Vendor focus: Sony - where did it all go wrong?

Why did the all-conquering trailblazer that so inspired Steve Jobs become just another electronics firm, and will it ever be able to reclaim its former glory?

In the eighties and nineties, if you wanted the best consumer electronics the high street could offer, the chances are you’d buy a Sony product. Its televisions, video recorders and Walkman music players were trailblazing and cool. Sony was a prestige brand. It was the Apple of its day.

And back then, Apple wanted to be like Sony, with Steve Jobs telling Fortune magazine in 1998 that “the whole strategy for Apple now is to be the Sony of the computer business”.

Apple is now valued at £321bn – making it the most valuable company in the world. While Sony – which was worth £75bn in 2000 – is now valued at only £7bn.

And, just last week, credit rating agency Fitch downgraded Sony’s corporate bonds to “junk” status, citing its high debts combined with “loss of technology leadership in key products, high competition, weak economic conditions and the strong yen”.

So what has gone wrong at the once all-conquering giant?

Days of glory

Founded on 7 May, 1946, by Akio Morita and Masaru Ibuka, Sony came to the fore-front of consumer electronics by creating products that had not previously existed.

It dominated the TV market for decades, created the personal audio market with the Walkman in 1979 (which eventually sold over 220 million units worldwide) and then achieved another industry breakthrough in October 1982 with the release of the world’s first Compact Disc (CD) player. It beat off Nintendo and Sega in the games market with its PlayStation console in the 1990s, building on this success with the introduction of the PS2 – which is the best-selling console of all time, with about 153.6 million systems sold worldwide.

The master is now the pupil

In 1961, Sony had 3,703 employees and a net income of ¥720m (£5.5m). By 1991, it had 19,811 employees and a net income of £924m. It now has more than 162,000 staff but reported a net loss of £202m in the April-to-June quarter this year.

In April, newly elected president and CEO Kazuo Hirai (pictured) stated that the firm would cut 10,000 jobs as part of a restructuring project. A month later the company’s shares plummeted to a 31-year low after it reported a record annual loss of £3.5bn.

According to industry analyst DisplaySearch, in the second quarter of this year, Sony’s market share in plasma and LCD TVs was just 8.3 per cent – coming in third after Samsung and LG. Meanwhile, Sony Mobile – which acquired Sony Ericcson in February 2012 – reported a net loss of £175m in the 2011 financial year.

Last week, it was announced that Sony had sold 70 million PlayStation 3 (PS3) consoles, still lagging behind the Nintendo Wii, which as of September had sold 97.18 million units worldwide.

So why has Sony stumbled from leader to follower?

Nature has played a significant role in its decline. The Japanese earthquake and tsunami of 2011 hit Sony hard, with a Blu-ray disc factory and a research and development lab damaged by flooding, and six other factories thrown into chaos by power outages. The devastating floods in Thailand later that same year also caused major disruption to its operations.

However, Jordan Selburn, analyst at research firm IHS iSuppli, believes commoditisation in China is largely to blame for Sony’s woes, and those of fellow Japanese strugglers Sharp and Panasonic.

“It is just a tidal wave that you can’t hold back. There is almost nothing Sony could have done to have position themselves better in today’s consumer market,” Selburn says.

Vendor focus: Sony - where did it all go wrong?

Why did the all-conquering trailblazer that so inspired Steve Jobs become just another electronics firm, and will it ever be able to reclaim its former glory?

However, while many recent setbacks have been beyond Sony’s control, others could be said to be self-inflicted. In 2011, the PlayStation Network was attacked, and 77 million customers’ credit card details were leaked online. It cost the firm a reported $171m (£107m) to repair and secure the network. Other attacks attributed to hacktivist group Anonymous also affected the firm’s reputation. Throughout this cyber security crisis, Sony came across as ill-prepared, ill-equipped, and just plain bad at communicating with its customers.

Bad decisions

But while all big firms make mistakes, Sony has made more than most, including many that were eminently avoidable.

For example, in the late 1970s Sony stuck by its Betamax video cassette recorder (VCR) format long after it was clear to everyone else that the technology had lost out to JVC’s VHS product. Despite a rapidly dwindling market share, Sony refused to introduce a VHS line until the end of the 1980s.

This self-defeating stubborn streak also caused Sony to cling to its failing MiniDisc players until 2011, a full 10 years after MP3 players had effectively consigned the technology to the dustbin of consumer electronics history.

Perhaps Sony’s greatest mistake was allowing Apple’s iPod and iTunes service to dominate the market that the Japanese titan created. The company’s attempt to hit back with the Sony Connect music store failed miserably.

This failure was partly down to a turf war within Sony, according to Interscope Records chairman Jimmy Iovine.

“How Sony missed this is completely mind-boggling to me, a historic fuck up. Steve [Jobs] would fire people if the divisions didn’t work together, but Sony’s divisions were at war with one another,” Iovine told Steve Jobs’ biographer, Walter Isaacson.

