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Sony's Sudden Samurai


It wasn't as far-fetched as, say, a geeky high school student morphing overnight into your web-spinning, friendly, neighborhood Spider-Man. But the Mar. 7 announcement that Sir Howard Stringer would take over management control of Sony Corp. (SNE), a $68 billion consumer-electronics and entertainment colossus, came pretty close to defying belief in Japan. Sure, Sony is a much-diminished force. But was it so desperate it needed to turn to a non-techie gaijin, a former CBS (VIA) television news producer who speaks no Japanese and who plans to run the show mostly from New York, not Tokyo?

Outgoing Sony CEO and Chairman Nobuyuki Idei says he handpicked Stringer, 63, based on his undisputed success as head of Sony's U.S. music and film operations. It helped, no doubt, that he led a consortium to buy the fabled Metro-Goldwyn Mayer Inc. (MGM) studio for $5 billion last fall, beating out Time Warner Inc. (TWX). With Sony's operations so enmeshed in the U.S. and its brand so well known around the world, "there is no reason why management should be Japanese," Idei maintains.

But there's also no obvious reason Sony should remain the company it is. Stringer has to convince skeptical insiders and outside investors that its warring fiefdoms can finally be quelled and forced into a coherent company. If not, a growing pool of non-Japanese investors may simply insist on unlocking the value of Sony's parts through some sort of breakup. Insiders say a stock sale of Sony's Hollywood studio is already a live issue within the company. Stringer vows instead that, on his watch, Sony will finally achieve the long-promised magic of convergence between its disparate entertainment and consumer-electronics units. If this company were American and not Japanese, the board of directors would probably have forced a drastic solution a long time ago.

Can Sir Howard succeed where Idei so visibly failed? Look at the two sides of the balance sheet. On the negative side: Stringer lacks technical depth in electronics. He cannot possibly have a hands-on role in a thorny restructuring in Japan if, as planned, he remains in New York. Most troubling, the road map he is following is the one Sony has been presenting to the world for the past 10 years: to find the synergies among movies, music, games, and gadgets, including many that have yet to be invented.

But there are pluses as well. As a foreigner with much charismatic appeal, Stringer may be able to impose Western management practices that could radically reshape and revive Sony. "In a sense," he says, "it's easier for me as an outsider to execute, provided I find a way to enlist the support of the employees." He also plans to spend at least one week every month in Tokyo.

When he's there, Stringer will be working with some of the world's most creative hardware designers, robot maniacs, toysters, hackers, and other crackerjack nerds. Sony is still a design and innovation hot spot. "The problem is not an absence of great engineers or the absence of great ideas," says Stringer. What's more, the directors and their advisers -- including internationalists such as Peter G. Peterson, senior-chairman of the private equity firm Blackstone Group, Nissan Motor (NSANY) CEO Carlos Ghosn, and Yotaro Kobayashi, chairman of Fuji Xerox -- are firmly behind the new CEO. "I happen to think Stringer is easily the best choice here," says Peterson.

Stringer calls the Sony brand "one of the 20th century's greatest creations." If it is going to survive in the 21st, here is what he must do -- and quickly:

1 HALT THE SLIDE IN CONSUMER ELECTRONICS

In 2003, Idei set a goal to shave $3.2 billion from Sony's cost structure, most of it from electronics, by eliminating 20,000 jobs, or 13% of the workforce, standardizing parts, and cutting the number of global suppliers from 4,700 to 1,000 by March, 2007. Sony is on target to hit that goal, but it's not enough: Sony's electronics division will probably lose $288 million in the coming fiscal year ending Mar. 31. It's losing sales and profits to rivals about as fast as it cuts costs. And it is resorting to desperate discounting to hold market share. Last fall the company slashed prices on its liquid-crystal display (LCD) rear-view projection sets to undercut no-name Chinese brands.

Stringer has to lay off more workers, especially in high-cost Japan. Analysts estimate as many as 10,000 more jobs have to go. That will cost plenty: Severance deals in Japan often involve lump payments of 24 months. While Sony already sources plenty of electronic gizmos from factories in Asia, it will have to raise that ratio without allowing quality to suffer. The restructuring goals have to be announced quickly -- before the summer -- if Stringer wants to sustain any credibility. In doing so, he would be borrowing a page from the playbook of Carlos Ghosn, who announced clear cost-cutting targets shortly after taking over at Nissan. (Stringer plans to consult with Ghosn.) The new CEO must also make it clear that there are consequences for executives who fail to deliver. He seems to recognize that. "I cannot allow the generosity of Sony's [culture] to resist certain changes," he says. "Kindness, in the end, can kill a company."

The good news: Stringer has experience. He whacked $700 million a year out of U.S. operations since 2001 and overhauled the studio operation by cutting TV producer deals and sharing costs on films. "It is a mistake to underestimate [him]," says MGM Chairman Alex Yemenidjian.

Nevertheless, much of the nasty work of restructuring electronics will have to be done remotely. Japanese deputies will have to wield the ax -- and overcome Japan's entrenched culture of accommodation and face-saving. Right now, the ax-man role seems to fall to Executive Deputy President Ryoji Chubachi, whom Idei has described as a good listener and consensus builder. The next three months will test his mettle.

