Sony Unveils Its Answer to Apple's iTunes
Sony (SNE) is taking a page from Apple's playbook (AAPL). On Nov. 19, Sony said it plans to launch an online store selling music, movies, and books as well as other downloadable applications for mobile products. Sony's top executives didn't specify when the Internet store, tentatively called Sony Online Service, would go live or what it would look like. But the online storefront, announced at a management strategy meeting in Tokyo, is likely to bear some similarities to Apple's iTunes store and would be Sony's most ambitious attempt to link its products to its own vast library of digital content. Coming up with a software strategy for Sony has been Chairman and CEO Howard Stringer's mission since taking over in mid-2006. The adjustment hasn't been easy. Long known for the world-class designs of its flat-screen Bravia TVs, Walkman music players, and Cybershot cameras, Sony has struggled to use software to its advantage. Analysts say that creating software to sell an array of online services and content is Sony's best hope of improving its fortunes. "Sony has been too focused on hardware," says Tokai Tokyo Research Center analyst Osamu Hirose. "It has to focus on networked products [and] delivering digital entertainment to consumers." String of LossesThe global recession has pummeled Sony's businesses and left its earnings in a shambles. With consumers cutting back on electronics, Sony says it's heading for its second straight loss. This fiscal year through March 2010, Sony predicts an operating loss of $674 million, from last year's $2.6 billion loss. Sales are expected to slide 6%. Sony's core electronics business has been its biggest problem. The two worst-performing products: TVs and video games. Reversing the losses of those divisions is crucial because they account for more than a quarter of Sony's $82 billion in annual revenues. The games division is expected to post its fourth straight operating loss. On Nov. 19, Sony said both the gaming and TV businesses aren't likely to see profits until next fiscal year. Stringer also pushed back the company's overall goal for a 5% profit margin until the fiscal year ending March 2013. To help its chance of a comeback, Sony is trying to cut $3.4 billion in costs in the year through March 2010 by centralizing parts procurement, reducing inventory, and closing factories. By May 2010, it expects to have 47 plants globally, from 57 last February. "We know we have to restore profit in our game and TV business," Stringer told a news conference at Sony's headquarters. "We must deliver sustainable financial results." The thin margins of Sony's hardware business explain why the company badly needs an online strategy. Four years ago, Stringer hired Tim Schaaff, a top lieutenant of Apple CEO Steve Jobs, to lead Sony's software development efforts. After encountering strong resistance from hardware engineers, Stringer announced a management shakeup last February, appointing a younger generation of managers who share his belief in the power of software. The move has paid off. "I couldn't be happier with the pace of change," Stringer said. Sony executives refused to say how much it plans to invest in the new online service. Kazuo Hirai, executive vice-president for networked products and services, said the service would be based on Sony's PlayStation Network. The Web-based gateway for PlayStation 3 video game consoles has been Sony's most successful push into online commerce so far. Launched three years ago, the PSN has 33 million registered users and sells thousands of downloadable games, TV shows, and movies. This fiscal year, Sony expects the service to bring in $500 million in revenues, triple the previous year's total. Last month, Sony signed a deal with Netflix that lets PS3 users stream movies and other content through the gaming console. "There's some debate as to whether all PlayStation Network users would migrate to the new service," Hirai said. "We would target quite a few of them." Sony will try to differentiate its service from iTunes. One example: Users will be able to upload videos shot on camcorders, save photos taken with digital cameras, and post other digital content to their personal online accounts. That's how Google's suite of Net-based services (such as YouTube video-sharing and Picasa photo site) works. At some point down the road, Sony would consider letting independent software developers create applications for the service, much the way Apple does for its iPhone. "The new online service will be one key factor as we introduce new types of mobile products," Hirai said.
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