Sony: All Chewed Up

The once-mighty Japanese giant has been struggling ever since connectivity became king in consumer electronics over a decade ago. Last year's tsunami didn't help either and now time is running out for charismatic boss Sir Howard Stringer.

by Bryan Gruley and Cliff Edwards
Last Updated: 09 Oct 2013

Sir Howard Stringer remembers when 2011 was going to be wonderful. 'This was the first year of the payoff,' he says, 'and next year (2012) was going to be the second'. As chairman, president and CEO of Sony, he'd 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 $2bn, its best in three years.

A batch of new products was heading 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 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 11 March. Stringer was in New York, having flown in from Tokyo the night before for emergency back surgery. Around 4.30am, 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, taking a sip of tea in his Fifth Avenue pied-a-terre. Stringer doesn't speak Japanese and thought he'd be more hindrance than help. On the phone with deputies, he learned that nobody from Sony was hurt and that employees had made rescue efforts. Workers at the company's technology centre in Sendai fashioned boats from foam shipping containers and used them to save victims and to ferry supplies. Stringer was so moved that he wrote an essay in the Wall Street Journal extolling the Japanese spirit of fukutsu no seishin ('never give up').

The disaster forced Sony to shut 10 plants temporarily, disrupting the flow of Blu-ray discs, batteries and other items. It also meant a big charge against earnings - and that the $2bn in operating profit that Stringer looked forward to announcing turned into a net loss of $3.1bn, 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 the London riots, and floods in Thailand shut component plants.

By autumn, 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 $1.2bn loss for the fiscal year to March 2012. Its share price at the end of the year hit a 24-year low; its $17bn market cap is half what it was when Stringer became CEO.

But there's more to Sony's problems than acts of God and currency traders. The maker of the Walkman and the Trinitron hasn't led pop culture for years. Sony thrived in the era of stand-alone electronics. When the internet arose and digital began to mean connected, iPods became the centre of people's entertainment lives, then smartphones and tablets - which Sony was late to produce. Even that quintessential Sony product, the TV set, has become a millstone. Sony has lost nearly $8.5bn 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 and 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 46in TV models in the US, 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 offers 15 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. Stringer acknowledges that change has never come easily at Sony. Japanese laws and the country's lingering culture of lifetime employment limit the ability of Japanese firms to close plants and shed jobs. And Sony's Japanese tradition of consensus-building doesn't help it battle competitors which 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. 'Because I made a commitment to put Sony on this road where the company would have a safe, secure future. It would be 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'.

When it's suggested that Sony is not thought of as the innovator it once was, his riposte is vigorous. 'Oh, fuck, 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 its recovery and rise as a world economic power. The company was founded by Masaru Ibuka, a restless inventor who pushed Sony's engineers to new heights of technical prowess, and the equally gadget-happy Akio Morita, who supplied the vision of what consumers wanted and transformed audio and video devices into moneyspinners.

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. He had watched teenagers on vacation in Japan and the US lugging their radios to the beach or into the mountains. In 1979, the Sony Walkman was born.

There were missteps - among them, Betamax losing in the VCR wars - but the Sony brand grew to encompass products of stylish design and the highest technical quality, often at higher prices than rival products. Sony's revenue was $3bn the year the Walkman appeared. Eleven years and 50 million Walkmans later, Sony had $25bn in revenue and owned CBS Records and Columbia Pictures.

The company behaved as if its superiority could never be challenged. So it clung to its Trinitron cathode-ray TVs when Sharp, Samsung and others were making flat screens in the early 2000s. Today, Samsung and LG both sell more TVs worldwide than Sony. Likewise, the company yawned when Nintendo brought out its motion-sensing Wii game in 2006. At the time, Stringer said he saw it as a 'niche game device' but not as a competitor. The Wii was a smash hit and is today the best-selling game console; Sony's PlayStation 3 is third.

No product haunts Sony more than the 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, says Stringer. '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'.

'Why did it fail?' Walter Isaacson writes in his biography of Jobs. 'Partly because it was a company ... organised into divisions 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 $851m from $1.51bn in 1999, and Samsung was about to surpass Sony as the most recognisable brand name in consumer electronics, according to a survey by BusinessWeek-Interbrand. Stringer was running most of the company's US 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-grey curls atop his head, he hardly looked like the CEO of a Japanese company. 'I was content to stay in America', he says.

But Sony worldwide needed big changes. Its core business, consumer electronics, was losing money. It was advised that the job required 'someone who was very gifted in his interpersonal skills'. As president of CBS, Stringer had gained a reputation as an 'affable hatchet man'. Friends and acquaintances describe him as charming and intelligent, with a self-effacing sense of humour.

Later, in his corner office at Sony's US headquarters in midtown Manhattan, he points out nine 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'.

He became chairman and CEO of Sony in 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 weren't even talking to each other. Most important was Sony's electronics business, comprising 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 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, sheepishly. '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 in doing so.

He 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"'. There had been long-time 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 met. He threw 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 in order 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 had been launched 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 visitor numbers soared past 100,000 a minute. Its 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 firm rented Dodger Stadium in Los Angeles and set up giant tents designed to maximise 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 US lieutenant, Hirai, chain-smoked in a VIP area.

In retrospect, the PlayStation system, with its elegant blending of hardware and software, might have given 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 off the business 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, saying in 1999 that Sony suffers from 'big-company disease'. The bosses tolerated him until the troubled launch of PlayStation 3.

Microsoft's 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 left Sony. Reached by phone in Japan, he says he's working on a 'totally cool' project, but declines to comment further.

Stringer's moves seemed to pay off in 2008, when Sony posted an operating profit of $3.3bn, a hair short of the goal Stringer had set when he began. By then he'd found more than $2bn in savings through job cuts, plant closures and supplier reductions. A year later, Sony was back where it started, reporting a net loss of nearly $1bn. There were rumours 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', who included Hirai.

Stringer now 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: "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 dump it. Stringer talks about Sony's profusion of products as if it were a badge of honour 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'.

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.

Last October, Sony bought Ericsson's share in the companies' mobile phone joint-venture. The rapidly growing smartphone market presents ample opportunity, as Sony is far behind Samsung and Apple with virtually no presence in the US. Sony must rely on Google to continue to improve the Android operating system that underpins the Japanese company'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 its range of devices with all 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 (Stringer is expected initially to relinquish the role of president).

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 marching 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.

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 in early 2011, 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 the summer went on, the analyst became more inclined to agree with the sales staff. His reports got more negative. In an August review entitled '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', says Loff, '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 heading for a memorial service for CBS commentator Andy Rooney, then to the Sony offices in midtown. Rumours 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'.

WHAT A DIFFERENCE THREE YEARS MAKE

2008-2011 change

Total sales: Yen8.9trn - Yen7.2trn -29%
Net income: Yen369.4bn - Yen259.9bn -170%
Share price: Yen6,000 - Yen1,400 -77%

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