. When the Internet arose and digital began to mean connected, iPods became the center of people’s entertainment lives, then smartphones and tablets—which Sony was late to produce. Even the quintessential Sony product—the TV set—has become a millstone. Sony has lost nearly $8.5 billion on TVs over eight years and expects to keep losing at least into 2013. Samsung, Vizio, and other upstarts have driven prices so low that one Sony executive says the company charges less for some TVs than it cost to ship them a few years ago.

Sony has been trying to adapt to the Internet Age for at least a decade, yet remains a gargantuan and unwieldy manufacturer, with 168,200 employees, 41 factories, and more than 2,000 products from headphones to medical printers to Hollywood-grade 3D movie production equipment. Jeff Loff, a senior analyst with Macquarie Capital Securities in Tokyo, points out that Sony sells nine different 46-inch TV models in the U.S. and its mobile-phone joint venture with Ericsson offers more than 40 handsets. “Can you imagine how dilutive that is to your R&D?” he says. A Sony spokesman says the number of phones is being reduced, and notes that Samsung has 15 different 46-inch TVs.

Stringer’s time as CEO is running out. He’s 69 and his latest three-year turnaround plan ends in March 2013, at which point Hirai will probably take over, according to several people interviewed for this story. Stringer acknowledges that change has never come easily at Sony. Japanese laws and the country’s lingering culture of lifetime employment limit companies’ ability to close Japanese plants and shrink payrolls. And Sony’s very Japanese tradition of consensus building doesn’t always help it battle competitors who respond quickly to the orders of a strong leader. “People mostly say to me, ‘You don’t need to do this. Why are you doing this?’ ” says Stringer between bites of his cantaloupe. “Because I made a commitment to put Sony on this road where the company would have a safe, secure future. It would be very hard to foresee a triumph at my age, but if we were actually able to take advantage of a combination of our assets, we would be a very powerful company.”

 

CEOs of multinationals travel a lot, but there can’t be many who log as many miles as Stringer. One recent trip took him from Tokyo to Los Angeles to London—his wife lives in England—to Paris to London and back to Tokyo, all in one week. Luckily, a stop in Beijing was canceled. “I do take a lot of sleeping pills,” he says.

It’s not lack of sleep, though, that irritates him when it’s suggested that Sony is not thought of as the innovator it once was. “Oh, f–k, we make so much more than we used to,” he says. He ticks off some of the products coming out this year, including binoculars that can record video and goggles for watching 3D video games and movies. “Don’t tell me that Sony technology isn’t great.”

Sony sprouted from the post-World War II rubble of Japan to become the embodiment of that country’s recovery and rise as a world economic power. The company was founded by two charismatic men who could get almost anything they wanted done. Masaru Ibuka was the restless inventor who pushed Sony’s engineers to new heights of technical prowess. The equally gadget-happy Akio Morita supplied the vision of what consumers wanted—sometimes before consumers themselves knew it—and transformed audio and video devices into money printers.

Sony’s “Founding Prospectus,” handwritten by Ibuka in 1946, described “a stable workplace where engineers could work to their hearts’ content in full consciousness of their joy in technology and their social obligation.” It also established the primacy of engineers in the Sony culture, presaging the conflicts at the turn of the century when software became at least as important as hardware. Those engineers doubted Morita when he insisted that they build a portable music player. “Morita was immovable,” writes John Nathan in Sony: The Private Life. “He had watched teenagers on vacation in Japan and the United States lug their radios with them to the beach or into the mountains. How could they resist the opportunity to immerse themselves in their music while they played, exercised, or simply walked down the street?” In 1979, the Sony Walkman was born.

