Sony With Stringer Era Waning Searches for Hit as Payoff Year Eludes Grasp

Sir Howard Stringer remembers when 2011 was going to be wonderful.

“This was the first year of the payoff,” he said, “and next year was going to be the second.” As chairman, president, and chief executive officer of Sony Corp. (6758), Stringer had 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 $2 billion, its best in three years. A batch of new products was headed for store shelves, including its first tablet computers, a compact 24-megapixel camera and a portable PlayStation player. Sony also was 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, Bloomberg Businessweek reports in its Nov. 21 issue.

“I honestly and truly thought I was going to have a year to remember,” he said 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 March 11. Stringer was in New York, having flown in from Tokyo the night before for emergency back surgery. At about 4:30 a.m., he opened a text message: An earthquake followed by a tsunami had devastated eastern Japan.

$3.1 Billion Loss

He considered returning to Tokyo but decided against it. “They didn’t need me there,” he said now, taking a sip of tea in his Fifth Avenue pied-à-terre. Stringer doesn’t speak Japanese and concluded that he’d be more hindrance than help.

On the phone with deputies, he learned that nobody from Sony was hurt and that employees had dived into rescue efforts. Workers at the company’s technology center in Sendai fashioned boats from foam shipping containers and used them to save victims and ferry supplies.

Stringer was so moved that he wrote an essay in the Wall Street Journal extolling the Japanese spirit of “fukutsu no seishin,” or “never give up.”

The earthquake and tsunami forced Sony to temporarily shutter 10 plants, disrupting the flow of Blu-ray discs, batteries, and other items. The disaster also meant a big charge against earnings -- and that $2 billion in operating profit Stringer looked forward to announcing turned into a net loss of $3.1 billion, the company’s largest deficit in 16 years.

24-Year Low

A hacking attack then 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 London riots and floods in Thailand shut component plants.

By fall, 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 $1.2 billion loss for the fiscal year ending March 31. Its share price hit a 24-year low, and its $17 billion market cap is half of what it was when Stringer became CEO.

There is more to Sony’s problems than acts of God and currency traders. The maker of the Walkman and the Trinitron hasn’t driven pop culture for years.

Sony thrived in an era of stand-alone electronics. When the Internet arose and “digital” began to mean “connected,” iPods became the center of people’s entertainment lives, then smartphones and tablets -- which Sony was late to produce. Even the quintessential Sony product -- the TV set -- has become a millstone.

Samsung, Vizio

Sony may lose as much as 675 billion yen ($8.8 billion) on TVs in the eight years through March and expects to keep losing at least into 2013. Samsung Electronics Co. and Vizio Inc., based in Irvine, California, have driven prices so low that one Sony executive said 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, including headphones, medical printers and Hollywood-grade, 3-D movie production equipment.

Jeff Loff, a senior analyst with Macquarie Capital Securities in Tokyo, said Sony sells nine 46-inch TV models in the U.S., and its mobile-phone joint venture with Ericsson AB offers more than 40 handsets.

“Can you imagine how dilutive that is to your R&D?” he said.

‘Made a Commitment’

Jim Kennedy, a Sony spokesman in New York, said the number of phones is being reduced, and notes that Suwon, South Korea-based Samsung has 15 different 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 probably will take over, according to several people interviewed for this story.

Stringer acknowledged that change has never come easily at Sony. Japanese laws and the country’s lingering culture of lifetime employment limit companies’ ability to close Japanese plants and shrink payrolls. And Sony’s very Japanese tradition of consensus building doesn’t always help it battle competitors who 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?’” Stringer said between bites of cantaloupe.

“Because I made a commitment to put Sony on this road where the company would have a safe, secure future. It would be very 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.”

Innovation Questioned

CEOs of multinationals travel a lot, and there can’t be many who log as many miles as Stringer. One recent trip took him from Tokyo to Los Angeles to London -- his wife lives in England -- to Paris to London and back to Tokyo, all in one week. A stop in Beijing was canceled.

“I do take a lot of sleeping pills,” he said.

It’s not lack of sleep, though, that irritates him when it’s suggested that Sony is not considered the innovator it once was.

“Oh, f--k, we make so much more than we used to,” he said.