In March 2011, the electronics giant said it would combine its TV, entertainment, mobile and PC businesses into one unit in a bid to resurrect its fortunes. But according to several reviews on social careers website Glassdoor, the management culture at Sony remains problematic.

One employee complains that Sony is a very hierarchical organisation that has not adapted to recent changes in the market.

“If you are non-Japanese, you always come second to them – and if you are a woman, you come last. Do not just say that you want to change how the company is working, actually do something. You need to adapt to how the market place is today or you will not survive in the long run,” the employee says.

When asked to comment on this, Sony said it was unable to locate an appropriate spokesperson.

IHS iSuppli’s Selburn believes Sony’s leadership is more enlightened than the firm’s critics allege. “Of the Japanese companies, Sony was supposed to be the one with the more flexible, more Western-like management system. When a company is struggling it is easy to cite problems with the management,” he says.

The here and now

Sony’s stubbornness has most recently been found in its decision to back the Blu-ray format. Its determination to use the technology in the PS3 delayed the console’s launch and significantly added to its production costs. Indeed, Sony makes very little from its games hardware, but what it loses on its consoles it now hopes to regain in the longer term. Much of its entertainment division’s profits come from licences for games, while by pushing the Blu-ray format to putative dominance it hopes to reap the rewards of selling more movies.

Vendor focus: Sony - where did it all go wrong?

Why did the all-conquering trailblazer that so inspired Steve Jobs become just another electronics firm, and will it ever be able to reclaim its former glory?

But while this strategy may work, Sony still has work to do to catch up with the likes of Apple and Samsung. Its Tablet S and Tablet P devices are relatively unknown, and the fact that gaming is beginning to move away from dedicated machines and onto tablets and smartphones is also a concern.

But according to Ovum analyst Nick Dillon, all is not lost.

“Sony is in an enviable position; it has arguably the widest range of connected consumer electronics devices, an established brand and an extensive range of content services,” he says.

But while Sony can offer excellent cameras and laptops to go along with its sexy HDTVs and sleek smartphones, these products are invariably let down by a marketing operation that is put to shame by rivals like Apple. Sony tends to have many similar products with unmemorable names like the “Bravia KDL40HX853”, while Apple has only a few devices in its product ranges, simplifying the choice for buyers.

Selburn believes Sony has traded off its name for too long, to the detriment of innovation.

“Sony TVs used to look better than the competition because of the ‘secret sauce’ they put into the image processing and video processing chips on the TV, but now the gap has closed and a top tier company like Samsung or LG has just as much ‘secret sauce’ to put in,” he says. “Also, companies like Vizio are able to get off-the-shelf processors and chips to do the majority of what is good but at a lower price point. So there is less reason to pay the premium price for the Sony brand.”

Regaining its crown

TechMarketView analyst Richard Holway believes the only way that Sony can revive its fortunes is by coming up with more “special sauce”.

“They can only do it by inventing a whole new genre. The TV is overdue a reinvention. Smart TVs are rubbish. There is a whole new market in connecting the ‘Internet of everything’ – really effective control centres for everything in your home controlled via your smartphone,” he says.

This is a view shared by Ovum’s Dillon, who argues that the firm’s salvation could lie in the development of a truly integrated multi-screen experience.

He says all Sony devices should come with a Sony Entertainment Network (SEN) app that allows users to access content using a single ID.

IHS’s Selburn believes the PlayStation console is the ace up Sony’s sleeve. “Sony should focus on a position that it is strong in, its consoles. And it could mean playing a game on a big screen but have a map or inventory list on your tablet or smartphone,” he suggests.

Sony’s recent attempts to, in Holway’s words, “reinvent the TV” have met with little success. Alongside Logitech, Intel and Google, Sony was the first manufacturer to launch a smart TV running on Google’s operating system. But this was a flop, prompting Logitech to quit the programme stating that the platform was “not ready”.

Sony has persisted with the alliance, once again showing its stubbornness but perhaps more worryingly revealing an over-dependence on Google.

“The problem is, even if the initiative takes off, where is the value for Sony? Is it really Google’s value that is causing people to buy the set and, if so, then Samsung, LG and Vizio can offer Google TV, too. Sony tried to be a leader with the first generation Google TVs but in the second generation it won’t be the only player, so all it does is keep Sony from falling behind rather than putting it in the lead,” says Selburn.

Dillon says that Sony is entirely reliant on Google to provide its smart device platforms, and that this poses a “significant risk” to the company.

Is Sony’s future make.believe?

Despite all its problems, Selburn believes that Sony can be more optimistic than the likes of Panasonic.

“I don’t see Sony as the Titanic. I think it has struggled, and is still at the mercy of forces beyond its control. I don’t know if any management changes will fix this but I don’t see it as a sinking ship,” he says.

Holway is less sanguine, arguing that Sony must sell off its unprofitable businesses in order to save itself.

“IBM is very good at killing off bits of itself, for example selling PCs to Lenovo,” he says. “But cutting off your limbs to save the rest of you is as painful to a corporation as it would be to any human. Do I think Sony can do it? No.”

@Sooraj_Shah