A year into his tenure as president and COO of Sony Corp., Nobuyuki Idei has come up with a sweeping strategy for Sony's future. On Apr. 11, Idei met Business Week Editor-in-Chief Stephen B. Shepard and Tokyo Correspondent Steven V. Brull to discuss recent trends in consumer electronics, digital "convergence," and Sony's widening role on this stage. The highlights of this interview are presented here and are available only on Business Week Online.
BW: Computing, communications, and consumer electronics are "converging" into a single industry with a common technological underpinning. What is Sony's view of convergence?
IDEI: Historically, the development of the information industry has been driven by a desire for improved productivity in the office. When Sony made computers in the early 1980s, we found that the PC architecture was that of an office machine. As a result, the major applications for today's computers are word processing, spread sheets, database management, and so forth. These machines have contributed a lot to productivity of the office environment. But now, the computer is used for sound and graphic entertainment. If you look at the CD-ROM software of five years ago, more than 95% was data-, or character-based. Now most of the interesting CD-ROMs are encyclopedias or music. The CD-ROM itself has evolved and is coming closer and closer to CD entertainment.
BW: How will this affect Sony?
IDEI: By the end of this year almost all computers will have the capability to play back MPEG-1 level compressed video. That means Sony Pictures Entertainment has a great potential to sell its movie catalogs to computer users. I'm not talking about DVD (digital video disks) but video CD. Many Americans still don't understand the power of computing and the power of the video CD. So many people talk only about DVD. But DVD has too much capacity for today's computers. The DVD format will evolve this year or next. Video CD, which is MPEG-1, will evolve to DVD, which is MPEG-2.
BW: Why would a consumer want to watch a movie on a computer?
IDEI: The amount of time people spend working on a screen is very limited. The rest of the time it's idle. That's why computer games are extremely popular. So if a computer can play back pictures, people won't worry about the screen. There's no distinction between a computer monitor and your TV.
BW: Except that we are used to putting a video on a VCR.
IDEI: This is your past habit. Gradually, gradually, the computer industry and the entertainment industries are combining into one. It used to be that Compaq, HP, or IBM had nothing to do with us. We thought they were in a different world. But today I have lots of meetings with those people. We've found that we should collaborate in many respects. Because for computers that handle audio and video, they need Sony's knowhow. We also need their technology. I call this cyber-collaboration. I am meeting those people more often than [with] traditional competitors like Philips.
BW: Give me an example of what that collaboration would mean in the form of a product?
IDEI: Today's television is a passive device and many people talk about set-top converters. But the set-top converter is an accessory. The next step is to add intelligent computing power to television. I don't like the word computer. But we have to think about how the television will evolve into an active device, not a passive one. There will be a superhighway of fiber to the home--and it will probably come to this country much quicker than America. Then what happens? There will be another superhighway within the home. So we'll need a system for hardware at home. We're working toward a networked solution within the home. That will solve many problems.
BW: What will people do with intelligent TVs?
IDEI: As for what will be the most important applications, nobody has answered that question. Our researchers are doing lots of work to figure out the future applications for the television or home terminal. I don't think word processing or spreadsheets will be needed at home. Five years ago, everybody thought video-on-demand was it. Now the fashion is cyber-money or home shopping or E-mail. I think some combination of E-mail, shopping, or on-demand services will be important.
BW: Why would Hewlett-Packard or Compaq want to collaborate? They could just say: "We have the technology to recast the PC as a consumer home device on our own." To put it bluntly, why would they need Sony?
IDEI: If they believe that, that company will die. They can lead in the office but not in the home. Computer technology will be applied widely. For HP, their major business is printers. But connecting a printer to the TV is one solution to newspaper distribution. So, if you think about a printing plant in your home, then we have to think about collaboration. Today's PC is at the end of its maturity. If we go ahead, it will be in the networked environment.
BW: Everybody would agree but they would just say "we're going to change it."
IDEI: I think everybody understands the need for change.
BW: And they all understand the need for collaboration?
IDEI: I think so. The emerging world of business is borderless. Yet the definition of the computer industry and the audio-visual industry is still categorized in the very classical sense of today. But if you think 30 years out, the definition will be very different. I think this is the impact of digital technology. When people talk about digital technology they're talking only about the Internet and other very subtle things. But the impact of digital technology will be much much deeper than everybody believes. Another impact of digitalization will be a drastic change in manufacturing. Components will be squeezed into even smaller spaces.
BW: In America, many believe this will minimize Japan's advantage in precision manufacturing. Systems that had been achieved through electro-mechanical means will be executed as systems on a chip.
IDEI: This is the typical optimistic thinking of American people. Manufacturing is the weak point of American industry. If the chip gets smaller components will become more miniaturized. You cannot make everything a one-chip solution. Manufacturing technology will remain a factor for success.
BW: It's been reported that Sony will be a key partner in Microsoft's Simply Interactive PC initiative to make the PC more user-friendly. Is this true?
BW: Is your vision to add intelligent functions to audio-visual equipment unique?
IDEI: It's not unique at all. Technology is evolving, and its history is only 50 years. So there is a chance for everybody. The reason we have had success is good concentration on areas of growth. I think we should always select our focus and use our resources where the market will grow. I'm talking about A/V technology and the computer. This is the general trend. This applies to everybody. Nothing is new or unique. So I think how to find the most appropriate product line or application is very key.
