Based on all information and data gathered, the economic performance of Sony over the last decade could be analysed.
DISCUSSION OF FINDINGS AND SUGGESTIONS
Strategies
Technical innovation and marketing superiority had been the two central pillars of the Sony establishment. These were put in place by the founders. Ibuka was a visionary, adept at imagining applications of emerging technologies to everyday life. Morita searched for new markets and growth opportunities.
When Nobuyuki Idei became CEO of Sony in 1995, he started to remake the company for the network age. He transformed the company that made stand-alone products shipped in boxes to one that produced an almost organic swarm of interconnected devices, services and experiences, all riding on the blurred pulses of a ubiquitous wide-spectrum network.
Idei split the group's unwieldy audio/video products company and created a new division for information technology products. The consumer electronics group would restructure to become less dependent on making television sets, video recorders and portable stereos, due to these products' commoditization and falling margins, and concentrate more on new networking opportunities (The Economist, March 11, 1999). He converted many of the company's analogue products into digital, since manufacturing digital products was relatively cheaper and they also commanded higher margins (The Economist, June 26, 1997).
Traditionally Sony was a high cost producer - a drawback that it used to compensate for by extracting higher premiums on its innovative products and designs. But its innovations and designs were quickly being replicated by cheap electronics producers at home (e.g. Matsushita) and abroad (e.g. Samsung), pushing down industry margins. These low cost producers had even captured a significant market share in a number of markets in Asia, Latin America and Russia, by charging up to 40% less than Sony prices. Cost control was then Idei's top agenda. He shut down 15 manufacturing centers worldwide, leaving Sony with 55 plants by 2003, a workforce reduction of 17 000 workers (The Economist, March 11, 1999), and a greater reliance on contract manufacturers like Flextronics and Solectron. Much of the production was moved overseas to low-cost countries like China, and 12 of the company's Japanese plants were placed under a rationalised structure to further control costs (The Economist, February 27, 2003). Sony's loss making low-cost electronics subsidiary, Aiwa, as well as the music and movies businesses were restructured to reduce costs. Three of the group's publicly traded subsidiaries Sony Music Entertainment (Japan), Sony Chemicals and Sony Precision Technology were brought back into the group as wholly owned units, strengthening the balance sheet to provide the financial muscle for the company's digital foray. In 2003, Sony restructured its loss making music business, Sony Music Entertainment, by slashing 1000 jobs, trimming its roster of artists and combining back office operations to cut costs. In 2003, Idei also announced that Sony would organise itself more like an American company.
Idei's convergence idea made investors interested, and Sony's market value had tripled by 1999, partly fuelled by the Internet boom.
Sony's core strength lay in its ability to innovate and come up with revolutionary products. Throughout the change process, this was a trait that had to remain unchanged. It was clear that Sony did not expect its next breakthrough to come from a single new electronic device (The Economist, February 27, 2003). Kunitake Ando, Sony's President and Chief Operating Officer, made sure Sony did not lose focus on hardware (Fortune, November 25, 2002). Sony R&D labs were continuously working on next generation wonders such as paper thin TV displays, high definition video projectors that turned entire walls into film screens and 'digital chopsticks' - a digital pointer that allowed a user to freely move a file or image from a screen and transfer it to another device, just like a chopstick. Sony blurred the lines between these gadgets by blending their features.
Game Console
One of the most important strategic decisions that Sony made in the mid 1990s was to enter the video game market. PlayStation was launched worldwide in 1995. The market at that time was dominated by Sega and Nintendo so game developers were initially reluctant to support Sony's new format. But Sony pushed forward with the PlayStation, eventually convincing the developers of the system's superior design and capabilities. By the year 2000, the PlayStation had dominated the market to become the world's largest selling game console, with a 70% market share and 80 million units sold (The Economist, February 24, 2000). This was followed by the famous launch of the console's new avatar, the PlayStation 2, in 2000 - when eager customers tumbled over one another to obtain the first machines (The Economist, May 17, 2001). The PlayStation 2 offered a substantial jump in performance and versatility with new features making possible more complex effects such as facial expressions and clothes fluttering in the wind. Over 10 million units were sold in the first year, and by 2003, PlayStation 2 accounted for about half of Sony's total profits and could be found in 50 million homes (The Economist, February 27, 2003). However, Sony's unexpected new rival, Microsoft, had launched the X-Box, in 2001. Despite a US$500 million marketing campaign, the X-Box sold only 10 million units by the year 2003, being a far second on console market share.
