4 Sony Mistakes, 4 Lessons for Apple

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In some ways, the spectacle of Sony’s (NYSE:SNE) recent spate of bad news was sad to watch. First came its acknowledgement last Tuesday that its fiscal fourth-quarter loss was set to double to $6.4 billion. Then came CEO Kazuo Hirai’s press conference on Thursday about Sony’ restructuring, including a layoff of 10,000 employees.

How did such a one-time consumer technology powerhouse lose its way so badly? The company that not long ago created a whole new industry of portable music players (using cassette tapes, not bits and bytes) and the most-after TV sets is now taking nothing off the table as it fights to remain relevant in a wholly transformed competitive landscape.

It can be tough to watch. But it also can be instructive – especially for another company that today is sitting at a similar – ok, even higher – pinnacle of consumer success and rivals’ envy. That’s Apple (NASDAQ:AAPL), of course. And for all its prowess and seeming unstoppability, just a few wrong moves could turn that juggernaut, too, into a sad spectacle.

Yes, several injuries Sony has suffered were largely out of its control. Ten years ago, $1 was worth 130 yen; today it’s worth 81 yen. That exchange rate has severely eroded Japanese profits in the U.S. market. The 2011 earthquake and tsunami that struck Japan also had a serious impact on Sony, shutting down 10 of its factories and seriously damaging at least one.

But these don’t compare to Sony’s self-inflicted wounds. Here are four mistakes it has made and the lessons they provide for Apple if it’s to avoid the once-mighty Japanese company’s fate.

Security: Sony’s Mistakes

Sony suffered a PR black eye, financial losses and gave gamers more reason to turn to Microsoft‘s (NASDAQ:MSFT) Xbox game console when its PlayStation Network was hacked in 2011. PCWorld reports the hack compromised 77 million user accounts and cost the company $170 million. What made the incident even worse was the revelation that Sony had cut network security staff in the weeks before the attack.

Security: Lessons for Apple

Imagine what would happen if Apple’s iTunes Store is hacked and funds get drained from user accounts? There have been increasing reports of fraudulent activity on Apple’s app, music, movie and e-book hub (most likely attributable to users having their Apple ID and password lifted from another site or through a rogue app). But the scenario of a full-on security breach has more than a few people worried — and Apple must make sure it never happens. The iTunes Store is critical to Apple’s success. If it ever had to be closed for weeks as Sony did its PS Network, millions and millions of Apple devices would be unable to purchase content, developers and publishers would lose revenue and Apple would suffer a PR and logistical nightmare much larger than Sony faced.

On the computer front, Apple also must confront increasing threats of virus attacks against its Macs. Witness most recently the Flashback trojan that has infected some 650,000 Macs.

Product Evolution: Sony’s Mistake

Look no further than the history of Sony’s Playstation and TV businesses for examples of how not to develop new products. The original Playstation (released in 1994) was the best-selling video-game console of its time  (102 million units against the nearest competitor’s 33 million). Playstation 2 sold 150 million units versus the second place Microsoft Xbox with 24 million.

Then Sony stumbled. First it let Microsoft beat it to market with its next-generation Xbox 360. Then it packed the PS3 with expensive extras (like a Blu-ray drive), pushing its 2006 launch price $200 higher than any other console — while reportedly losing between $241 and $341 on every unit sold. Result: Sony has since handed the console crown to Nintendo‘s (PINK:NTDOY) Wii, and now trails the Xbox 360.

In TVs, Sony’s Trinitrons were once considered the best. By 1994, the company had sold 100 million of them. But as the technology moved from bulky CRTs to flat screens, Sony ran into problems. The list of missteps is long, including too many models, which led to confusion for consumers; trying to compete on price while promoting high quality; and failed strategic partnerships. The result has been eight consecutive years of losses in the TV division while Samsung (PINK:SNLF), Vizio and LG Electronics — all once dismissed as selling inferior TVs — surpassed Sony in U.S. sales.

Product Evolution: Lessons for Apple

Apple has been doing a good job of avoiding Sony’s key Playstation and TV mistakes. Each of Apple’s products has been an incremental, but worthy, update from the preceding version, so it has been able to keep prices stable. For example, the latest iPad is better than the iPad 2 in many ways (enough to stay ahead of the competition), but it’s not so loaded down with new tech that it’s priced out of the market. Apple has also avoided the trap of selling new hardware for less than it costs to make — in fact, even though Engadget says the new iPad costs Apple more than the iPad 2 (at the same selling price), it still maintains a 51% profit margin.

Apple can’t allow itself to expand its product lineup to the point where consumers can’t tell the gadgets apart. Don’t engage competitors in a race to the bottom on pricing. Don’t underestimate underdog competitors. (In Apple’s case, that’s Samsung. The Korean company is coming at Apple on the smartphone, tablet and ultrabook fronts.) Don’t assume that consumers will always accept an expensive product upgrade and add manufacturing capacity that reflects such an assumption.