There were missteps—among them, the Betamax loss in the VCR wars—but the Sony brand grew to mean products of stylish design and the highest technical quality, attributes that frequently allowed the company to get away with charging higher prices than competitors. Sony’s revenue was $3 billion the year the Walkman appeared. Eleven years and 50 million Walkmans later, Sony had $25 billion in revenue and owned CBS Records and Columbia Pictures. The company behaved as if its past superiority could never be challenged. So it clung to its Trinitron cathode-ray-tube TVs when Sharp, Samsung, and others were making flat screens the new industry standard in the early 2000s. Sony eventually responded, but today Samsung and LG both sell more TVs than Sony worldwide. Likewise, the company yawned when Nintendo came out with its motion-sensing Wii game in 2006. Bloomberg News later quoted Stringer as saying he saw it as a “niche game device” but not as a competitor. The Wii became a smash hit and remains the best-selling game console today. The PlayStation 3 is third.

No product haunts Sony more than Apple’s (AAPL) iPod. Before Apple introduced it in 2001, followed by the iTunes Music Store in 2003, Sony was working with other companies on devices that would download music, Stringer says. “Steve Jobs figured it out, we figured it out, we didn’t execute. The music guys didn’t want to see the CD go away.” In his biography of Jobs, Walter Isaacson writes that Sony had “all of the assets,” including a record company, to create its own iPod. “Why did it fail?” he writes. “Partly because it was a company … organized into divisions (that word itself was ominous) with their own bottom lines; the goal of achieving synergy in such companies by prodding the divisions to work together was usually elusive.”

 

By 2004, Sony was looking for a new leader. Net income had fallen to $851 million from $1.51 billion in 1999, and Samsung was about to surpass Sony for the first time as the most-recognizable name in consumer electronics, according to a BusinessWeek-Interbrand survey. Stringer was running most of the company’s U.S. operations. He’d restored the movie business to profitability with the help of the Spider-Man franchise and had overseen a restructuring that involved laying off 9,000 workers. He wasn’t eager to leave that post and, as a tall Welshman with a tuft of reddish-gray curls atop his head, he hardly looked like the CEO of a Japanese company. “I was content to stay in America,” he says.

Sony worldwide, however, needed big changes. Its core business, consumer electronics, was losing money. The job required “someone who was very gifted in his interpersonal skills,” says Peter G. Peterson, then senior chairman of Blackstone Group (BX), who was advising Sony on its CEO search. As president of CBS (CBS) earlier in his career, Stringer had gained a reputation as an “affable hatchet man” for meeting individually with people he fired, according to a report by the Asia Case Research Centre. Friends and acquaintances describe him as charming and intelligent, with a self-effacing sense of humor. At his apartment, he says he’s reluctant to boast of his view of the reservoir at Central Park because it might suggest he’s rich. (He shows it off anyway.) Later, in his corner office at Sony’s U.S. headquarters in midtown Manhattan, he points out 9 of the 11 Emmy trophies he shared as a CBS journalist, then grins and says he doesn’t count the others because those “were for lifetime achievement, and that just means it’s the end.” Nearby, a sculpture of a cowboy on a bucking bronco bears an inscription from Burt Reynolds calling Stringer “the only network president I can hang out with and still love.”

Stringer became chairman and CEO of Sony in June 2005. He didn’t get the title of president. That turned out to be a problem. The company he took over had too many product fiefdoms that weren’t being held accountable, or even talking to each other. Most important was Sony’s electronics business, comprised of eight groups with leaders who answered to Ryoji Chubachi, whom the board named Sony president and electronics CEO when Stringer came on.

Stringer drew up a plan to streamline Sony by creating marketing, software, and other platforms common to all the businesses. Progress was slow. He finally determined it was because he wasn’t really in charge of electronics; Chubachi, the president, was. “President” can be a powerful title in Japan, connoting the day-to-day authority typically commanded by a chief operating officer in the West. “I didn’t know I wasn’t [in control],” Stringer says, a hint of sheepishness in his voice. “I just thought it was a natural part of Japanese companies to be consensus-driven and I had to spend a lot of time trying to achieve consensus.” He lost a year.

Stringer also encountered a hardware-worshipping culture that mistrusted him because he wasn’t an engineer. He was a “content guy” who supposedly cared less about making devices than pushing movies and music. “Whenever I mentioned content,” he says, “people would roll their eyes because, ‘This is an electronics company, and content is secondary.’ ” That resulted partly from longtime rivalries between engineers in Japan and generally better-paid movie and music people in California. Sony’s consumer electronics unit sometimes declined to send products for use in Sony movies even as Samsung was generating buzz with placements of its phones in blockbusters like The Matrix.

