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Time was, Sony Corp. (SNE
) was an unbeatable force in televisions. Its Trinitron TVs ruled the business for decades, with consumers worldwide willing to fork over a premium for Sony's quality guarantee. That makes the company's July 28 revision of its profit forecast even harder for its execs to stomach. Sony said it expects to earn just $270 million this fiscal year, down from an earlier forecast of $1.4 billion. The primary culprit for Sony's woes, it turns out, is its TV business.
That's a big problem, given that TVs today make up about a third of Sony's overall sales, up from 15% a decade ago. Since 2000, consumers have rapidly shifted to flat-panel models, but Sony was slow to see the trend. Although the company started working on LCD and plasma screens in the 1970s, in the '80s and '90s its managers were focused on building up the movie business and were wary of investing in new factories. Meanwhile, rivals such as Samsung (SHCAY
), Sharp, and Matsushita (MC
) got a head start on the new technology. As sales of flat panels boomed, Sony's share of the global TV market shrank from more than 10% in the late '90s to 6.5% last year. "Sony is in trouble because it was late in launching flat-panel TVs," says Credit Suisse First Boston analyst Koya Tabata.
That puts lots of pressure on Howard Stringer, Sony's new chairman. As the Welshman, who took over the company in June, formulates a strategy for rescuing Sony, turning around TVs should top his to-do list. "Stringer will need to change the structure of Sony's TV business faster than planned," says Merrill Lynch & Co. (MER
) analyst Hitoshi Kuriyama. Stringer isn't scheduled to announce details of his overhaul until September, but already some basic outlines are clear. Sony plans to close a cathode-ray-tube TV plant in Britain. And it is rushing new HDTVs to market, while launching a major ad campaign that emphasizes their clear, bright pictures. Soon, the company expects to install in its high-end televisions a newfangled processor to improve high-definition images, called the Cell chip, that Sony developed with IBM (IBM
) and Toshiba Corp. (TOSBF
)"THE COLLAPSE OF PRICING"
At the same time it rethinks its TV business, Sony continues to cut overall costs. In the past two years the company has eliminated more than 15,000 jobs, saving about $3 billion. Sony says it will spend an additional $791 million on restructuring this year, and analysts predict 10,000 more jobs could be cut.
Even so, Sony's TV division remains deeply troubled. This fiscal year, Sony expects to sell 2.5 million LCD TVs, up from 1 million last year, and 1.4 million rear-projection LCD TVs, up from 650,000 in 2004. But in the April-June quarter alone, prices for LCD TV sets in the U.S. dropped by nearly 50%. The unit will likely lose $1.3 billion this year, Mizuho Securities figures. Though the U.S. market is relatively solid, "we're in a peculiar situation because of the collapse of pricing," says Dick Komiyama, president of Sony Electronics Inc. Nomura Securities Co. (NMR
) estimates that Sony's TVs cost 3% more to make than they bring in from sales. And Merrill Lynch asserts that Sony's strategy of undercutting Sharp's and Matsushita's prices for flat-panel TVs in Japan by at least 10% risks tainting Sony as a discount brand in its home market.
Despite the TV unit's problems, few think Stringer will spin it off. The division is just too important, and Merrill estimates that Sony pours $1.3 billion a year into research and development. Stringer has said he prefers to integrate the conglomerate's fractured units and look for an "opportunity down the road" that might let Sony wed its music and movies to consumer electronics. If he doesn't fix the TV business, though, Sony will find that road mighty bumpy. By Kenji Hall in Tokyo, with Cliff Edwards in San Mateo, Calif.