Can Sony's Kutaragi Score Big?

Once pegged as CEO material, the outspoken exec was bounced back to the games unit. Now his fortunes are tied to PlayStation 3

Things have been unusually quiet for Ken Kutaragi lately. This time last year, the genius behind Sony's (SNE) hot-selling PlayStation video-game consoles seemed a shoo-in for the corner office once Chairman and CEO Nobuyuki Idei moved on. After creating the PlayStation in 1994 and building it into a multibillion-dollar profit machine, Kutaragi had been put in charge of the struggling consumer-electronics unit in 2003. The 55-year-old Kutaragi, a former engineer and technophile, was seen as the man to restore the magic to Sony's gizmos.

Then in a management shakeup last March, Kutaragi was passed over for the top job -- and demoted. Idei, who hand-picked Welshman Howard Stringer to run the $60 billion electronics and entertainment giant, removed Kutaragi from the board and sent him back to his old job as head of Sony Computer Entertainment, the games division.

The move seemed like an attempt to teach a lesson to Kutaragi, whose outspokenness and blunt public criticisms of other Sony execs stood out in a corporate culture where consensus ruled. Friends and ex-colleagues say Kutaragi was dispirited. "I know that Kutaragi told Stringer that he wanted to quit," says one former Sony exec who spoke on condition of anonymity.


  But don't think Kutaragi is shopping around his resume. As the man in charge of getting Sony's latest game console, PlayStation 3, to store shelves in time for a launch this spring, he has a chance to redeem himself.

Kutaragi's talent of staying ahead of market trends is already having an effect. Six years ago, he had the foresight to schedule the PS3's release to coincide with two new technologies -- the high-definition Blu-ray DVD player and a new multimedia chip called the Cell -- that will make it far more than an ordinary gaming machine (see BW Online, 2/7/06, "The Cell Chip's Other Life".

Sony is counting on the PS3 to become the control hub of the digital home. It will store and manage digital recordings of Seinfeld, Sopranos, or Curb Your Enthusiasm episodes, keep digital photos of a trip to Mexico, and play a Beck song or a Spider-man movie sequel downloaded from the Net. The buzz the machine is expected to generate among teens and 20-somethings alone has prompted Hollywood to make many movies available in Sony's new Blu-ray format, one of two formats competing to become the standard in high-definition DVD players.

And if software developers can harness the power of the ultra-fast Cell chip, it will mean lifelike graphics that will allow, say, an image of a shattering window to change every time you play a game. "A basketball or a baseball or a football will all break a window in different ways," says Deutsche Securities analyst Takashi Oya.


  Nobody has proven better at marketing game machines than Kutaragi. His PlayStation and PlayStation 2 are the two hottest-selling game consoles ever, exceeding sales of 100 million units each. And while the games unit has typically racked up losses from the huge startup costs of launching each new generation console, it has always bounced back to steady profits once the royalties earned from game software sales start to flow in.

Last fiscal year, games made up only 10% of Sony's $60 billion in sales but accounted for around 38% of the company's operating profit of $560 million. If Kutaragi can come up with another hit console, Stringer & Co. might feel comfortable handing him a bigger role in shaping Sony's future.

But if it were just about profits, Kutaragi wouldn't have fallen out of favor in the first place. While his friends and ex-colleagues praise him as a visionary and a savvy businessman, they also admit that he isn't a natural communicator. He has little patience for anyone who doesn't share his grasp of technology or disagrees with his views, and his micromanaging can grate on engineers' nerves.


  "Kutaragi nitpicks about the smallest of details," says Takeshi Natsuno, senior vice-president at mobile operator NTT DoCoMo (DCM), and a friend of Kutaragi. "Most engineers aren't used to that. But if you want a breakthrough product, you need someone like him."

Before his demotion, Kutaragi had publicly berated Sony execs for the company's go-it-alone strategy on everything from digital music players to movies. He lobbied hard to get rid of copyright protections that made shuffling digital content between gizmos a headache. Privately, he expressed frustration at the internal resistance to his efforts to reform the consumer-electronics division.

And since he was still responsible for games, that resistance made the task of rolling out two key game initiatives -- the PS3 and the PlayStation Portable, the company's first handheld console, launched in December, 2004 -- all the more taxing. "I personally believe he was given too much to do," says Richard Doherty, research director at the Envisioneering Group in New York. Adds DoCoMo's Natsuno: "At one point, he mentioned what a tough time he was having."


  In recent months, Kutaragi has adopted a low profile. He doesn't talk about the company's management changes to outsiders, avoids interviews, and restricts his public remarks to game-related matters. Sony insiders say Kutaragi may be trying not to deflect attention from Stringer, and they credit Stringer with reassuring Kutaragi of his crucial role on the new management team.

At a speech during a tech conference in Tokyo in December, Kutaragi explained the PS3's lifelike gaming graphics and the speed of the Cell chip, then strode off the stage without taking questions. It could be a sign that Sony's one-time bad boy has found an ally in Stringer and stopped trying to fight the system.

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