He ticked off some of the products coming out this year, including binoculars that can record video and goggles for watching 3-D video games and movies.

“Don’t tell me that Sony technology isn’t great,” he said.

Ibuka, Morita

Sony sprouted from the post-World War II rubble of Japan to become the embodiment of the country’s recovery and rise as a world economic power. The company was founded by two charismatic men who could get almost anything they wanted done.

Masaru Ibuka was the restless inventor who pushed Sony’s engineers to new heights of technical prowess. The equally gadget-happy Akio Morita supplied the vision of what consumers wanted -- sometimes before consumers themselves knew it -- and transformed audio and video devices into money printers.

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.

50 Million Walkmans

“Morita was immovable,” John Nathan wrote in “Sony: The Private Life.” “He had watched teenagers on vacation in Japan and the United States lug their radios with them to the beach or into the mountains. How could they resist the opportunity to immerse themselves in their music while they played, exercised, or simply walked down the street?”

In 1979, the Sony Walkman was born.

There were missteps -- among them, the Betamax loss in the VCR wars -- but the Sony brand grew to mean products of stylish design and the highest technical quality, attributes that frequently allowed the company to get away with charging higher prices than competitors.

Sony’s revenue was $3 billion the year the Walkman appeared. Eleven years and 50 million Walkmans later, Sony had $25 billion in revenue and owned CBS Records and Columbia Pictures.

Yet it clung to its Trinitron cathode-ray-tube TVs when Sharp Corp., Samsung, and others were making flat screens the new industry standard in the early 2000s.

Apple, Nintendo

Sony eventually responded, but today both Samsung and LG Electronics Inc. (066570), based in Seoul, sell more TVs than Sony worldwide. Likewise, the company yawned when Nintendo Co., based in Kyoto, Japan, came out with its motion-sensing Wii game in 2006.

Bloomberg News later quoted Stringer as saying he saw it as a “niche game device” and not a competitor. The Wii became a smash hit and remains the best-selling game console today. The PlayStation 3 is third.

No product haunts Sony more than Apple Inc. (AAPL)’s iPod. Before Cupertino, California-based 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, Stringer said.

Steve Jobs figured it out, we figured it out, we didn’t execute,” he said. “The music guys didn’t want to see the CD go away.”

In his biography of Jobs released last month, Walter Isaacson writes that Sony had “all of the assets,” including a record company, to create its own iPod.

9,000 Layoffs

“Why did it fail?” he writes. “Partly because it was a company … organized into divisions (that word itself was ominous) 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 $851 million from $1.51 billion in 1999, and Samsung was about to surpass Sony for the first time as the most- recognizable name in consumer electronics, according to a BusinessWeek-Interbrand survey.

Stringer was running most of the company’s U.S. 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-gray curls atop his head, he hardly looked like the CEO of a Japanese company.

“I was content to stay in America,” he said.

Burt Reynolds

Sony worldwide, however, needed big changes. Its core business, consumer electronics, was losing money. The job required “someone who was very gifted in his interpersonal skills,” said Peter G. Peterson, then-senior chairman of Blackstone Group, who was advising Sony on its CEO search.

As president of CBS Broadcast Group earlier in his career, Stringer had gained a reputation as an “affable hatchet man” for meeting individually with people he fired, according to a report by the Asia Case Research Centre in Hong Kong. Friends and acquaintances described him as charming and intelligent, with a self-effacing sense of humor.

At his apartment, he said he’s reluctant to boast of his view of the reservoir at Central Park because it might suggest he’s rich. Later, in his corner office at Sony’s U.S. headquarters in midtown Manhattan, he points out nine of the 11 Emmy trophies he shared as a CBS journalist, then grins and said 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.”

President Chubachi

Stringer became chairman and CEO of Sony in June 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 even talking to each other. Most important was Sony’s electronics business, comprised of 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, the president, 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.

A ‘Content Guy’

“I didn’t know I wasn’t (in control),” Stringer said, a hint of sheepishness in his voice. “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.

Stringer 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 said, “people would roll their eyes because, ‘This is an electronics company, and content is secondary.’”

That resulted partly from longtime 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.”

PlayStation Popularity

Stringer was alarmed to learn there were software developers working on different product lines who had never met. He threw them 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 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 debuted 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 the number of visitors soared past 100,000 a minute.

