By MIHO NAGANO
Sony is finally recovering in its core consumer electronics business. Sony (SNE) is finally recovering in its core consumer electronics business.
Just a year ago, the Japanese tech giant faced a massive recall of 9.6 million lithium-ion laptop batteries. Its PlayStation 3 video game console business has been losing money, while rival Nintendo’s Wii console has sold out at many stores and captured a new nongamer audience, such as senior citizens.
But analysts say the tide is turning this Christmas season. Sony’s Bravia, a high-definition TV with liquid crystal display, is increasing its U.S. market share, says Masahiro Ono, an analyst at Morgan Stanley.
Sony ranked No. 2 after Samsung in LCD TV global market share by sales in November, according to Display Search. Sony doesn’t disclose holiday-season sales figures, but Ono predicts it will soon surpass rival Samsung to claim the No. 1 spot.
Aggressive discounting seems to be paying off. Best Buy (BBY) cut the price of the popular 40-inch Bravia by 10% to $2,249 between October and November. More importantly, Sony got its hands on LCD panels when rivals like Panasonic struggled to find them.
“Whoever gets panels wins the game,” Ono said.
Sony’s TV business in the second quarter, which ended Sept. 30, still showed a $181 million loss. Discount LCD TV maker Vizio outpaced all rivals by units sold in the U.S. But Sony’s strong sales of Cybershot digital cameras, camcorders and Vaio PCs offset the loss.
The company’s earnings for the second quarter rose from barely profitable a year ago to $641 million, or 61 cents per U.S. share, beating views. Operating income in the electronics division jumped 13 times to about $939 million. Total sales rose 12.3% to $18.27 billion.
Howard Stringer, who holds U.S. and British citizenship, became the first non-Japanese chief executive in 2005. The former CBS president, who has strong ties to the entertainment industry, cut thousands of jobs and killed the unprofitable Aibo robot business.
“At that time, Sony was behind rivals in flat-panel TVs, and for audio it was way behind Apple, (AAPL) ” Sony spokesman Shigenori Yoshida said. It was important to revive the TV business.
Without a recovery in TVs, Sony’s electronics business will not recover, says Ryoji Chubachi, Sony’s electronics CEO. Sony applied technology developed for high-definition TVs to its popular Handycam camcorders. It added a hard drive that allows users to save pictures more easily than on tapes or DVDs. It also added a function to connect Bravia TVs to the Internet.
To cut costs, Sony sold its advanced semiconductor unit to Toshiba. Dubai International Capital recently bought a stake in Sony, which analysts say helped boost its share price.
The company set a target of 4% for its operating profit margin in electronics and 5% overall for the fiscal year ending in March 2008.
Can it be achieved?
Daniel Ernst of Soleil-Hudson says it’s likely, citing the electronics unit’s recovery over the past five years. “(The unit’s) moved from negative 2% margin to now over 6%,” said Ernst.
But the biggest hurdle is sluggish PlayStation 3 sales. Equipped with expensive cell chip technology and a Blu-ray Disc player, the console is more expensive thanNintendo’s Wii and Microsoft’s (MSFT) Xbox. The sales slump widened the electronics unit’s quarterly loss to $841 million.
Sony cut the price of the console to $499 from $599 and introduced a $399 console with a smaller hard drive. It announced that PS3 sales in North America on Thanksgiving week more than tripled from a year ago.
But with every PS3 console it sells, Sony is losing several hundreds of dollars because the cost of making a console is higher than its price.
“The cost to develop games for PS3 is high and hardware is not selling well. So software makers don’t see an attractive market,” said Tastuya Mizuno, an analyst for Fitch Ratings in Tokyo. Sony wants to make a profit in its game unit in ’09, but Mizuno says that’s a high hurdle.
Morgan Stanley’s Ono says that no matter how many losses it takes, Sony should do everything it can to sell at least 10 million PlayStation 3 units this fiscal year. If the company sells more consoles, the revenue from software increases and Sony can eventually offset the red ink. “The worst-case scenario is not cutting price, then the software sales end up not picking up,” Ono said.
A recent decision by Japanese game maker Capcom surprised PS3 gamers. Capcom said it would sell the latest version of its million-seller “Monster Hunter” for the Wii, when “everybody thought the new version would be exclusively for PS3,” Ono said.
The PS3 slump led a big management shuffle, including the resignation of Ken Kutaragi, PlayStation’s creator.
Star Kuratagi’s departure signals where Sony is headed, Mizuno says.
“In the past, Sony invested enormous resources toward big visions of charismatic leaders,” he said. “That made it possible for the company to create huge hits, such as Walkman and PlayStation.” The current management doesn’t seem to allow that anymore, he says.
Analyst Ono sees Kutaragi’s departure as a positive. “Only Howard was able to let Kutaragi go,” he said.
“It’s not easy to turn around a company that disorganized,” said Ernst. “PS3 is still behind, but it is growing faster now.”
Rival Apple’s smash-hit iPod made the Walkman maker rethink what its products lacked, Sony’s Yoshida said: “We recognized our products were missing the user-friendly software that Apple had.”
Sony is trying to regain customers’ hearts with its new Walkman video player that supports Windows Media-compatible content, including YouTube clips.
Its trusted brand image is still Sony’s No. 1 asset, analysts say.
After the battery recall cost Sony $429 million, the company put in place a quality compliance system that would notify the CEO of a serious defect within eight hours.
To the criticism that CEO Stringer is not knowledgeable about the electronics business and Japanese corporate culture, he often counters: “I am not a foreigner. I am a Sony warrior.”
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Reprinted from Investor’s Business Daily, in the “General News” section.
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