Stringer, Reviving Sony, Seeks to Avoid PlayStation 3 Failure

July 31 (Bloomberg) -- Sony Corp. Chief Executive Officer Howard Stringer, who last week delivered his third consecutive quarter of better-than-expected earnings, now has to ensure the PlayStation 3 video game console isn't an expensive flop.

A bigger loss from games was among the few blemishes tainting Tokyo-based Sony's return to profit in the fiscal first quarter. The world's second-largest consumer-electronics maker predicts costs of developing the console, due for release in November, will widen losses at the division this quarter and may take five years to recoup.

The PlayStation 3 will test Sony's strategy of new devices spurring sales across the whole group because it includes the Blu-ray high-definition DVD player and a faster chip called Cell. Microsoft Corp. has used Sony's six-month delay to win market share for its Xbox 360, giving it a wider catalog of games and scope to cut prices.

``The PS3 is key to the medium-term success of this company since so much has been invested in it,'' said Yoji Takeda, who helps manage $600 million in Asian stocks at RBC Investment (Asia) Ltd. in Hong Kong. Success may be ``harder because of the pricing and the delays of the product so far.''

Sony stock rose 4.2 percent on July 28, a day after the company said net income in the latest quarter was 32.3 billion yen ($278 million), twice the 15.5 billion yen median estimate of five analysts surveyed by Bloomberg. Shares in Sony had fallen 8.9 percent between the March 15 and the earnings release because of the PlayStation 3 delay. The shares today rose 1 percent.

First Foreigner

Stringer, 64, is trying to revive Sony, the inventor of the Walkman music player, after it lost its position as the world's biggest consumer electronics maker to Matsushita Electric Industrial Co. The company also gave up its leadership in music players to Apple Computer Inc.'s iPod.

Sony's first foreign leader sought to unite the whole company in a search for hit products. The Welsh-born U.S. citizen has spotted winners before in his career, attracting comedian David Letterman to his lineup as president of CBS/Broadcasting Group between 1988 and 1995 and overseeing the first ``Spider-Man'' movie as head of Sony's U.S. operations.

In his first 13 months at Sony, he closed 9 factories, eliminated 9,600 jobs and reduced costs by 76 billion yen. He also took 44 retired executives off the payroll, sold two corporate jets, and dumped Sony's restaurant chain.

Sharper Focus

The sharper focus helped profit from the electronics division reach 47.4 billion yen, from a loss of 26.7 billion yen a year earlier. By contrast, the loss from Sony's game division widened more than fourfold to 26.8 billion yen. Sales at games fell 29 percent as the six-year-old PlayStation 2 wasn't able to hold its own against the Xbox 360.

Losses at the division for the full year will probably swell to 100 billion yen this fiscal year, and the total investment will take five years to recoup, Takao Yuhara, Sony's head of investor relations told reporters on July 28.

``Additional revenue sources from the PS3'' will justify the spending, Yuhara said. ``Users can enjoy not only games but entertainment content in high definition on the console or on line.''

Sony is hoping the console's Blu-ray DVD player will spur sales from its movie library, which includes classics such as the ``James Bond'' series. In 2005, consumers spent $22.8 billion renting and buying DVDs, according to the Los Angeles-based Digital Entertainment Group. Sales of gaming consoles, software and accessories totaled $10.5 billion last year, according to U.S. researcher NPD Group.

No Guarantee

The Blu-ray system isn't a guaranteed success. Sony and Toshiba Corp. are battling for support from studios, personal computer makers and consumers for competing formats for the new high-definition DVD players, which offer sharper, more lifelike images.

Adding to the cost of the console is a 200 billion yen investment in the Cell chip, which will make PS3 about 35 times faster than the existing model.

The PlayStation 3 will have to be a superior product because the cheapest version will cost $499, about a $100 more than the Xbox 360. Nintendo Corp.'s Wii console, whose controller can be swished like a sword to create a matching movement on the screen, will cost less than $250 when released in the fourth quarter.

``PlayStation 3 will be a huge money loser in the beginning,'' said Masafumi Oshiden, who helps look after more than $1 billion for Merrill Lynch Investment Managers Co. in Tokyo. ``I think Wii will sell better than the PS3.''

Not Enough Information

Sony's PlayStation 3 introduction in November may be hampered by fewer and less-powerful games because the company hasn't given final technical details of the new console, according to video-game publishers. THQ Inc. said in May it didn't have enough information to make a version of ``The Sopranos'' for the player.

The game division loss has so far frustrated Stringer's push for operating profit, expressed as a percentage of sales, to more than double to 5 percent. Sony's margin in the latest quarter of 2.2 percent trailed the 3 percent reported by Matsushita Electric and the 10 percent of Samsung Electronics Co.

While Sony shares have climbed 35 percent since Stringer became chief executive, they have still lost more than half their value in the past six years.

``If the PS3 doesn't sell well, Sony won't be able to recoup the investment in five years,'' said Kazuharu Miura, an analyst at Daiwa Institute of Research Ltd. And that, he says, will hurt profitability for much of the group.

To contact the reporters on this story: Young-Sam Cho in Tokyo at ycho2@bloomberg.net; Kyoko Suzuki in Tokyo at ksuzuki3@bloomberg.net

To contact the editor responsible for this story: Teo Chian Wei at cwteo@bloomberg.net