Global Economics

For Sony TVs, a New Downscale Front


An all-out effort in lower-end models should result in big unit sale gains, but some wonder if Bravia sets at Wal-Mart will hurt the brand

The prospect of a global economic downturn should make Sony (SNE) nervous. After all, you can't expect consumers to shop for giant flat-screen TVs and other pricey consumer electronics if they're worried about losing their jobs. A drop-off in TV sales would do more than dent Sony's earnings outlook. It would also dash Chief Executive Howard Stringer's hopes of ending the losses from TVs that have plagued the company's electronics business for several years.

But on May 14, the Japanese electronics and entertainment company predicted a big jump in unit sales of flat-screen TVs. The company, which reported full-year earnings, forecast sales of 17 million Bravia liquid-crystal-display sets this fiscal year, which ends in March, 2009. That would be 70% more (BusinessWeek.com, 5/14/08) than the 10.6 million it sold globally in the year just ended through March 31, and nearly three times what the company sold two years ago.

The forecast also beats those of its most formidable domestic rivals. This year, Sharp (6753.T) is expecting to sell 10 million LCD TVs, while Matsushita Electric Industrial (MC) is betting on 11 million Panasonic-brand flat-panel sets (BusinessWeek.com, 4/29/08). LCD TV sales are expected to top 100 million units this year and come within reach of 125 million in 2009, according to iSuppli. A day after Sony reported earnings, its shares rose 8.7% in Tokyo, vs. an 0.9% rise for the benchmark Nikkei 225 stock average. Since the beginning of the year Sony's shares have lost 16%, compared to the Nikkei index's 3.9% decline.

TV Unit Sales Up, Revenues Flat

On closer inspection, Sony's TV gains aren't as significant for the bottom line as they might seem at first glance. One telltale sign: Despite rising unit sales, LCD-related revenues this year are expected to stay flat at $1.25 billion. The figure is also 7% less than sales two years ago. Sony executives say they are working to make the division profitable. "The main risk is profitability in LCD TVs near term," Goldman Sachs (GS) analyst Yuji Fujimori wrote in a May 15 report.

The combination of higher volumes and lower revenues reflects a harsh reality in the TV business. Until now, companies like Sony, Samsung Electronics, Philips (PHG), Sharp, and Matsushita have been at the cutting edge of producing bigger TVs more efficiently. To do so, they have invested billions of dollars in sophisticated plants that can pump out the giant sheets of specialized glass that are cut to make TVs. Theoretically, a bigger glass sheet makes more TVs.

But they haven't only been competing with each other; they have also had low-cost manufacturers in Asia nipping at their heels (BusinessWeek, 2/26/07). That meant offering discounts so the low-cost brands didn't lure away all but the wealthiest of buyers. It also meant finding new ways of lowering costs so that profits didn't get decimated by rising materials and energy costs and falling TV prices, which have been sinking at a rate of roughly 25% every year. Not many companies have been successful at doing that.

Changing Buying Patterns

Now Sony, faced with an economic slowdown, is shifting gears. Instead of focusing mainly on big screens with all the bells and whistles that bring in higher profit margins, the company is making more so-called entry-level models. These are TVs with screens in the 40-inch range and smaller that use proprietary LCD panels from Sony's joint venture with Samsung (and, eventually, from a future Sharp plant), but come without top-of-the-line stereo speakers and image-processing chips that reduce picture blur. If Sony wants to be No. 1, it has to load up on extra features or cut prices, says iSuppli analyst Riddhi Patel. Sony is doing both.

The move highlights how Sony is paying closer attention to changing TV-buying patterns—and quickly adjusting its product mix. Sony execs say this shows they are shedding the traditional if-we-build-it-they-will-buy mindset, which analysts say is crucial if the company is to attain its goal of raising profitability in the core electronics division. In terms of profits, TVs and video games remain the company's Achilles heel (BusinessWeek.com, 1/31/08). "Over the past two years, we've gotten better at responding to what consumers want in a timely fashion," says Sony Chief Financial Officer Nobuyuki Oneda. "And it's starting to pay off."

That's also in sync with a shift toward high-volume sets that are 40 inches and smaller, have fewer extras, and are lower priced, says Gartner (IT) analyst Paul O'Donovan. Such TVs now account for around 85% of all LCD TVs sold globally. This explains no-name manufacturer Vizio's ability to challenge the big TV brands in the U.S.

This fiscal year, Sony expects to post overall operating profit growth of 20%, to $4.32 billion, on a 1% uptick in sales to $86.5 billion. The gains seem impressive but pale in comparison to last year's quadrupling of operating profit to $3.6 billion, thanks to a 7% rise in sales and a one-off windfall from the partial sale of the company's headquarters, a Japan-based chipmaking factory, and property in Berlin. (Even then Sony missed its own January forecast of $3.9 billion.)

Eye on the BRIC Markets?

Sony has begun selling its pared-down models through U.S. retail chain Wal-Mart (WMT) and electronics-specialty stores Best Buy (BBY) and Circuit City (CC). "A few years ago Sony executives told me they would never sell their TVs at a discount or at Wal-Marts and other big chains and, as a result, they lost out to Samsung, LG and Philips," says Gartner's O'Donovan. "If Sony sold only premium products now, their market share would shrink phenomenally."

The company may introduce the models in other markets. Oneda didn't specify where, but a natural choice would be fast-growing countries such as Brazil, Russia, India, and China. That would be exciting news for consumers who have been dying to get a Sony but couldn't afford one.

It's harder to judge whether Sony's brand image will suffer. Sony execs dismiss the idea but some analysts think the company is making a mistake. TVs are a big branding tool for consumer-electronics companies, and Sony could send the wrong message about its Bravia sets by leaving out innovative technology that has differentiated them from the rest. Automaker Toyota Motor (TM), for instance, would never add mass-market cars to its luxury Lexus lineup, says Carl Gessum, founder of London-based market researcher Premonvision. "The Bravia brand," he predicts, "will take a major hit."


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