Outlook: Sony's long road back to mastery of the gadget universe

British American; Leeds United
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The Independent Online

The walkman, the compact disc, the Trinitron TV -so much which is synonymous with modern day consumer electronics was invented and developed by Sony. Yet somehow or other, this great wonder of Japan's post war economic miracle failed to see the coming of the flat screen TV or the mobile phone, it failed to move with the times by shifting its production to low-cost China, and it allowed itself to become bloated and unwieldy by diversifying into unrelated businesses from movies and music to financial services.

In so doing, Sony has become symbolic of the wider malaise that has afflicted the Japanese economy these past 14 years. Its profits and share price have collapsed and a painful restructuring now beckons. The question on everyone's lips: can the Sony supertanker be turned around, or are yesterday's series of initiatives another instance of too little too late?

If this were Britain or the US, Nobuyuki Idei, the chief executive, would have been given the bullet long ago, and a hatchet man would have been brought in to do the salvage. But this is Japan, where there is no equivalent of Anthony Bolton to carry out the assassination. Instead, Japanese investors seem content to wait and see.

Sony is still the world's most powerful brand in consumer electronics, yet in nearly all areas outside games, it seems to have lost its way. For instance, it has no equivalent of the iPod, the MP3 player produced by Apple that has taken the personal stereo market by storm. Even five years ago that would have been unthinkable. For the inventor of the Walkman, it's a terrible indictment. Too often the company is playing catch-up in a sector whose product innovation it once used to dominate.

Mr Idei's recovery plan involves dramatically cutting cost at the same time as investing heavily in new product development. Great store is being set by the release of the new Playstation games console, and hundreds of billions of yen are being invested in the microprocessor that will control it and perhaps one day be imbedded in all Sony TV sets. The group's relatively successful financial services businesses are to be consolidated and floated as a separate company.

Crucially, Sir Howard Stringer, Sony's British-born head of American operations, is being brought closer to the the centre of power in gaining responsibility for the whole of the group's entertainment interests, including games. In so doing Sony hopes to realise its vision of a seamless whole, combining both electronic hardware and content into a global media company. As it happens, Sir Howard would have been an excellent choice as a future chairman or chief executive of ITV, but yesterday's elevation rules him out. ITV's loss is Sony's gain.

He can only hope that Mr Idei's plans for corporate transformation prove more robust that Japan's so far botched wider attempt at economic reform.

British American

Martin Broughton, chairman of British American Tobacco, seems to have done a great deal by his shareholders in agreeing to combine BAT's Brown & Williamson offshoot in the United States with R J Reynolds - but only if the merger actually happens. The risks of it being blocked by the US Federal Trade Commission, wasting tens of millions of pounds of shareholders money on fruitless investment banking and legal fees, are a good deal higher than either the company or its advisers would like to admit.

The combined company would have about 34 per cent of the US tobacco market, which in normal circumstances would be enough to scupper any such deal. Back in 1994, the FTC blocked BAT's takeover of American Brands on a combined market share of much less - just 17 per cent. BAT eventually got the deal through, but only after agreeing to brand disposals. So what makes Mr Broughton so confident this time? In part it is because the market leader, Philip Morris, has an even larger share with nearly half the market.

But it is mainly because of the tobacco industry's $250bn settlement with state attorneys five years ago - the so-called "master settlement". Payable over 25 years, the master settlement is in effect an extra tax on tobacco, ostensibly to help state governments fund the medicare costs of treating smoking related illnesses. In practice, the money is widely used for other purposes.

Be that as it may, the settlement has roughly doubled the cost of a packet of cigarettes in the US, allowing a plethora of new entrants of those not party to the 1998 agreement into the market. Together they now account for some 10 per cent of the market, and because they don't have to pay the master settlement, it is they that lead on prices, not the market leader. Mr Broughton believes this has so fundamentally altered the nature of the market that the competition authorities will drop their objections.

Perhaps, but it would be unwise to bank on it. The American political and judicial establishment remains deeply suspicious of Big Tobacco, with good reason. The FTC is in no mood to dole out favours to an industry whose past deceits are not yet forgotten. In Europe, BAT is suspected of being complicit in tobacco smuggling, a suggestion which bizarrely the company has never seriously attempted to counter, or not in public anyway. An ongoing Department of Trade and Industry investigation into the allegations hasn't yet helped in clearing the air.

Many of BAT's largest shareholders would like Mr Broughton to quit the US altogether, so as to insulate their company against future litigation. Mr Broughton reckons he's got the litigation largely beat anyway, but is none the less making much of the point that the new behemoth, Reynolds America, will take on liability for all current and future litigation against Brown & Williamson, thereby eliminating a persistent cause of worry among BAT investors.

The City buys the story, to judge by yesterday's 12 per cent leap in the share price, which virtually removes the remaining discount to peers BAT shares have long traded at. Yet, the litigation point is actually something of a canard. Come what may BAT's 42 per cent interest in the combined whole would continue to be liable to whatever litigation heads the company's way. In the event that Reynolds America is bankrupted by lawsuits, the litigants would then attempt to come after BAT in the UK. It is a misunderstanding to think BAT has made itself legally immune. All BAT is in fact doing is making itself liable for a smaller share of a larger whole.

The business of tobacco is about managing litigation and decline in mature, developed markets while at the same time pursuing expansion in the emerging markets of the Far East, Eastern Europe and Latin America. On both counts Mr Broughton appears to be doing remarkably well, but it is wrong to think yesterday's news entirely lances the US "problem". It does not.

Leeds United

Those who believe that the Stock Exchange is no place for a football team will find plenty of ammunition in the débâcle that is Leeds United. Despite yesterday's disclosure of the biggest loss in English football history, there remains a huge gap in information on the true state of the company's finances. Alarmingly, Leeds has mortgaged not just its gate receipts, which has become relatively common practice among football clubs, but some of its most valuable players as well in an effort to pay for past profligacy.

Leeds United will not say which players have been mortgaged, but does admit that the total amount outstanding is £21m. Interest on these loans is probably 7 per cent, but that figure will rise when base rates go up. The result is disaster. The ever present Allan Leighton, deputy chairman, and ARM Holdings, a finance provider that should not be confused with the microchip maker of the same name, promise to pump in £4.4m in return for shares. It may not be enough.