Sony had a strong business case to support its foray into the game business, although its move was met with skepticism in 1994. A survey found out that 60% of Americans played video games, and 61% of these game-buffs were adults; 43% were women and their average age was 28, implying that this form of entertainment was now mainstream (The Economist, June 20, 2002). Similar trends were observed in Europe and Japan too.
A presence in the game console market had far more strategic implications for Sony, and was indeed an important part of its future digital game plan. The first reason was that the gaming industry was not yet as competitive as the consumer-electronics industry and there was potential for high margins through product differentiation ad margins on gaming software. More importantly, Sony's vision for the game console was that it could be the next entertainment hub in homes of the future, equipped with multimedia capabilities and connected to other devices with a broadband network. It would then allow players to compete with other gamers on the network, and would be a gateway to a host of multimedia services and content. The console was thus a centerpiece of Sony's vision of digital convergence, and a new way to distribute its content. The entry of software giant Microsoft into the game console market was a testimony to the device's unlimited potential.
Computer
At first, Sony failed to capitalise upon its powerful brand in its early attempts to enter the PC market through the high margin notebook-PC segment. Collaborating with Intel and former marketers from Apple Computer, Sony launched its VAIO (Video-Audio Integration Operation) line of multimedia capable notebooks in 1996. Initial adoption was slow, as the users found the price too steep given the notebook's features. But Sony decided to learn from experience saying that it needed PC expertise more than it needed the profit (The Economist, June 26, 1997). Sony continued to improve its line of computers, add new features and slash production costs, also launching the CLIE range of handheld computers in 2000. Sony's persistence finally paid off, and by 2002, it was the fastest growing major PC maker in the world, ranking eighth in overall market share. Its CLIE handhelds commanded a 22% market share, second only to Palm (CNET News.com, September 23, 2003).
Content
Sony avoided any extravagance during the mergers and acquisitions boom in the media industry in the late 1990s, which resulted in underperforming conglomerates such as AOL Time Warner and Vivendi Universal. Sony's main weakness in the content business was its absence in the American TV networks arena, which were the strongholds of its competitors such as AOL Time Warner, Disney and Viacom. Being a Japanese company, Sony was not allowed to set up broadcast networks in the US, while the difficulties resulting from its acquisitions prevented it from creating cable networks in the early 1990s (The Economist, July 1, 1999). Sony then invested in satellite broadcasting in Japan (through a partnership with Rupert Murdoch's News Corp) and many other countries outside the US and Europe. By globalising production, Sony exploited a shift in demand in international markets where American programming was gradually being replaced by locally produce programmes in the prime slots (The Economist, July 1, 1999). By 1999, Sony had set up production facilities and TV channels in most of the big countries in Latin American and Asia, and was making 4000 hours of foreign language programmes as to 1700 hours of nglish Language programmes (The Economist, July 1, 1999). This strategy worked in favor of Sony. By 2003, many of its local channels were performing extremely well, for example the Sony Entertainment Channel in India, which consistently scored top viewer ratings in a country of 1 billion viewers.
Sony's disciplined approach in the media business had begun to pay dividends. As a result of its cost focused operations, its TV series production business was posting healthy returns in 2003, while its movies business was the most profitable one in Hollywood in 2002, thanks to blockbusters like Spiderman. Only the music business was a concern, due to falling sales and widespread piracy. As of 2003, stringent cost cutting measures were underway to turn the division around.
Strategic Alliances
Sony saw alliances as a valuable means of growth. The development of the PlayStation itself was aided by alliances forged between hardware designers and creative game-software developers, so were other innovations like the Compact Disc, a result of an alliance with Philips. Sony was more interested in forging 'soft alliances' than the riskier strategies of mergers and acquisitions.
Mobile phones were an integral element of Sony's network strategy. But Sony had never really been successful in capturing any substantial market share in the industry. To quickly overcome this shortcoming, Sony pooled resources with the Swedish phone maker, Ericsson, to launch a joint venture - Sony Ericsson Mobile Communications (SEMC) in October 2001. Ericsson was a major player in the mobile phone business, and had introduced several technical innovations over the years. But it had witnessed its market share fall against its archrival - Finland-based Nokia. Although Sony Ericsson was still making losses as of 2003, Sony and Ericsson would put in more resources into the venture. Its phones were highly regarded by technology enthusiasts and the youth for their advanced and user-friendly features, and the company predicted that its next generation handsets could finally turn things around.