Stringer was alarmed to learn that there were software developers working on different product lines who had never even met. He threw them a cocktail party so they could exchange business cards and ideas. At Sony’s annual management conference at Tokyo’s Grand Prince Hotel New Takanawa in 2006, he set aside prominent seats for software developers to stress their importance to the company’s future.

Perhaps the most walled-off of Sony’s product silos was Sony Computer Entertainment, the unit that produced the PlayStation video game system. PlayStation debuted in 1994, the bastard child of a joint Sony-Nintendo project that didn’t work out. Executive Ken Kutaragi, an engineer and rabid gamer, urged his bosses to go ahead without Nintendo. They reluctantly agreed.

By 2000, the PlayStation unit was accounting for a third of Sony’s operating profit. When PlayStation 2 came out that year, Sony had to shut down a website taking pre-orders when the number of visitors soared past 100,000 a minute. The company’s stock leapt past $300 per share, an all-time high. Sony was on a roll. There was talk that Kutaragi might be the next CEO.

Sony’s spending on PlayStation marketing events became the stuff of legend. For the annual E3 game expo, the company rented Dodger Stadium in Los Angeles and set up giant tents designed to maximize views of Chavez Ravine and the downtown skyline. Gorging on sushi, mini hot dogs, Chinese food, and booze, gamers and Hollywood celebrities wandered around watching El Circo fire dancers and performances by Incubus and the Black Eyed Peas, while Kutaragi and his key U.S. lieutenant, Hirai, chain-smoked in a VIP area.

In retrospect, the PlayStation system, with its elegant blending of hardware and software, might have provided Sony an early platform for competing with Apple’s iTunes. Stringer himself called Kutaragi “the epitome of convergence,” and Kutaragi said he had aspired to create “a fusion of computers and entertainment.” But he cordoned the business off from other parts of Sony, mostly ignoring entreaties from executives at other units who wanted to work with his talented engineers. Kutaragi cultivated a renegade image within the company, telling BusinessWeek in 1999 that Sony suffers from “big-company disease.” The bosses tolerated him until the troubled launch of PlayStation 3.

Microsoft’s (MSFT) Xbox 360 had been out for a year when the PS3 debuted in 2006. Hirai bragged, “The next generation doesn’t start until we say it does.” The new system, loaded with a Blu-ray player and other pricey gear, initially lost between $240 and $307 for each unit sold, even though it was priced at least $100 higher than Microsoft’s Xbox 360, researcher iSuppli noted. Stringer put Hirai in charge of PlayStation. Kutaragi retired from Sony. Reached by phone in Japan, he says he’s working on a “totally cool” project, but declines to comment further, saying “many of the Sony old boys may be better to speak to.”

Stringer’s moves appeared to pay off in 2008 when Sony posted an operating profit of $3.3 billion, a hair short of the goal Stringer had set when he began. By then he’d found more than $2 billion in savings through job cuts, plant closings, and supplier reductions. A year later, Sony was back where it started, reporting a net loss of nearly $1 billion. There were rumors that Stringer would step down. Instead, he consolidated his power, finally adding the title of president, laying plans for more cuts, and handing control of TVs, PlayStation, and other electronics to a group of executives he called the “four musketeers,” including Hirai.

