Business Analysis: How Sony lost the plot

Japan's consumer electronics giant squeezed by US rivals and Far-East competition

One of the big losers from the runaway success of Apple's iPod has been Sony, the company that invented portable music players.

Just how painful Sony has found it to compete in this and a dozen other consumer electronic markets was laid bare yesterday when it warned that profits had been shredded by a crash in the prices it can charge for its goods.

The Japanese giant competes in a bewildering number of markets. In the market for portable music players, Sony battles the iconic iPod; in games consoles it takes on Nintendo; while in mobile phone handsets, it has to fight the mighty Nokia.

Sony is also engaged in hand-to-hand combat with rivals in such fast-moving industries as the making of television sets, DVD players, digital cameras, microchips, computers, as well as producing content in its movies and music businesses.

It has had triumphs in its core consumer electronics business, most notably the Walkman personal stereo and PlayStation games console, but has also seen many of its markets stolen by competitors - remember the Betamax débâcle in video recorders in the 1970s and early 1980s - and now the iPod has trounced its Walkman brand.

With competition from the US and European entertainment industries and hardware manufacturers in the US and Europe, as well as low-cost companies from South Korea, Taiwan and China, there can be few businesses that compete in as many sectors and in so many countries as Sony.

The sprawling nature of Sony has led many to question whether it is pursuing a manageable business model at all, particularly as some of its businesses seem to be working against other parts - its recordable DVD players, for instance, allow piracy of its movie releases.

In recent years, the newsflow has been pretty negative as the company that symbolised the Japanese economic miracle got lost in the country's economic malaise.

Yesterday was another bad day for the lumbering giant. Sony stunned investors with a warning that operating profit for this business year - to 31 March - would be almost one-third less than its previous expectations. One of the factors it cited was sluggish performance in the iPod-dominated portable audio business.

Sony said DVD recorder prices were falling at an annual rate of 40 per cent, while flat-screen TV prices slid 20 to 30 per cent, hit by intense competition. It also pointed to weak demand for its microchips. Other businesses, including movies, music, games and financial services, were roughly in line with its plans.

Katsumi Ihara, Sony's chief financial officer, said: "Product prices have dropped more sharply than we anticipated, and we have been unable to make up for that with cost cuts."

Sony now sees a group operating profit of ¥110bn (£568m) for the 2004-05 year, down from its previous estimate of ¥160bn. It cut the sales target by 2.7 per cent to ¥7.15 trillion.

"A big problem right now is that just about anyone can make a finished product because key parts are available. That makes it difficult to differentiate your product," Mr Ihara said. "It is, therefore, important for Sony to develop products with technology and features that rivals can't copy. That would allow Sony to charge a premium and reap profits."

In 2003, Sony had been forced to put in place a huge restructuring programme after delivering dire financial results still known as the "Sony Shock". The aim was to get profit margins up to 10 per cent by March 2007, by reducing the workforce by 13 per cent and sourcing components from cheaper suppliers abroad. That year, the chief executive, Nobuyuki Idei, complained the company was "lacking a sense of urgency" seen in rivals such as South Korea's Samsung.

The margin target now appears much more challenging, with margins this year now seen at just 1.5 per cent.

One big problem area has been audio-visual products, such as televisions (where Sony was late into flat-screen technology), leaving some to question where it should be in this market at all. The Sony brand was once a badge which guaranteed quality. But now Japanese rivals such as Panasonic (owned by Matsushita), and Korean competitors such as Samsung and LG, have products of equal quality, at lower prices. In many consumer electronics markets, Sony retains little advantage but doggedly remains in them. Analysts believe it ought to concentrate on areas where it has an advantage. One obvious area is games machines, a sector where Sony has had phenomenal success.

Its PlayStation was launched in 1994. The company cleverly spotted a market for more sophisticated games for older enthusiasts, quickly brushing aside Nintendo and establishing a dominant market share, selling more than 100 million units. The PlayStation2 was launched in 2000 and has sold more than 80 million. Details of the launch of the PlayStation3 are expected to be released later this year.

Sony's film business was once a laughing stock but is now one its more reliable earners. Recent hits include Spiderman. Sony is expanding its interests through the planned acquisition of MGM, to add to its Columbia Pictures arm. In music, Sony, along with the other players, remains on the back-foot, but last year it pulled off a merger with one of the other big five, BMG.

Sony is saddled by a more expensive manufacturing base than its electronics rivals, and a chip business less advanced than other Japanese groups. Basically, it still produces too many loss-making devices.

But Sony's vision is bold. Remember that this company started buying content businesses in the late 1980s, long before the internet revolution spawned endless talk of "convergence". Sony's is a much deeper and more literal sense of convergence than the sort of meaningless rhetoric espoused in the dot.com boom.

Sony's vision is of networked homes, where its devices communicate with others and play Sony content. Like Microsoft, Sony wants to "own" your home, and digital technology makes this a possibility. If it can pull that off, Sony could yet emerge in a uniquely strong position, as king of content and gadgetry.

THE WALKMAN

Still Sony's greatest triumph, the Walkman was the first personal electronic device. Rolled out in 1979, the cassette player seemed more revolutionary than the iPod in its day, allowing consumers to take music anywhere. It has been credited with changing people's relationship to music and redefining the youth culture of the late 20th century.

Dozens of companies copied the design and the price came crashing down. Sony has sold more than 340 million Walkmans over the past 26 years. Sony, of course, now has electronic versions of the product, still branded as a Walkman, which store music either on hard-disk drives or flash memory cards. It says the advanced hard-disk version can store more songs than the iPod, and is cheaper.

THE IPOD

It is no exaggeration to say the iPod has transformed the fortunes of Apple. Aside from its attractions as an electronic device, its sleek design was seen as "cool" and it was taken up quickly by consumers.

Launched in 2001, it can store 10,000 songs. A cut-price version, which can store 1,000, was launched last summer with a £179 price tag. One of the great features was Apple's accompanying service, iTunes, which allows consumers to download music easily on to their iPods from the internet. Sony was slow in spotting the need for such as service, launching its equivalent - Connect - afterwards.

Sony was later forced to makes its models compatible with the industry standard MP3 format for song files.