Other alliances included PressPlay, an online music distribution site launched by Sony Music in partnership with Universal Music Group in 2001, and Sony's alliance with Palm Corporation to use its operating system for the CLIE handheld. Sony planned to use the open source Linux operating system for many of its other devices. These alliances provided Sony with an alternative to Microsoft products, and thus helped keep its licensing costs down.
Sony also struck another alliance with America Online (AOL) in 2001. The deal gave the PlayStation 2 users access to the web, email and other services operated by AOL, the world's largest Internet service provider with 29 million subscribers at the time. A special Internet browser was also developed for that reason and Sony designed additional equipment like hard disk drives, mouse and keyboard to connect to the console. This, according to Sony, was just a glimpse of things to come in the broadband world, and was "an important first step taking PlayStation 2 into the online and broadband environment," according to Kaz Hirai, President of Sony Computer Entertainment. Sony was also partnering with IBM and Toshiba to develop the next-generation 'cell microprocessor' technology, an extremely fast and network capable multipurpose chip that would be the heart of future Sony devices, including the PlayStation 3. Other alliances included a consortium of nine companies - including Sony, Philips, Samsung, Sharp and Thomson - pushing for the adoption of their 'Blu-Ray' DVD recording standard over a rival standard from NEC and Toshiba.
The Future of Sony
If everything in the future went Sony's way, the consumers could see a whole new world of rich content delivered anytime, anywhere through broadband networks on a spectrum of devices that would be hybrids of computers and consumer electronics. Sony's vision of the future seemed exciting, but many real hurdles lay ahead.
The biggest internal challenge that Sony faced in achieving its digital convergence ambitions was to achieve seamless cooperation between its various subsidiary companies by selling the network vision internally. This was no easy task, given different subsidiaries' different expectations and goals. Traditionally, despite attempts at discovering synergies, there had been little cooperation between the content people in the United States and the technical wizards in Japan. Even the product units used to work rather independently - the development of PlayStation under Ken Kutaragi being the prime example. He worked outside the company's mainstream and forged his own alliances with various parties. PlayStation was highly successful, but it is a doubt whether it could enjoy similar luxuries of independence in the 'networked' future. Whether innovation could still be maintained by comprising upon this independence is also another question.
To counter the low cost imitators of its mainstream products that threatened its profits, Sony would have to keep at the forefront of innovation. Now that Sony was making innovative interconnected digital multimedia products, the content business, already plagued by piracy, was even more concerned about the implications these new devices for its copyrighted content. As a producer of both content and devices, this was a dilemma for Sony that many other competitors did not have to worry about. As a result, competitors were already making many devices that Sony ought to have made. Sony, on the other hand, equipped its MP3 players with unpopular anti-piracy software, greatly affecting their market acceptance.
Being a consumer electronics company, Sony was well aware of the importance of standards – having learnt its lesson early when its Beta video format had lost a fiercely battle against Matsushita’s VHS format. But Sony won more standard battles than it had lost, the Compact Disc being one of them. In the age of digital convergence, it could be a winner-takes-all situation in a standards war. The number of companies, including Sony, fighting it out over the new DVD Recording standard was a testimony to the high stakes involved in modern standards battles. Evidently, the age of convergence was expected to bring with it the fiercest standards battles ever, with rival players like Microsoft, Samsung, Nokia, Sun Microsystems, etc., all pushing their own formats and protocols for market dominance. Sony’s broadband dream could only be a reality if its own standards prevailed. Joining alliances for joint standard specification was a good risk mitigation strategy.
The competition between Sony and other companies had traditionally been with a stable set of rivals – like Philips, Matsushita, Toshiba and Samsung. Competitive issues the company usually faced were important but less complex, such as cheap producers of commodity electronics eroding Sony’s margins. But thanks to the age of convergence, Sony had suddenly found itself up against an overwhelming set of adversaries, including, but not limited to Computer makers like HP and IBM, PC makers like Dell, Apple and Palm, network equipment makers like Cisco and 3Com, software makers like Microsoft and Sun, media companies like AOL Time Warner and Vivendi Universal, game makers like Nintendo, photographic equipment makers like Kodak and Fuji and mobile phone makers like Nokia and Motorola. This complex, multidimensional competition was a bitter reality of the world of digital convergence, where the boundaries between traditional industry segments had disappeared. Sony had entered the terrains of these companies in the media, computer, gaming and networking markets, and had also witnessed these very players enter Sony’s traditional fortes. Microsoft was now making game consoles, Apple was making personal digital stereos, 3Com was making network radios and Nokia was making PDAs. And with most of its competitors nurturing grand broadband visions of their own and staking their future on them, Sony’s digital dream did not seem that unique.