BW: What are Sony's advantages against other companies. Can Sony's manufacturing, brand name, and marketing prevent high-image companies like Intel, Compaq, or HP from usurping your role?
IDEI: I think Sony's biggest asset is brand recognition itself. But brand image in the past does not automatically ensure it in the future. So the most important mission of the president of the company is to improve the brand image.
BW: Did you think about buying Apple Computer Corp.?
IDEI: No. I like Apple myself. I'm a Mac user. Also, Apple's brand and its customers are very similar to Sony's. Of course, our customers have nothing to do with each other. But we conducted a survey and found that Apple's customer base is one of the closest to our own.
Q: Gateway and other computer companies are beginning to sell PC/TVs for the living room. Are they on the right track?
IDEI: Essentially, television is collective, and passive, viewing. It's family entertainment. The PC is personal entertainment. So for PC users, there's a one-to-one relationship with the screen. But in the future, with the advent of broadband Internet that will support moving pictures, there's the possibility that the computer will be collective entertainment for the family. Still, I don't believe the computer will become a home appliance. Many Americans complain that it's very difficult to set the videotape recorder. (But that's nothing comopared to using Windows 95.) The computer can penetrate easily to one-third of households, or maybe more. But exceeding two-thirds will be difficult. Computer companies should think about how to make the computer more exciting.
BW: Larry Ellison of Oracle is releasing a $500 network computer in the fall. Will Sony also release a similar product?
IDIE: I don't think so. I think the $500 computer will definitely find a market. But unless we have a major application or a change in social infrastructure that would permit cyber-shopping or other applications, it will be very difficult to sell. I don't see any major applications.
BW: Ellison would say the application is E-mail.
IDEI: If it is only E-mail then I think we can add this function, more cheaply, to TV.
BW: Wouldn't that mean you would have to have a keyboard on the TV?
IDEI: I don't think a keyboard is anything special.
BW: What about audio as an input device for E-mail. Is this feasible in the near future?
IDEI: There are a lot of American companies working on this. I also think it is a very interesting feature.
BW: What's Sony's long-term profit outlook?
IDEI: Now our consolidated sales are about $44 billion. Geographically, revenues are well balanced between Japan, America, Europe, and the rest of the world. But America is definitely the most important market.
BW: Do you predict an increase in sales?
IDEI: We should. It's very difficult to stand still and make a profit. I think that growth is a very important factor for business.
BW: What products are most profitable for Sony?
IDEI: Margins are bigger in nonconsumer than consumer products, especially professional video products.
BW: We haven't touched upon Sony Pictures Entertainment....
IDEI: Thank God.
BW: Why do you need to control 100% of the company to enjoy the benefits of synergy?
IDEI: I'm not talking about synergy, but what we need to do is introduce a modern management system to Hollywood. Now it's a star-driven operation. You need star management, star producers, star directors, star everything. So the cost of operations increases yearly. But whereas we used to count only the box office, there are now new media windows for television--where the rest of the world is bigger than America--and the video-game business. So we should totally change the way we see Hollywood. It's an information-creating industry and depends on distribution power. Strategically, I don't want to control the contents, but creation is a harvest and managing the company with modern management techniques is necessary. If today we had a partner, we'd have two different opinions, which is difficult.
BW: But you've got your plate more than full with the electronics business. Why are you bothering with Hollywood at all?
IDEI: Sony is the only company with a leg both in hardware and software. I feel it is my mission and challenge.
BW: Is synergy your goal?
IDEI: I really don't like the word synergy but hardware and software will create new businesses together. The Walkman is the first example; compact disk players are the second example. And the PlayStation is the third. These are all from the packaged world, but the networked world is different. So the networked world is a totally new business opportunity for Hollywood. Hollywood used to be very reluctant to be a technology leader. But in the future, it should be one.
BW: Yes. But could you still have effective control even with a 70% or 60% share. You could sell a minority stake or trade it for distribution.
IDEI: We have no intention to sell.
BW: In effect, what you're saying is that there are two revolutions going on. The digitalization revolution and the new networking world will provide opportunities in the future for a company that does hardware and software in a way that wasn't possible when it was just a packaged world.
IDEI: We have [some] challenges: [One is] revitalization of hardware. This is also a challenge for Japan. Two, [we must] increase the assets of the software business. This is the challenge for America. So the future collaboration of Japan and America will [create] new businesses by combining the power of hardware and software.
BW: How do you manage all this?
IDEI: I think that localized globalization is important. We let each business unit's management work [as fast as possible]. But we also have to think about global efficiency. I don't need to control every business unit in detail. But we should share the broad strategic direction.
BW: Do you think it would pay at some point to have some senior U.S. execs such as Alan Levine of Sony Pictures or Carl Yankowski of Sony Electronics join the executive board?
IDEI: I don't see any reason why they should be on the board of the electronics business. Electronics is still 75% to 80% of our business, and we have to worry about finances, litigation, and so on. But in the future you're right. I think we should change. The goal is to have constant feedback from different areas.
BW: This is what, five years away? Ten years?
IDEI: I don't know, but I hope we can do this within the limit of my term as president, which is for another seven years.