2 COME UP WITH SOME NEW HITS -- LIKE YESTERDAY

Sony is already making some of the right moves in cranking out novel products that consumers want. It's reaching out to other companies to share the burden of developing new technology. And in at least a few cases it's staying ahead of the pack. One example is a portable version of the PlayStation, which hits the U.S. market this month, and the next generation console, PlayStation3. This game machine will run on a superfast chip called Cell, which Sony developed in a partnership with Toshiba Corp. and IBM (IBM). Sony Ericsson Mobile Communications, a joint venture in cell phones, has gotten Sony back into the handset game. Sony struck a joint venture with archrival Samsung last year to manufacture high-end LCD panels for flat televisions. And Sony has fielded a plausible bid to dominate the next generation of high-definition DVDs, with its Blu-ray format. In its camp: Samsung, Panasonic (MC), Dell (DELL), and Disney (DIS).

Partnerships speed up product development. But Stringer still has to banish some old-fashioned thinking, like trying to control the market with proprietary technology. When the company launched its answer to Apple Computer's (AAPL) iPod, Sony made it impossible for customers to play songs in formats other than its own. Now the world of online video is emerging, and once again Sony seems stuck in the same groove again. Its solution for sharing video among multiple devices is an approach called Giga Pocket that appears to work well only with Sony gear. Two years down the road, video could be bigger than music, and Sony could be a major player. But it needs to throw its full weight behind industry standards and depend on the excellence of its products -- rather than lock-in -- to win consumers.

Finally, Sony should do less to achieve more. Of the hundreds of different products Sony factories exhale each month, only a handful are real profit makers. As Stringer puts it, "Sony is battling on a very broad front.... [We] are going to have to look at the balance sheet to see if there are too many winners and losers."

3 CRUSH THE SILOS INSIDE SONY

There's no doubt Sony has the most enthralling assets of any entertainment company. But even Sir Howard admits that Sony needs "better integration between our services and our device portfolio." Translation: Studio execs and hardware geeks don't talk.

Stringer has to set up a framework where executives around the world from games, music, movies, and hardware meet often, hatch plans, set goals, and -- if they fall behind -- take responsibility. If that means planting cosseted Hollywood execs in stiff, white-collar environments in Tokyo for six months at a stretch, so be it. If senior staff can't meet these requirements, Sony shouldn't be the right home for them.

Breaking the silos is probably the hardest task Stringer faces. The Sony factions are as wily as they come. Back in 2002, Idei and other senior executives came up with the sensible idea of selling off its Sony Life insurance division to General Electric Co. (GE). It was profitable but made little sense for a consumer-electronics giant. There was just one catch: Sony Life execs rebelled, leaked nasty stories to the Japanese press about Idei, and forced Sony to cave.

Stringer thinks the ammunition is in place to blow up some silos. Phil Wiser, Sony's chief technology officer in North America, is deep inside the inner circle of engineers in Tokyo. And, Stringer adds, "there's no longer resistance to content people participating in everything." The Welshman has pushed hard to break down resistance inside U.S. operations, especially between the movie studio and the games and electronics divisions. "Howard is pretty insistent about supporting the other parts of the company, " says Michael Lynton, Sony Pictures Entertainment chairman. Stringer's lieutenants are now looking forward to such connections with Japan. "Tokyo is now Howard, so I think we'll see ever more co-operation between music and electronics," says Andrew Lack, CEO of Sony BMG Entertainment.

A key silo issue is the role of Ken Kutaragi, the official Sony bad boy. Kutaragi created the PlayStation in 1994 and has run the game unit ever since. His gang delivered an astounding 68% of Sony's $650 million in operating profits last year. In the recent power shift, he was knocked off the board. With his brash manner, "Ken doesn't have a lot of friends in the home office," says one insider. But Stringer should rise above that and find a suitable cross-boundary role for one of Sony's most creative dynamos.

4 THINK THE UNTHINKABLE

What if Stringer fails to tease out the synergies that would elevate Sony -- and what if Sony's notorious factions defy his efforts? As Stringer himself concedes, "the worst nightmare would be passive resistance."

If it happens, the chief should go to the next step and plan an orderly breakup of the company. A stock offering of the studio would be snapped up, considering the good job Stringer's lieutenants have done in containing costs and producing hits like Spider-Man. Games could be a stand-alone company. And if electronics went out on its own, management could focus on cutting costs and rolling out new products. Silicon Valley has murmured that parts of Sony would fit nicely with Apple.

A bust-up, of course, is the last thing on the mind of Sony's rank and file. "We've been blasted the last couple of years for not having a Michael Dell in charge," as one Sony insider puts it. "Here is the face and voice of a powerful figure running a powerful company." It's certainly the most audacious management call in Sony's 59-year run. If Stringer can't reboot Sony at this point, it is hard to think who could.

By Brian Bremner in Tokyo, with Cliff Edwards in San Mateo, Calif., Ronald Grover in Los Angeles, and Tom Lowry and Emily Thornton in New York


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