Tech

Tim Culpan is a technology columnist for Bloomberg Gadfly. He previously covered technology for Bloomberg News.

An upgrade to Sony Corp.'s credit rating highlights the company's gradual move away from a hardware-focused business toward software and services.

Late on Tuesday, Moody's Japan K.K. returned the Japanese company's investment grade after a gap of almost three years, noting that the move to Baa3 shows Sony's financial profile "has been dramatically repaired following the extensive decline of the past several years." In its note explaining the upgrade, senior analyst Masako Kuwahara made clear where Moody's thinks Sony's future lies:

"The company's strategy of focusing on strengthening its recurring revenue, such as network and subscription revenue, supports the more cyclical aspects of the Game & Network Services segment and will contribute towards stabilizing earnings and cash flows over the medium and longer term."

Gadfly said as much back in July when, during the height of Pokemon mania, I advised readers to keep an eye on Sony's games division and "never discount the value of long-term customer loyalty for the excitement of a short-term craze."

Confidence
Within a year of its downgrade to junk at Moody's, Sony equity investors shows their love for the stock
Source: Bloomberg

Investors -- both equity and debt -- seem confident that CEO Kazuo Hirai has put Sony on the right track. It helps that Kaz's background is in entertainment and gaming, and he is thus less wedded to the company's hardware legacy, allowing him to chase software (games) and services (the network). I have also argued that he should consider selling the devices business -- which makes camera modules -- since he's turned that from a winner into a loser.

Safety
The cost of insuring Sony's five-year notes through credit default swaps has fallen as debt investors show more faith in its turnaround plan
Source: Bloomberg

Yet there are a few ways that the wheels can fall off. Sony has a clear lead in virtual reality, thanks to its ownership of both hardware and software platforms, and its decades-long relationships with developers and gamers. At the same time, there are pitfalls on the macro and micro level: The future of VR isn't certain, while hacks of Sony's gaming network and the corporation itself are examples of how a reputation can be damaged with a few keystrokes.

After expending significant ink praising Sony, Moody's ended with an important caveat: Failure to maintain adequate earnings momentum in the games and network services segment would be likely to put "considerable renewed pressure" on the ratings.

That's a reminder to Kaz that credit ratings are no game.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tim Culpan in Taipei at tculpan1@bloomberg.net

To contact the editor responsible for this story:
Matthew Brooker at mbrooker1@bloomberg.net