Sony's new chief faces many challenges

The Bellagio casino-hotel in Las Vegas hosted a shotgun wedding in January. The bride and groom had met just a couple hours earlier. The ceremony was actually a PR stunt. But the man who brokered it, incoming Sony Corp boss Kazuo Hirai, was dead serious.

The couple were  supposed to represent the Internet and Sony’s Bravia television sets, their match symbolising the consummation of the company’s years-long, frustrated quest to marry hardware with content. His ability to make that union a reality, says Hirai, will define his tenure at the troubled Japanese brand.

As Hirai became Sony’s president and CEO on April 1, he takes charge of a company facing a crisis unlike anything it has experienced in its nearly 70-year history.

It’s been years since Sony has produced a new mega-hit device. Its TV business is an albatross that has accumulated losses of $10 billion. The company is on course for a fourth straight annual net loss for the year ending March 31. Efforts to connect its vast entertainment and games content with its huge menu of gadgets began way back in the 1990s, but are still a work in progress.

What has flourished at Sony, after a bumpy start, is its PlayStation business, which Hirai ran for five years. His plan is to apply the PlayStation model company wide: extend its network to the rest of the Sony gadget family to create a unified content-delivery platform. Even if not by intent, it is a model close to Apple Inc and its iTunes.

“The Sony Computer Entertainment model is a bigger concept we can grow into a bigger space,” Hirai, 51, said in a group interview at the company’s Tokyo headquarters last month. “Hardware drives software and software drives hardware.”

Interviews with former Sony bosses and executives warn that Hirai faces a daunting task in
marrying hardware and software in the Sony family.  If he succeeds, he could be the man who saved Japan’s most famous company. Failure means presiding over the fall of an electronics empire that once held sway over the world’s consumers.

TV Strategy

Hints are emerging that Hirai may begin his comeback attempt by kicking his newlywed TV bride out of the Sony home. An executive said that the option is to divorce TV from the rest of Sony and try and merge it with the battered TV businesses of Japan’s other struggling set makers. Both Panasonic and Sharp are in trouble. It would be a marriage of convenience that a Japanese government anxious to safeguard jobs and spawn national champions could help forge, the executive added.

A framework for such a grand compact exists already. Last year, Sony agreed to bundle its small operations for making liquid-crystal display screens with those of Toshiba Corp and Hitachi Ltd. The merged company, Japan Display, is two-thirds owned by the taxpayer-funded Innovation Network Corp of Japan.

Hirai will need that to gain the trust of engineers. They fear the company has lost its golden touch for making cutting edge gadgets in favour of the content side of the business, such as games and movies, which was nurtured under the past two chief executives, Howard Stringer and Nobuyuki Idei.

“Let’s not forget, underneath Kaz there are some very strong leaders who have engineering backgrounds,” Molyneux said. But the engineering father of the PlayStation, Ken Kutaragi, warns that there is risk in Sony’s “asset-light” strategy of outsourcing its manufacturing. Its Korean rivals, Samsung Electronics and LG Electronics, could unleash a blitzkrieg of credit-card thin organic light emitting diode (OLED) TVs, he warns.

Sony in 2007 pioneered the technology with the world’s first OLED TV. At only 11 inches (28 cm) and a $2,000 price tag, the XEL-1 did not make a splash in the recession. Sony ended production at the end of 2010, shifting instead to crowd-pleasing 3D TVs.

Samsung and LG, however, stuck with the concept, and their 55-inch prototypes picked up a slew of awards at the CES show in Las Vegas. At a rumoured price tag of around $10,000, they will cost 10 times an equivalent LCD set, posing a challenge to the Koreans to make them more cheaply. Hirai reckons the cost gap will ensure LCD remains the mainstay of the TV market for the next three years at least.