The world of digital convergence also meant that one company could not do everything on its own, necessitating selective cooperation with its competitors. An example was Sony’s dependence on Intel for VAIO chips and Microsoft for its software. This trend was rather unfamiliar to Sony, which had been hitherto fiercely independent when it came to launching new consumer electronics products. The traditional consumer electronic model also meant companies operating huge manufacturing plants on their own. But such plants now had to give way to third party contract manufacturers like Flextronics and Solectron, so that the company could concentrate on swiftly designing innovative new products, as manufacturing superiority and efficiency were no longer the basis of competition. This outsourcing trend had significantly reduced barriers to entry into the industry.
Meanwhile, piracy continued unabated, eating the revenues in the music business. Despite an increase in demand, global music sales paradoxically fell by 9% in 2002 (The Economist, February 27, 2003). Illegal copies and sales in countries like Russia, China, Brazil and Ukraine were estimated to cost movie and music companies US$7 billion a year. With international sales fast becoming major revenue earners for US based content producers, the piracy trend spelled doom to the industry. If this trend continued, many movie and music producers, including Sony’s content divisions, could go out of business – leaving the digital convergence dreams unfulfilled. In 2003, Sony teamed up with AOL Time Warner and Viacom to step up its anti-piracy measures.
The most interesting part of Sony’s digital convergence dream was that it was, after all, still a dream. Despite elaborate preparation for the next generation of networked entertainment, the networks themselves remained conspicuously missing from the picture. By mid 2003, not a single product from Sony had yet incorporated any of the features that Idei proclaimed in his dreams. Sony had bet too much on broadband, but there were no elaborate broadband networks in a place to realize those dreams. Although a technical reality for some years, the broadband had not caught on at the pace that Sony would have liked. Even in the United States, the traditional trendsetter in network technologies, broadband was slow to replace the slower dial-up access networks. Japan, however, showed faster adoption. By 2005, half of Japan’s households were expected to have a broadband connection, compared to just 30% of American households. The prices of such services were not helping either, costing US$50 per month in the US, compared to US$20 per month in Japan (Fortune, November 25, 2002). The situation was even worse in other parts of the world – many developing countries with high market potential had not even seen the first wave of the digital transformation. In 2002, about 30% of Sony’s Walkman sales were units that still used the traditional cassette tape for which the Walkman was first launched in 1979. Sony, having no relationships with telecom and infrastructure companies, could only wait, but not forever. Even if broadband networks become mainstream, the consumers’ acceptance of Sony’s convergence products could not be taken for granted. Sony’s first attempt at an Internet appliance, the ‘eVilla’, a desktop web-browsing device, had miserably failed in 2001 (Fortune, November 25, 2002). Sales of the Airboard, the network Walkman and third generation (3G) phones had also been ominously discouraging.
Sony also faced the daunting task of selling its broadband vision and new identity to their customers. The task of projecting an image of a player in the digital convergence industry was much more complex, given that most people still did not understand what this convergence actually meant.
CONCLUSION
Sony had indeed done quite a lot in the past to successfully change its image from a pure consumer electronics company to a total entertainment company, later adding information technology products to its portfolio. Mistakes made in the past should be used as valuable lessons for future undertakings.
One thing that Sony did not want to do was to give up. Dreams were an integral part of Sony, and fervently following them, despite failures, was part of Sony’s culture. As Kunitake Ando emphasized his company’s determination: “We don’t want to go back to being a box company. If we lose our dreams it’s not Sony at all (Newsweek, January 2003).”
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BIBLIOGRAPHY
CNET News.com, September 23, 2003
Fortune, November 25, 2002
http://www.sony.net/SonyInfo/CorporateInfo/History/prospectus.html
http://www.finfacts.com/brands.htm
http://news.sel.sony.com/corporateinfo/overview/
Newsweek, January 2003
The Economist, June 26, 1997
The Economist, March 11, 1999
The Economist, July 1, 1999
The Economist, February 24, 2000
The Economist, May 17, 2001
The Economist, June 20, 2002
The Economist, February 27, 2003