Forget the Walkman, Sony Should Just Entertain
I was in high school when Sony ruled the electronics world. In Moscow in the 1980s and 1990s, owning a Sony TV, videocassette recorder (remember those?) or even a Walkman tape player was a sign of wealth and status. The famed Japanese quality, sleek design and, yes, competent sub-brand management all contributed to Sony's prestige. At Sony, the average employee is 36 years old, so there are plenty of people who still remember that era.
Sony needs to recognize that it's over.
Perhaps symbolically, on a recent earnings call Sony chief executive Kazuo Hirai kept having trouble hearing a question about whether trying to revive the company's flagging electronics business was worth it after almost a decade of failure. Hirai had just agreed to give up Sony's personal-computer business to a turnaround consortium and spin off TV set production into a separate, Sony-owned business. Still, he is holding on to other hardware operations, such as mobile phones and cameras. It is death by a thousand cuts.
In the three months through December, mobile products and communications subtracted $120 million from Sony's operating income. The devices segment cost $226 million. By far the biggest positive contributions to operating income came from Sony's banking and insurance business ($455 million), movie production ($231 million) and music ($207 million). Activist investor Daniel Loeb is not happy with the way the entertainment businesses are run, but they are consistently profitable, and the brands they have at their disposal -- the Spiderman movie franchise, Lady Gaga, Miley Cyrus, to name just a few -- are probably more powerful than the Sony brand itself. Admit it, you did not know Miley was part of the Japanese company's roster.
Sony is good at producing and selling digital content. Hirai sees the content and electronics businesses as part of an ecosystem, and at least one partner has used that perception to his own ends. Ericsson chief executive Hans Vestberg sold Sony the Swedish company's half of their mobile handset joint venture in 2011, arguing the business would work better at Sony because phones could be used as a content delivery channel. The idea is looking increasingly far-fetched.
Hardware in general is turning into a commodity. Korean and Chinese producers have honed their supply chains and production processes to such an extent in recent years that competing with them is increasingly pointless, even at the high end of the market. Samsung, the world's biggest TV producer, runs this business with a 3 percent operating margin. There is no point in owning production facilities. At Apple, whose hardware is firmly associated with its brand in customers' minds, 58 percent of the cost of goods sold goes to paying Hon Hai Precision Industry of Taiwan, also known as Foxconn, to assemble mobile devices.
Phones, televisions and tablets made by Korean and Chinese manufacturers are perfectly capable of delivering any kind of content to consumers. Only Apple succeeded in creating a proprietary universe by refusing to license its operating systems to hardware producers. Sony's mobile phones run Android, an open system that is available to everyone. There is no exclusivity on its other devices, either. Vaio PCs were also a means for content delivery, but Sony is finally taking the plunge and shedding the division, so why not all the other devices? The growing mobile handset sales that make Hirai proud are deceptive. Google's recent sale of Motorola Mobility to China's Lenovo, which keeps picking up hardware production operations from formerly established players, shows where the mobile hardware business is headed.
The only ecosystem Sony really owns is the videogame platform, PlayStation, where Sony indeed locks in customers with proprietary software. Not coincidentally, the game console business is the only hardware-related segment in which Microsoft, another "intangible" product powerhouse, excels.
Sony should take the lead from Philips, the Dutch group which invented the CD and made the first disc players. Under chief executive Frans van Houten, Phitips exited the consumer electronics market, including segments that were still profitable for the company, and even dropped the word "Electronics" from its name. The strategy is paying off after a period of painful job cuts.
In his heart of hearts, Hirai must know he is fighting a losing battle in holding on to the legacy electronics business. He is gradually taking steps in the right direction. Openly acknowledging a shift to a content and services model, however, would help accelerate the process and make some long-overdue decisions.
(Leonid Bershidsky writes on Russia, Europe and technology for Bloomberg View. Follow him on .)
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