Sony's market value drops by $100B amid missteps

By Joel Dreyfuss
Bloomberg News Service

Sony Corp.'s share in the consumer electronics market has been eroded by rivals including Hewlett-Packard. Advertiser library photo • April 20, 2004

Today, the Walkman Room is a shrine to Sony's past. The world's No. 2 consumer electronics company — creator of the first transistor radio, the compact disc player and the PlayStation game console — is struggling in the digital age.

"A 20th century business model is no guarantee of success," says Nobuyuki Idei, 66, Sony's chief executive officer and chairman. "This is the biggest challenge, how to change."

On May 10, almost 2 1/2 years after Apple Computer Inc. unveiled its iPod music player, Sony announced its first iPod competitor, called the Vaio pocket.

That delay — and a yearlong lag in starting the Connect online music service after Apple's iTunes Music Store set up shop — reflects how hard it is for the 58-year-old electronics behemoth to adjust to new rivals.

Howard Stringer, 62, Sony vice chairman and head of the company's U.S. divisions, says executives were so concerned about music piracy that they couldn't agree with designers on the kind of player to create.

"We didn't get there, and by that time, Steve Jobs was there," says Stringer, referring to Apple's CEO.

Stringer, who is known as Sir Howard since he was knighted by Queen Elizabeth II in 1999, is one of three non-Japanese members on Sony's board.

The plunge in Sony's stock price shows change is needed, says Nobuaki Murayama, who helps manage $560 million in Japanese equities at Cigna International Investment Advisors K.K. in Tokyo.

"The environment has changed," he says. "It doesn't take much investment to develop products anymore, and Sony is seeing more and more competition."

Since Idei became CEO in 1999, Sony's shares have lost almost three-quarters of their value. They fell from a peak of 16,300 yen on March 1, 2000, to 3,960 yen on Friday. During that time, Sony's market value plunged to $33 billion from $138 billion.

The "Sony shock" accelerated the decline. On April 24, 2003, Sony reported a fourth-quarter loss of $970 million, triple what most analysts had expected. For two days, Sony shares tumbled the maximum permitted by the Tokyo Stock Exchange, falling 27 percent.

When stereos and bulky televisions dominated living rooms, Sony held its own against two main competitors: Matsushita Electric Industrial Co. of Osaka, Japan, the world's biggest consumer electronics company and maker of the Panasonic brand, and Amsterdam-based Royal Philips Electronics NV, Europe's No. 1 consumer electronics company.

Customers paid more for Sony innovations like the Trinitron TV, which used patented technology to deliver a crisp image. The phenomenon became known as the "Sony premium."

Now, Sharp Corp. leads Sony in unit sales of flat-panel TVs, according to fourth-quarter 2003 figures from DisplaySearch, an Austin, Texas-based company that tracks sales of TVs and computer monitors. Canon Inc. is neck-and-neck with Sony in digital cameras, according to Japan's Camera and Imaging Products Association. Dell Inc., Gateway Inc. and Hewlett-Packard Co. sell consumer electronics.

In the past five years, Sony's annual sales have edged up an average of 2 percent and profit margins have stalled at 1 percent. Canon's average profit margin in the past five years has been 5.7 percent, according to data compiled by Bloomberg.

Sony managed to eke out net income of just $851 million on revenue of $72 billion in fiscal 2003, which ended on March 31, 2004. Canon, which is the world's largest copier maker in terms of revenue and No. 2 in digital cameras, after Sony, generated $2.6 billion of net income on $29.9 billion of revenue in 2003.

Sony's trouble is that it's too big and too unfocused, says Al Ries, an Atlanta-based marketing strategist. The electronics unit makes everything from image sensors for digital cameras to CD players, personal computers and headphones. The entertainment side creates movies, music and video games. The financial arm houses two insurance companies and an Internet bank.

"It becomes virtually unmanageable once you go into so many categories," says Ries, chairman of Ries & Ries, which advised Apple on marketing its Apple IIe computer.

Idei says his continuous preaching about all things digital is yielding results. In May, Sony said it would introduce the PSP, a portable PlayStation, in Japan at the end of this year and in the U.S. and Europe early in 2005. The console will play music, videos and games and will compete with Nintendo Co.'s Game Boy. Also in May, Sony unveiled Net Juke, an audio system that downloads and plays music from the Internet.

To boost profit, Idei is pushing executives to deliver 10 percent operating profit margins by fiscal 2006, when Sony turns 60. Sony plans to cut its worldwide workforce by 13 percent, or 20,000 employees and reduce factory capacity 30 percent by closing plants.

To get Sony's premium back, Idei will have to convince investors he hasn't lost the formula that made the Walkman an icon for the analog age.