Proprietary Formats: Sony’s Mistakes

Consumers like standards. They like the idea that products from different manufacturers have key elements that can be used interchangeably. A DVD purchased at Walmart (NYSE:WMT) can be played on  DVD players from any manufacturer, watched on computers or popped into a car’s multimedia deck. Instead, Sony embarked on a multi-decade battle over formats that alienated consumers and raised costs for products that didn’t have the manufacturing economies of scale offered by standard versions.

The list is long: Betamax video recorders, followed by UMD (universal media disc), Memory Stick storage cards, Minidisc, and ATRAC (Sony’s alternative to MP3 format digital music files). Sony still hasn’t learned, as seen with a new proprietary memory card format for the Playstation Vita portable gaming system. Sony seems determined to go it alone on formats that won’t work on other devices even as it loses customers.

Proprietary Formats: Lessons for Apple

This is one area where Apple seems to be following Sony’s lead. Tying its hardware to its own operating systems (OSX for computers and iOS for iPhone, iPod Touch and iPad) aside, Apple turned to AAC (Advanced Audio Coding) instead of MP3 digital music files. It promoted QuickTime and MPEG-4 movie files when AVI was the most common format. It banned Adobe’s (NASDAQ:ADBE) Flash on portable devices. iBooks won’t accept EPUB e-books sold through other e-bookstores. And instead of a standard USB port, iOS accessories must connect to iOS devices through a proprietary dock connector.

However, Apple generally takes a softer stance than Sony does and usually offers a way for customers to work around its preferences. For example, Apple computers have been given the ability to run Windows, iOS devices will play MP3 files, iTunes will convert purchased AAC content to MP3 if needed, and apps are available to access content that Apple doesn’t offer native support for.

Still, Apple faces risk here. Look online, and you’ll see repeated comments from Android smartphone and tablet owners saying they chose Google‘s (NASDAQ:GOOG) platform because Apple’s doesn’t play nice with non-Apple products and media.

Innovation: Sony’s Mistakes

Sony was the company that introduced the transistor radio, the Walkman, compact discs and DVD players. With the Trinitron, it became synonymous with premium TV sets, a category that hadn’t really existed previously. But in the past decade, it’s largely played catch-up to other companies and is spreading itself way too thin. Instead of innovating, Sony has expanded its offerings to the point where it sells over 2,000 products as it tries to be everything to everyone and has been forced to slug it out in a disastrous TV price war to remain a contender.

Innovation: Lessons for Apple

Under Steve Jobs, Apple built its reputation on innovation. However, its most successful products — the iPod, iPhone and iPad — weren’t new inventions, they were significant improvements on existing technology. While Jobs received much of the credit, Jonathan Ive (Apple’s senior VP of industrial design) has led the design team since 1996 and was a big part of all the key products. With Jobs gone, Apple still retains half of the team that looked at the clunky MP3 players of 2000 and decided they could do it much better.

One concern Apple analysts have is that Apple without Jobs will coast and begin releasing mediocre products. Doing so would open the door for the next emergent consumer electronics company to take the lead. In consumer tech, innovation is key to staying on top. Research In Motion (NASDAQ:RIMM) is another cautionary tale of what happens when a market leader coasts for a few years: Products that seem a year (or more) behind the pack rapidly kill market share.

Lessons from Apple for Sony

Of course, comparisons between two consumer electronics giants at opposite ends of the success spectrum can go both ways, and that has to provide a glimmer of hope for Sony. Although it seems like ancient history now, Apple not too long ago was also in a desperate situation. After sparking the PC revolution, Apple ran into trouble in the mid-90s, seemingly lost. The stock, which had traded as high as $17.93 in 1991 fell to a low of $3.32 in 1997. Ugly.

We all know what happened next. Exiled co-founder Steve Jobs returned to Apple, eventually assuming the permanent CEO role in 2000. Under his leadership, unprofitable products like the Newton were axed, core products (desktop and notebook computers) were modernized with a new operating system and design aesthetic, sales channels were revamped and included new Apple-branded retail stores, while product lines were simplified.

Then Jobs pursued his holy grail, the triumphant triumvirate of the iPod, iPhone and iPad — products that appealed to a much wider range of customers than computers. Apple wasn’t first in any of these markets, but a combination of innovation, attention to design detail, effective marketing, integration with iTunes and more than a bit of Jobs’s showmanship made these products the world-beaters they are today. And, boy, has Apple’s stock price stock responded.

Put in that perspective, Sony’s troubles don’t seem so insurmountable. Sony CEO Kazuo Hirai isn’t Steve Jobs, and Sony isn’t Apple, but they share many similarities (see above). If Hirai can stop the bleeding and stabilize Sony long enough to return to its innovative, premium product roots, history might just repeat.

Brad Moon has been writing for InvestorPlace.com since 2012. He also writes about stocks for Kiplinger and has been a senior contributor focusing on consumer technology for Forbes since 2015.


Article printed from InvestorPlace Media, https://investorplace.com/2012/04/4-sony-mistakes-4-lessons-for-apple/.

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