Sony stops bowing to tradition and promises to be 'cool again'

The genius got out of the bottle at the electronics giant, so it's done the very un-Japanese thing of putting a foreigner in charge, as Benjamin Friedland reports from Tokyo

Sony's biggest problem, say some insiders, is that its founder, Akio Morita, was the only genius who ever worked there. As the architect of Japan's most famous corporation - and helmsman of the world's most successful electronics firm - Morita occasionally dropped pearls of wisdom that rang with the arrogance of Sony's triumph and of Japan in its 1980s bubble heyday. "We don't ask consumers what they want. They don't know," he once said. "Instead we apply our brainpower to what they need, and will want, and make sure we're there, ready."

Sony's biggest problem, say some insiders, is that its founder, Akio Morita, was the only genius who ever worked there. As the architect of Japan's most famous corporation - and helmsman of the world's most successful electronics firm - Morita occasionally dropped pearls of wisdom that rang with the arrogance of Sony's triumph and of Japan in its 1980s bubble heyday. "We don't ask consumers what they want. They don't know," he once said. "Instead we apply our brainpower to what they need, and will want, and make sure we're there, ready."

Now, decades on and with Sir How- ard Stringer, a Welsh-born American, at the head of Sony, those words have returned to haunt Morita's battered giant. Consumers, it seems, still have no idea what they want until it is on the shelves, but it is decreasingly Sony whose brainpower dictates what those products will be.

Morita's ethos of competitive creativity is probably still intact somewhere - at Apple perhaps - but Sony's management is stodgy and the follow-through on ideas has recently been a mess. Readiness, say the investors who have watched Sony's stock lose nearly three quarters of its value in three years, is not a word easily associated with the company.

The company may have sold 1.2 million units of the PlayStation Portable (PSP) in less than two months, and just launched a sexy MP3 player to rival Apple's iPod, but the background picture on the core electronics business has been dicey since 1999.

Sony technology is good but no longer has that edge which means it is "talked about" in the digital era. Rivals like Sharp, for example, have stolen that edge in flat-screen TVs, while Canon and Casio dominate digital cameras. Sir Howard's first declaration of duty was the need to "make Sony cool again".

As analysts have pointed out, the promotion of Sir Howard from Sony's US operations formed part of a triple-headed surprise: the sudden departure of Sony's long-time leader, Nobuyuki Idei; the appointment of a foreigner in his place; and the demotion of the PlayStation visionary, Ken Kutaragi.

In Tokyo, as elsewhere, much has been made of the symbolic non-Japaneseness of the firm's new president. But Sir Howard's inability to speak Japanese, and his failure to bow deeply at press conferences, are the least critical aspects of the shake-up. Sony has long been the most kokusaiteki, or cosmopolitan, of all Japanese companies and the much-praised presence of Frenchman Carlos Ghosn at the head of Nissan has somewhat numbed the nationalistic smarting over foreign chief executives.

The fact that Sir Howard has only worked at Sony for seven years carries far greater shock value: it goes against a Japanese corporate tradition that places immense value on seniority and steady promotion. By demonstrating a contempt for all this, Sony could be trying to install a meritocracy based on the talent for producing new ideas.

If others follow the example, and the company leads the destruction of the seniority-based promotion system in Japan, the effect of Sir Howard's appointment will be immense.

Another critical question, and one that still baffles Japan, is why Idei decided to hand over the keys at this stage. Clearly, the former president and group chief executive has done plenty that would, in other corporate cultures, have forced his resignation some time ago.

The so-called "Sony Shock" profits warning of 2003 was a grim moment, but the rot had set in much earlier. Under Idei's stewardship, and with the electronics business being held above water by the film and games operations, Sony lost the title of most valuable technology company in the world. To make the embarrassment all the more wretched, the title did not pass to Matsushita or Mitsubishi, but to the arch-enemy in South Korea, Samsung.

Last year, Idei had hoped to put everything right with "Transformation 60" - a bold restructuring programme that would, supposedly, return Sony to robust health in time for its 60th birthday in 2006. The plan involved more than 20,000 job cuts andother streamlining measures. The most significant of these was the decision to discontinue its cathode ray tube TV manufacturing business in Japan.

Normally, a Japanese chief would be expected to sit out such a programme until it has run its course, then put its success or failure at the centre of a resignation speech. In this context, Idei's early departure has prompted several theories.

One is that he was being punished for not inventing the iPod - ie by running Sony in such a way that it did not assume immediate leadership of the prevailing trend in portable music. Another theory is that, one year into Transformation 60, it has already become clear to the board that the scheme will fail. Sir Howard was quick to suggest that the programme's margin target of 10 per cent is unlikely to be met.