Two years later, Stringer argues that that losing year, too, would have been a winner had it not been for the “Lehman shock,” his shorthand for the 2008 global financial crisis. He chuckles about a public remark he recently made about Sony being spared “toads and pestilence.” But he looks uncomfortable about what many people—and certainly Wall Street—could see as excuse-making. “You can’t keep on saying that, ‘I had this and I had that.’ When the Thailand floods hit, I thought, well, wait a minute. If you add to that the yen, you don’t feel sorry for yourself, but you do occasionally say, if some of my competition had the same experience. …”

 

Both Stringer and Hirai have vowed that Sony will stay in the TV business, despite calls for the company to consider dumping it. Stringer talks about Sony’s profusion of products as if it were a badge of honor or a competitive advantage. “Why don’t you sell?” Stringer asks himself, rhetorically. “Because that’s the Sony legacy, I can’t do that. Everybody at Sony is very proud of the hardware they create.” Hirai says Sony has lowered TV sales targets and will continue to shed assets, cutting staff and factory capacity as it outsources more production. Echoing Stringer’s view that Sony needs to produce a “different kind of TV,” he says Sony is working on prototypes that replace commodity LCD and plasma TVs. “We’re going to move onto these new technologies sooner rather than later,” Hirai says. Sony hopes to get its cool back with ultralow-power, glasses-free 3D sets that double today’s resolution, though they’re not expected to be mainstream until at least 2013.

In October, Sony bought Ericsson’s share in the companies’ mobile-phone joint venture. The rapidly growing smartphone market presents ample opportunity, seeing as Sony is far behind Samsung and Apple with virtually no presence in the U.S. Sony must rely on Google (GOOG) to continue to improve the Android operating system that underpins Sony’s tablets, smartphones, and some TV efforts.

Consumers should expect to hear more about Sony Entertainment Network, the company’s most ambitious effort yet to connect all of its devices with all of its content. In addition to movies and music delivered through the disaggregated magic of the cloud, Hirai, who’s overseeing the project, is pushing his team to create additional services and exclusive content. That could include everything from Sony-produced TV shows to extended scenes from movies such as The Amazing Spider-Man and Arthur Christmas.

“The plan is to bring everything under the Sony Entertainment Network umbrella,” Hirai says, including the PlayStation Network and its 45 million unique users. He adds that only now has hardware become powerful enough to deliver Sony content across all four screens of TVs, smartphones, tablets, and computers.

As Stringer’s probable replacement, Hirai is crucial to Sony’s future. A tall native of Japan, the 50-year-old speaks perfect English, sounding like a man in a hurry, and commutes between Tokyo and California, where his family lives. His experience running the PlayStation business and early years working with Sony Music Entertainment give him an “understanding of how hardware and software need to be in lockstep,” he says.

He and Stringer say everyone at Sony is now rowing together. Last year, Hirai moved hundreds of PlayStation employees from the hip Aoyama section in Tokyo to Sony headquarters in grittier Shinagawa. The move was symbolic—breaking down the old PlayStation isolation—as well as practical, saving money and making it easier for everyone to work together. Hirai says it made him briefly unpopular.

Jeff Loff, the Macquarie analyst, wonders why Sony doesn’t take bolder steps to right its TV business—perhaps a huge round of layoffs. “I don’t think they know what to do,” he says. Loff started covering Sony earlier this year, around the time of Japan’s earthquake. His early assessments of the company were kind. After he ranked Sony as an “outperform” stock, Macquarie sales staff asked him if he was nuts. “They said this company always overpromises and underdelivers,” Loff says.

As summer went on, the 34-year-old analyst became more inclined to agree with the sales staff. His reports got crankier. In an Aug. 30 report titled “Pushing Reset,” he downgraded his rating to “neutral” and noted something remarkable. For the past nine years, the business that has accumulated more profit than the rest of Sony combined is financial services, mostly life insurance, with some auto insurance and banking. “Sony,” Loff says, “is a life insurance company with a money-losing TV business.”

Informed of this analysis, Stringer shrugs and says, “Yeah, it’s been a big moneymaker.” Breakfast over, Stringer is headed to a memorial service for Andy Rooney, then to the Sony offices in Midtown. Rumors have again floated that his resignation might be imminent. Not true, Stringer says. “I’m still here because I love the place. I completely believe in the vision and I think we’re getting there. But you can’t expect people to be patient.”

Gruley is a reporter-at-large for Bloomberg News in Chicago.
Cliff_edwards
Edwards is a reporter for Bloomberg News and Bloomberg Businessweek in San Francisco.

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    (Sony Corp)
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    (Apple Inc)
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