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Sony's Indispensable Samurai

International Business: Japan

Sony's Indispensable Samurai

Ken Kutaragi's video vision keeps the company in the black

On the eve of the Japan debut of the PlayStation 2, the world's most eagerly awaited DVD-game console, master creator Ken Kutaragi was a nervous wreck. The president of Sony Computer Entertainment Inc. had just spent a sleepless night dealing with a software glitch on his company's new online order site for the PS2. Then he began to fret about problems that could thwart the launch. "What if the deliveries are delayed, or if we can't sell the machines we've prepared?" Kutaragi says.

As it turned out, there was nothing to fret about. So great was demand for the new 128-bit wonder--which can double as a DVD-movie and audio-CD player--that all 720,000 units available to retailers sold out. With online orders, the weekend tally came to nearly 1 million machines, an industry record and 10 times the number sold when the original PlayStation launched in 1994. If Sony can meet demand and release the PS2 as planned in the U.S. and Europe this fall, PS2 could sell 10 million consoles this year. Analysts say the PS2 could eventually outperform the first PlayStation, whose sales total 75 million.

But the 49-year-old Kutaragi isn't about to sit back and bask in glory. He and his engineers are already working on the PS3, which is set to roll out in four to five years. By then, Kutaragi hopes, the world will be ready for a true network appliance to serve as a conduit for digital games, movies, and music flowing into the home over broadband networks. Meantime, PS2 is nothing to sniff at. For $370, users get clear graphics that zip along at a dizzying pace and convey details of shadow and light never before offered in video games. Moreover, starting next year, PS2 owners in the U.S. will be able to plug their consoles into cable-TV networks to download games, and later engage in multi-player challenges online.

With a network future in mind, Kutaragi is rapidly making deals he hopes will create the infrastructure for a high-speed broadband network to handle games and other services for PlayStation. His goal is to establish the PlayStation as a separate brand, not part of a dedicated Sony network for the online distribution of music, movies, and TV shows. "We'd never be able to attract game developers to a Sony site," he says. "Only an open platform will work." It's an open question how it will make money, but happy investors have recently gorged on Sony Corp.'s stock.

So far, Sony has given Kutaragi freedom to make big decisions. That's remarkable, considering Sony doesn't easily grant autonomy to its chieftains. But PlayStation contributes 38% of operating income--so Sony owes Kutaragi a long leash. Initially snubbed by Sony execs as a mere toy when Kutaragi created it in 1989, the PlayStation is Sony's most profitable product ever.SEGA THREAT. Brash and confident, Kutaragi revels in the spotlight. Colleagues call him a hands-on manager uncomfortable with delegating authority. Yet his ability to create a 10-year vision in his head and implement it has brought him legendary status beyond the game industry. Hollywood directors George Lucas and Steven Spielberg seek him out to discuss the future of computer graphics. And Silicon Valley execs sound him out on chip technology to power information appliances of the future.

His competitors, though, show no signs of giving up. Sega Enterprises Ltd. is investing heavily in an online strategy, and Nintendo is developing a DVD-based machine. But the biggest threat could come from Microsoft Corp. Chairman William H. Gates III is to announce the results of a hush-hush project, code- named X-Box, on Mar. 10. Koji Furukawa, head of Kyoto-based game developer Video System, which was approached by Microsoft, says it's a $500 network device: "It'll be fun and easy to use, and aimed at the living room (page 48)."

That makes it imperative for Kutaragi to get PS2's games network going strong. Sony Computer loses money on every console it sells, so the strategy is to build market share and then reap profits through the sale of game software, a business model that was devised for the first PlayStation. While new games are being developed, fans can still play old games on the new PS2. "We need to sell a lot of content before we can start making money," says Kutaragi, "so it will take time."

The steady buildup is just part of the master plan. If history is any guide, expect Kutaragi's next vision to become reality.By Irene M. Kunii in Tokyo

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