Sony's New Video Camera Shoots for Glory

The HC3 offers consumers high def for less than $2,000 -- and is enabling the manufacturer to recapture high profitability

When Sony (SNE) unveiled the mass-market, high-definition video camera called the HC3 in late February, it staged none of the standard over-the-top glitz. Held at a tiny theater inside one of Sony's satellite offices in Tokyo, the event was so low-key it looked like a minor product launch.

But the sleepiness of the event belies the importance of cameras for Sony's bottom line. In an otherwise lackluster electronics portfolio, the unit stands out as a star performer. Although hardly anybody thinks of Sony as a camera maker, the company is No. 1 in video cameras, holding on to 40% of the $8 billion global market. The company's recent purchase of Konica Minolta Holdings' digital single-lens reflex camera operations also makes it a contender in that $13 billion market.


  Sony refused to comment on full-year earnings ahead of its Apr. 27 announcement. But Goldman Sachs (GS) estimates the digital-imaging unit's profit margins amounted to 7% and contributed more than a fifth of the electronics division's sales last fiscal year, which ended in March. That's no small feat, given that Sony's overall margins probably totaled less than 2% -- the third straight year of weak profitability. In a report issued on Apr. 10, Deutsche Securities' Yasuo Nakane called the business "one of Sony's cash cows."

The unit's rosy profit outlook represents only part of the story. Led by its executive vice-president, Yutaka Nakagawa, the camera division is key to chief exec Howard Stringer's plan to make sure Sony gizmos find their way into the digital home. The thinking goes like this: Anyone who spends roughly $1,200 for the HC3 will want a high-definition TV or projector to watch the superclear footage and a PC for editing purposes -- and a living-room console would help organize all the data.

The HC3 is a sign of Sony's new direction for another reason: It shows how the company is trying to mine the market for ideas. That might not have happened so readily in the past. But since the company fell behind in flat TVs and music players -- areas where Sony might once have dominated -- execs have questioned whether engineers should have the final word on new technologies. Stringer now says the rank-and-file should listen more intently to what consumers want, and has put that strategy front-and-center in his strategy for restoring Sony's fortunes.


  When it comes to video cameras, Japanese companies rule the roost. But while Canon (CAJ), Toshiba (TOSBF), Hitachi (HIT), and Sharp also make digital video cameras, as of now Sony is the only one offering a high-definition gizmo so small for less than $2,000. Even so, the company didn't jump in right away.

Before getting started, Sony officials wanted to know if such a product would sell. Poll results gave them an answer: Consumers were interested if it was compact and a cinch to operate. "We took that very seriously," says Sony's camcorder product planner, Noriko Shoji. "For this product, we relied more heavily on surveys."

Those consumer surveys helped shaped the debate over the HC3's design. Sony's feature-happy engineers felt consumers would appreciate a fully loaded video camera. But surveys suggested only technophiles would miss the manual controls. Fewer buttons would mean less circuitry, letting engineers make the most of the smaller imaging chips and lens. Simpler controls would also give the gizmo broader appeal, especially among travelers and parents with young kids. "Unless we appeal to them, high-definition products might not go mainstream," Shoji said.

The HC3 has gotten off to a promising start in Japan. The HC3 has topped the sales charts in digital video cameras for seven weeks straight, according to Tokyo-based market watcher BCN. In the past week alone, one in every six video cameras sold in Japan was an HC3, BCN says.


  Sony's profitability in cameras resulted in large part from in-house technologies. The company developed the CCD and ClearVid CMOS sensor chips for high-definition pictures and miniaturized the circuitry for recording and playback. It also made the touch-screen liquid-crystal display panel as well as the mini-DV cassette tapes and the memory sticks used to store data.

"Sony has an advantage, especially in technology for high-definition pictures, because it makes professional-use cameras for broadcasters," says Hiroyuki Shimizu, Gartner's principal analyst for semiconductors in Tokyo.

By shrinking the imaging chips, Sony managed to go with the HC3's small lens, says Shoji, the company's product planning chief. Procuring so many parts internally also allows Sony to cut costs without having to depend on suppliers, says John Yang, technology analyst at Standard & Poor's. And it has a firmer grip on the supply chain. "If you're getting technology from someone else and there's a shortage, you pay a premium," Yang says.


  Sony's dominant share probably won't last. Rivals are already rumored to be rushing similar products to market before the seasonal sales peak in autumn. Gartner predicts Sony's profits from high-definition video cameras will last two to three years before low-priced commodities take over the market.

Sony will eventually have to switch from cassettes to other storage devices, such as DVD recorders, hard drives, or even flash memory chips, which could further erode margins. But that won't be much of a concern for Stringer if he can apply the lessons learned from the HC3 to other gizmos -- and jazz up the Sony brand again.

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