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Can Sony's New Walkman Run?

By Kenji Hall Months before Sony (SNE) was ready to unveil its new portable music player, it had to settle a fierce internal debate. Though the Japanese electronics and entertainment giant had invented the idea of portable music in 1979 with its Walkman cassette-tape players, Sony's digital-era gadgets were getting creamed by Apple's (AAPL) iPod. Sony execs couldn't help but wonder: Was it time to retire the Walkman brand for something fresher?

"The Walkman's image was from decades ago, when it played tapes," says Koichiro Tsujino, co-president of Connect, Sony's digital audio business. "Inside the company, some felt we should change the name." But Tsujino was against walking away from a brand that had helped Sony sell an estimated 350 million gizmos worldwide.

In the end, his view prevailed. On Sept. 8, Sony took the wraps off a new lineup of Walkman digital-music players. The sleek, oval-shaped device with a built-in hard drive and storage space for up to 13,000 songs represents the company's latest foray into the iPod-dominated market.

LOST EDGE. But Sony may remain a bit player in the market because it's a latecomer. "It's really in catch-up mode and will be for several years," says analyst Paul O'Donovan of Gartner Dataquest, in London.

Sony has a lot riding on the Walkman's success. Since the iPod was launched in 2001, Sony's revenue from audio players, such as CD and minidisk players, has fallen steadily. That's as potent a symbol as any that Sony's core consumer-electronics division -- which at one time had the industry abuzz with cool designs and innovative technology -- has lost its edge. Now with newly appointed Chief Executive Howard Stringer preparing to announce a turnaround plan later this month, Sony is focusing on key products to boost profits in its core consumer-electronics and music divisions, while restoring luster to its brand.

Given Sony's late start, it won't be easy creating buzz for the new Walkman. The Tokyo company didn't come out with its first Network Walkman digital music players until July, 2004 -- nearly three years after Apple's iPod. And while last year's Walkman models have sold well in Japan and Europe, they haven't eroded the iPod's market share much. In 2004, Sony shipped about 850,000 Walkmans to retailers worldwide, according to Deutsche Securities in Japan.

LIFE SUPPORT. This year, Sony is targeting global sales of around 4.5 million Walkmans, including the latest models, which will hit stores in Japan on Nov. 19 and in other markets later this year. That's a sliver of a market that's enjoying double-digit annual growth. Research firm iSuppli predicts the market for digital-music players will expand to 57 million this year from almost 37 million last year. By 2009, it may surge to 132 million. Apple remains the leader, selling more than 22 million iPods worldwide since 2001. "In digital audio players, Apple's brand is just far stronger than Sony's," says Yoshihisa Toyosaki, who heads iSuppli's office in Tokyo.

The Walkman hasn't been Sony's only weak spot lately. The one-time king of electronics has become an industry laggard after years of trying to extend the life of older technologies, such as CDs and cathode-ray-tube TVs, even as rivals were moving on to new digital music players and flat-screen TVs. On July 28, Sony said it expects to earn just $270 million this fiscal year, down from an earlier forecast of $1.4 billion.

Despite the grim profit forecast, Sony finally has a music player that wins points for design. The first-generation digital Walkman had a square shape and understated looks. The newer version is wrapped in a flashy, translucent case with a readout that appears to float inside an outer shell. It comes in two sizes: a wallet-size version that weighs 190 grams, boasts a 20-gigabyte hard drive, and will cost about $300 in Japan.

A CONTENT STORY. A lighter model weighs 110 grams and contains 6 gigabytes of memory -- Sony's answer to the pencil-thin iPod Nano, which was announced hours earlier and will hold up to 4 gigabytes of music. Both Walkmans will keep track of the 100 most-played songs and automatically shuffle them. It can also link tunes of similar genre. "It's a machine with an IQ," says Tsujino. "Raising that IQ is a direction we want to explore."

Those models will complement a $200, 2-gigabyte, cigarette lighter-shaped player released months earlier that doesn't have a screen, relies on flash memory chips, and has helped Sony stay competitive at home. In Japan, Sony's Walkman has a 19% share, compared with 37% for Apple, according to industry researcher BCN.

Still, analysts say the key to the Walkman's worldwide success will be Sony's digital content. Apple's iTunes Music Store has a huge database of downloadable songs and user-friendly software that few others can match. It also recently added a podcasting directory so people can listen to other types of audio.

SHREWD MOVE. Sony previously faced criticism for making its music players in a format that was incompatible with other downloadable music. It now says it will start a service called Connect that will charge customers per song, but it has yet to offer details about the service, including whether the Walkmans will play nonmusic files. The longer Sony waits, the better the chance that rivals -- including such online music pros as Napster, which is joining satellite-radio provider XM Satellite Radio Holdings (XMSR) to start a new service later this year -- will get a jump in an already crowded field.

Sony's move to preserve the Walkman name may have been its shrewdest. Though audio players account for a puny slice of Sony's profit, Walkmans play an outsize role in Sony's music business. Over the years, many audiophiles have remained loyal to Sony because of its history of developing newfangled gizmos to play music under the longstanding Walkman brand.

"There are people who still think 'portable music: Walkman. Sony,'" says O'Donovan, of Gartner Dataquest. "There's a perception among some: Sony did it first, so they're the only ones who can do it well." If only Sony could make that perception stick.

Hall is a correspondent in BusinessWeek's Tokyo bureau

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