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International -- Asian Business
The Slump at Sony (int'l edition)
Suddenly, the outlook is murky
Sony Corp.'s Nobuyuki Idei has always preferred the view out ahead. True, he faced a major restructuring job when he became president five years ago. He also had a sea of red ink to mop up, not least at the Hollywood studios Sony acquired in the late 1980s. But it's innovative products--the sleek Vaio notebook personal computer, or Aibo, the world's most sophisticated robotic toy--that set the tone at Idei's Sony. Every chance he gets, the 62-year-old Idei spreads the word about Sony's future as an Internet company: Everything from the venerable Walkman to the popular PlayStation game console will soon connect to the Web.
It's an enticing vision, and for a time investors bought into it eagerly. Sony's stock, after tripling last year, hit a record high of $152 on Mar. 1. Three days later, Sony rolled out the much-heralded PlayStation2. That turned out to be the most successful console launch ever: Sony sold 980,000 PS2 units in the first three days in Japan. Plenty to celebrate, right?NO TURNAROUND. Plenty to worry about is more like it. In one market after another--films, PCs, mobile communications--Sony is suddenly looking lackluster. Even Sony Computer Entertainment Inc., the video-game unit that has spawned the mighty PlayStation, now faces formidable competition from Microsoft Corp., which is about to invade the game market with a souped-up console. Amid all this, take a look at the share price: It's off 40% since its peak, to $89 on May 24. While Sony has been hit by the recent sell-off in tech and Net stocks, it still stacks up badly next to the Nikkei's 20% plunge in the same period. What's more, there's no great turnaround in the offing. "Sony doesn't have anything to argue the stock back up," says Masami Fujino, a consumer-electronics analyst at Nikko Salomon Smith Barney in Tokyo.
There lies Idei's dilemma. To pay for the transformation into "eSony," as he calls it, Idei is under pressure to boost market cap. Last year, he launched into the most ambitious restructuring agenda since Sony's founding in 1946. Then he trumpeted his plans to move into Internet services, build Net devices, and distribute Sony's movies, music, and games through cable and other broadband networks.
It helped push market cap to $130 billion by March--more than double what it had been just six months earlier. But by casting Sony as an Internet company without much to show for it, Idei left Sony vulnerable to the market's perceptions. Even with a new stock issue, market cap is now down to $80 billion. Says electronics analyst Reiji Asakura, who has two books on Sony to his credit: "Sony hasn't really come up with anything concrete on the Internet. It's still propaganda."
Idei's response to Sony's new troubles is all too familiar. On May 8, he announced the latest in a string of management reshuffles. This time, Idei is to become chairman while remaining chief executive. Chief Operating Officer Kunitake Ando, 58, currently head of the Vaio PC division, adds the title of president, and Teruhisa Tokunaka, former head of the PlayStation unit and the final member of the new triumvirate, retains his post as chief financial officer. Idei says this setup will let him focus on the Net strategy. But it hardly seems enough--especially since Idei had already designated both Ando and Tokunaka as his lieutenants in executive shifts over the past year.
Indeed, Idei's problems run much deeper than his response so far suggests. Consider Sony Pictures Entertainment. After a string of hits, Sony will almost certainly lose money on the recently released I Dreamed of Africa. The movie cost more than $80 million to make but has so far generated just $5 million at the box office. That will dent Sony's earnings on more promising projects, including a half-interest in the hit Erin Brockovich and two Sony films that are highly regarded in-house.BIRD IN THE BUSH. Mobile communications is another problem area. It has emerged as the hot growth sector for electronics makers, but Sony lags far behind companies such as Matsushita, NEC, and Fujitsu. Sony hopes to boost production this year of GSM cell phones in Europe, but that remains a bird in the bush. At the same time, competition is hitting the margins on Sony's popular consumer-electronics products. Even competitors such as Matsushita Electric complain of price deterioration.
Against this background, Sony's dismal 1999 results, announced on Apr. 28, hardly came as a surprise. Annual sales were flat, at $62.5 billion, while operating income fell 31%, to $2.3 billion. Mike Morimoto, senior vice-president for investor relations, cites the yen's recent strength against the dollar as "the whole reason" for the poor numbers. Indeed, the electronics segment, which accounts for almost two-thirds of total revenues, saw profits fall $1.7 billion because of the yen's rise. But other multinationals offset the strong yen. Toyota Motor Corp., for one, showed modest gains by launching new products.
As if all this weren't enough, there are signs of trouble in Gameland. The most worrisome is Microsoft's plan to introduce its Internet-capable X-Box by the fall of 2001. In Japan, Sony Computer Entertainment hasn't been able to ramp up production of the PS2 beyond the launch level of 500,000 units a month, partly because output of its graphic synthesizer chip, a key component, is limited. While a new production line will allow Sony to double PS2 output later this year, game-market experts wonder whether Sony Computer can produce enough consoles for the U.S. and Europe, which are to receive their first shipments this fall, while satisfying Japanese consumers. "It's a balancing act," points out Lisa Spicer, a game analyst at ING Barings. "It's not certain if they can pull it off."
Sony's PlayStation group is so wrapped up in making a success of PS2 that its executives may be neglecting their core market. Seven out of 10 major U.S. retailers recently reported that they had run out of stock of the first PS console, which still has many more users than the PS2. That's risky, considering that the game business is now Sony's lifeline. PlayStation hardware and software contributed 9% of Sony's revenues but 27% of its profits last year. To keep the cash cow flowing, it needs to milk the first PS for all it can in countries that are just discovering video games. That, in turn, will help pay for PS2, a 128-bit machine that delivers impressive 3-D graphics.
Idei has a lot more than short-term profits riding on the PlayStation. The game console, or a variation of it, could emerge as the hub of the home network, downloading content while serving as a gateway to the Web. Idei is now scouting for tie-ins with U.S. and Japanese cable and other broadband network providers that could handle the delivery of Sony entertainment products. "Idei's reputation will depend on whether he can make a business out of the Internet," says critic Asakura. But first, PS2's success must be firmly established. Investors are waiting.By Irene M. Kunii in Tokyo, with Ron Grover in Los AngelesReturn to top