A third theory is that an irreconcilable split had emerged between Idei and Kutaragi, the brilliant, geeky inventor of the PlayStation games consoles credited with saving Sony in the mid 1990s, and the man previously tipped to run the show after Idei's retirement. Insiders believe the company had finally recognised that the Idei/Kutaragi partnership was too unstable to save the company, and ended it before further damage was done.

Not only was Kutaragi demoted from Sony's main board last week, but he was stripped of a role that gave him control of the overall electronics business.

Idei pointedly remarked that Ryoji Chubachi, the man who will replace Kutaragi in the top rank of management, was "a good listener". However, many analysts believe that Kutaragi's return to running just Sony Computer Entertainment (SCE) creates the potential for greater crisis.

Despite assurances from Sir Howard that Kutaragi remains highly valued, the quirky engineer was a strange choice of whipping boy given that the PSP is on the verge of a global launch and the PlayStation3 is expected later this year. The PS2 may have massively outsold Microsoft's Xbox, but the battle for the next generation of games machines is not won yet. If Kutaragi is poached by Bill Gates, what is currently Sony's most profitable division will look vulnerable.

Some speculate that the scene may be being set for a flotation of SCE, a move that would also be risky. SCE is, along with Sony Corp, IBM and Toshiba, one of the four patent-holders of The Cell, a supercomputer chip that is expected to form the core of many future devices from Sony.

To cede any control of that chip would place the parent company in a weakened position if, for example, the electronics division planned to combine the functions of a games machine with those of a TV.

Analysts have pointed out that as someone who has mostly run Sony's content operations, Sir Howard's ability to repair the core electronics business is probably limited. He has regularly stated his frustration with the Japanese focus on Sony's hardware operations and investors' tendency to ignore the film and music sides despite their profitability.

But if he has been chosen for anything, Sir Howard is most probably in place in the hope he will resolve the true conundrum that has brought Sony to its knees: how to marry the conflicting needs of the content and hardware divisions.

In that light, the timing of last week's boardroom upheaval is crucial. This is not because Sony has lost the battle for MP3 players or digital cameras, but because it knows the real war is only just coming.

Sony is about to tout the Blu-Ray disc as the global medium for all the content it produces, but in this do-or-die endeavour it has a direct competitor in Toshiba's HD-DVD technology. The Blu-Ray consortium has some heavyweight names, such as Dell and Hewlett-Packard, behind it. And, as the company learned from its Betamax debacle, hardware showdowns are only ever won via ruthless content management.

Sony may not have geniuses at the helm any more, but perhaps the company is still spiritually listening to Akio Morita when he famously told his board: "Don't be afraid to make a mistake. But make sure you don't make the same mistake twice."

GOOD CALL: SWEDISH CONNECTION BRIGHTENS THE OUTLOOK

When Sir Howard Stringer starts to examine in detail all the problems at Sony, he will at least take comfort from one corner of the electronics giant's empire.

After a troubled start, Sony's joint venture with the Swedish telecoms company Ericsson is finally paying handsome dividends.

Last year Sony Ericsson broke into profit, announcing a net income of €316m (£221m) on sales of £6.5bn. The venture has finally established itself as a desirable brand in the fickle mobile market.

It hasn't been an easy journey. Launched in April 2001, the company boasted that it would overtake Nokia as the world's number one handset maker by 2006. But merging the cultures and management of the Swedish and Japanese groups proved harder than anyone had thought, and for the first couple of years the handsets that Sony Ericsson produced were, at best, ordinary. The turning point came with the launch of the T610 model - the first phone to be designed from scratch by the joint venture. In the final quarter of 2004, Sony Ericsson shifted 12.6 million phones ,making it the world's number six handset maker. It has now abandoned its aim of overtaking Nokia (which sold 66.1 million in the same quarter) and instead is focusing on making high-quality phones that sell at a price to match.

Miles Flint, president of Sony Ericsson, says: "If we were to compete with the really big players then we would have to go into volume manufacturing in a way that is not feasible. We would lose a huge amount of money. Instead, our aim is to make fun and attractive phones."

Sony Ericsson has made inroads in the camera phone market. The next step will come this summer when it launches the W800 (pictured), a phone that lets users store and play up to 150 MP3 music tracks. Critically, it will carry the Walkman branding, which dates back to 1979 when Sony's ground- breaking personal cassette player was launched.

Ben Wood, an analyst at technology research firm Garter, says: "It has taken a long time, but Sony Ericsson is now delivering on its promises. However, the company will face stiff competition when it moves into music. Motorola has a venture with Apple and Nokia is working with Microsoft."

But for now at least Sir Howard can tick Sony Ericsson as a success.

Clayton Hirst