That could be a fatal miscalculation, says Kutaragi, Hirai’s former boss at Sony Computer Entertainment. “It’s possible that OLED will beat predictions and spread faster than the switchover from cathode ray to LCD,” says Kutaragi, who left Sony in 2007 but remains as a technical advisor.
Sony’s issues are much deeper. Hirai faces a fundamental divide in the company that pits an old guard of engineers, mostly in Japan, against device-agnostic content champions, many of them in the movie and music centers of the United States.

The chasm opened up in the mid-1990s when Nobuyuki Idei, then leading the company, began steering Sony to content and networks. He added Hollywood’s Metro-Goldwyn Mayer studio in 2005, and established New York-based Sony BMG Music Entertainment. He started a joint mobile-phone venture with Ericsson that his successor Howard Stringer ended.

The content push at times, however, may have hobbled the hardware business. It contributed to Sony losing its lead in music players, insists an analyst. “I see a lot of things written saying that Sony missed the portable music trend, the hard disc player, but it’s not true, they made a conscious decision not to build it,” says Vandenbree, who left Sony in 2009 for LG.

Unsure the iPod music player he had just released would be the hit it was, Steve Jobs suggested an alliance with Sony in launching his iTunes store, in part to counter the might of Microsoft, explained Maeda, confirming local media reports. Not wanting to upset the software giant, Sony turned him down.

Lost for words

In 2005, Idei handed over to Stringer, Sony’s first foreign boss. The former broadcast journalist vowed to bust open Sony’s silos and make content and hardware work together. His high point came on January 4, 2008. As executives gathered in Las Vegas for the annual CES show, Toshiba raised a white flag, ending a format war between blu-ray disc technology championed by Sony and its HD DVD alternative. It allowed Stringer to claim content and hardware were finally pulling together.

Yet unable to speak Japanese and spending more time out of Japan than in, Stringer struggled to close the hardware-content rift that opened on Idei's watch. According to one high-level person in the company, Stringer could never be sure his managers in Japan listened to what he asked, understood what he said, and would act as he directed.

Sometimes he learned too late of changes that hurt Sony’s business. In 2005 managers dropped back-lit LED TVs because of cost without telling Stringer. That was one of Stringer’s biggest regrets, the source said. Rival Samsung released its own version in 2009, forcing Sony to play catch-up in 2010 with a product it had had first.

Sony’s engineers in Japan in the meantime grew resentful of a boss they perceived as spending too much time hobnobbing overseas and too little time paying homage to Sony’s roots as a maker of hit gadgets. A dearth of new hits and the subsequent loss of market share to Apple and Samsung gave the old guard engineers ammunition to lob at the Welsh-born Stringer.

“For rank-and-file workers, his presence was almost zero,” said an R&D engineer at Sony. Stringer, he said, made it to very few events where engineers explained their work to executives. The global recession  forced Stringer to lay off 16,000 workers and pare $3 billion in expenses. Japan’s March 11 earthquake and tsunami last year unraveled supply chains.

A month later Sony came under a firestorm of criticism over the hacking of its online game accounts. Floods in Thailand last July crippled production again. Sony said it expected a 220 billion yen loss for the year ending March 31.

Hirai differs from his two content-oriented predecessors by being more of a hybrid boss. Born in Japan, Hirai, 51, spent about 20 years in the US , some of that as a child when his father, a banker, worked there.

Helping him up the ladder was his success in molding 100 million online users around the PlayStation platform, in what so far is Sony’s only notable success in melding content and hardware.

Despite optimism, some in the Sony family talk of a grimmer possible future. A former-Sony executive states a scenario: A fund could buy Sony, he says, break it up and sell off pieces that individually are worth more than the whole. As Sony's fortunes waned, so has its share price. In 2000, the company was valued at seven times that of Apple. During the early 1990s leadership of Norio Ohga, who pioneered the switch to CDs, Sony executives once considered a takeover of Apple.

The brand value alone is huge. London-based branding agency Interbrand estimates the Sony name is worth $9.9 billion, ranking it at 35 in its annual list of the world's most valuable brands. Samsung at 17 overtook Sony in 2005 and Apple at 8 in 2008.