Record Share Price

The company’s stock leaped 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 Electronic Entertainment Expo, the company rented Dodger Stadium in Los Angeles and set up giant tents designed to maximize views of Chavez Ravine and the downtown skyline. Gorging on sushi, mini hot dogs, Chinese food, and alcohol, 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 U.S. lieutenant, Hirai, chain-smoked in a VIP area.

In retrospect, the PlayStation system, with its elegant blending of hardware and software, might have provided Sony an early platform for competing with iTunes. Stringer himself called Kutaragi “the epitome of convergence,” and Kutaragi said he had aspired to create “a fusion of computers and entertainment.”

Renegade Image

Yet he cordoned the business off 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, telling BusinessWeek in 1999 that Sony suffered from “big-company disease.” The bosses tolerated him until the troubled launch of PlayStation 3.

Redmond, Washington-based Microsoft Corp. (MSFT)’s Xbox 360 had been out for a year when the PS3 debuted in 2006. Hirai said, “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 the Xbox 360, researcher iSuppli noted. Stringer put Hirai in charge of PlayStation. Kutaragi retired from Sony.

Reached by phone in Japan, he said he’s working on a “totally cool” project and declined to comment further. “Many of the Sony old boys may be better to speak to.”

$3.3 Billion Profit

Stringer’s moves appeared to pay off in 2008 when Sony posted an operating profit of $3.3 billion, a hair short of the goal Stringer had set when he began. By then he’d found more than $2 billion in savings through job cuts, plant closings, and supplier reductions.

A year later, Sony was back where it started, reporting a net loss of almost $1 billion. There were rumors 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, including Hirai, he called the “four musketeers.”

Two years later, Stringer said the 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 chuckled about a public remark he recently made about Sony being spared “toads and pestilence.” Still, he looked uncomfortable about what many people -- and certainly Wall Street -- may see as excuse-making.

Staying in TVs

“You can’t keep on saying that, ‘I had this and I had that,’” he said. “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...”

Stringer and Hirai vowed that Sony will stay in the TV business even though there are calls for the company to consider dumping it. Stringer talks about Sony’s profusion of products as if it were a badge of honor or a competitive advantage.

“Why don’t you sell?” Stringer asked 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 said Sony lowered TV sales targets and will continue shedding 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 said 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,” Hirai said.

Sony Entertainment Network

Sony hopes to get its cool back with ultralow-power, glasses-free, 3-D sets that double today’s resolution, though they’re not expected to be mainstream until at least 2013.

In October, Sony bought Stockholm-based Ericsson’s share in the companies’ mobile-phone joint venture. The rapidly growing smartphone market presents ample opportunity since Sony is far behind Samsung and Apple with virtually no presence in the U.S. Sony must rely on Google to continue to improve the Android operating system that underpins Sony’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 all of its devices with all of 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, including “The Amazing Spider-Man” and “Arthur Christmas.”

Rowing Together

“The plan is to bring everything under the Sony Entertainment Network umbrella,” Hirai said, including the PlayStation Network and its 45 million unique users. He added 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. 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 said.

He and Stringer say everyone at Sony is now rowing 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 said it made him briefly unpopular.

‘Believe in the Vision’

Loff, the Macquarie analyst, wondered 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 said.

Loff started covering Sony earlier this year, about 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 said.

As summer went on, the 34-year-old analyst became more inclined to agree with the sales staff. His reports got crankier. In an Aug. 30 report titled “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 is a life insurance company with a money-losing TV business,” Loff said.

Informed of this analysis, Stringer shrugged and said, “Yeah, it’s been a big moneymaker.”

Breakfast over, Stringer is headed to a memorial service for former “60 Minutes” commentator Andy Rooney, then to the Sony offices in Midtown Manhattan. Rumors have again floated that his resignation might be imminent.

Not true, Stringer said.

“I’m still here because I love the place,” he said. “I completely believe in the vision and I think we’re getting there. But you can’t expect people to be patient.”

To contact the reporters on this story: Bryan Gruley in Chicago at bgruley@bloomberg.net; Cliff Edwards in San Francisco at cedwards28@bloomberg.net

To contact the editor responsible for this story: Jim Aley at jaley@bloomberg.net

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