Sony’s Kazuo Hirai Needs a Magic Wand

by Jonathan Berr | September 4, 2012 9:34 am

Sony’s Kazuo Hirai Needs a Magic Wand

Sony (NYSE:SNE[1]) CEO Kazuo Hirai recently told CNBC[2] that the faltering Japanese conglomerate would undertake an “aggressive” product-focused turnaround, whatever that means. What he actually needs, though, is a magic wand.

That’s the only way Hirai, who assumed the job in April, will be able to straighten out this hot mess of a company quickly enough to satisfy Sony’s beleaguered investors, whose U.S. shares have plunged more than 37% this year. Tokyo-based Sony has had a knack for being a day late and a dollar short for every new tech trend in the past decade or so. Making up for that lost ground[3] won’t be easy.

For one thing, Sony’s corporate turnaround plan is confusing. Harai says he wants to focus on gaming, mobile and digital imaging as Sony revitalizes its moribund TV business. But Hirai hasn’t said anything about Sony’s content businesses[4], which I argued earlier this year should be sold.

While Sony’s music and TV production businesses generate steady cash flow, the business case for owning them is weak. A viewer of Sony’s Wheel of Fortune is no more apt to purchase a Sony TV than anyone else. This model made more sense in the early 20th century when Thomas Edison decided to sell phonographs along with his music players to encourage the sales of the hardware.

Speaking of the TV business, the challenges there are huge. Sony lost about $126 million in TVs in the last quarter. Last year’s massive Bravia recall soured many consumers on the brand, and Sony sold its shares in a joint LCD venture to partner Samsung. Market researcher iSupply[5] estimates that Samsung has about a 23% share of the U.S. flat-screen market while Sony was in a distant fourth with 8%, as the South Korean company won a price war.

With the TV business continuing to get commoditized, Sony’s predicament will go from bad to worse. I see no other option but for Sony to exit the TV manufacturing business.

Sony’s Imaging Division is almost as big a basket case as the TV business, but at least it posted solid gains in the most recent quarter. Sony badly lags its rivals in key markets such as digital single-lens reflex and mirrrorless[6] cameras, according to the blog Fstoppers.

The company is making a stab at the tablet market with the Xperia Tablet S,[7] which launches next week, but reviewers have complained about the price. Its push into medical devices seems promising, but investors should reserve judgment on it for now. If Sony can find a way to easily exit the camera business, it should do so. The other operations have better chances for growth, though the odds are against them as well.

 Sony continues to have high hopes for its gaming division. Earlier this year, it introduced its Vita portable gaming device, which analysts expect to generate $2.2 billion in sales in 2012. Investors, however, were skeptical because more and more gaming is moving to mobile devices. Hirai has said Vita sales were lagging in some areas, though he declined to say where. Vita has gotten positive reviews, though some pundits have complained[8] that it’s too pricey, a common refrain about Sony.

The company isn’t doing much better in consoles, where Microsoft‘s (NASDAQ:MSFT[9]) Xbox 360[10] has captured the market share lead for 18 straight months at the expense of Sony’s PlayStation and Nintendo‘s (PINK:NTDOY[11]) Wii. Sony’s game business lost $45 million in the last quarter, as strong Vita sales were unable to offset declines in older products.

The gaming sector is going through some wrenching changes as players migrate to offerings that are free or close to it. Since the losses in the business are not huge, Sony should stick with it and bet that one of its developers will dream up the next big hit.

For this turnaround to work, Hirai will still have to hack off the parts of Sony that are too far gone to save and invest heavily in those that have potential. I don’t envy him.

Jonathan Berr does not own shares of the listed companies. Follow him on Twitter @jdberr.

Endnotes:
  1. SNE: http://studio-5.financialcontent.com/investplace/quote?Symbol=SNE
  2. Kazuo Hirai recently told CNBC: http://www.cnbc.com/id/48838510
  3. Making up for that lost ground: http://investorplace.com/2012/04/5-things-sony-needs-to-do-to-stage-a-comeback-sne-aapl-ssnlf-nok-mmi/
  4. Sony’s content businesses: http://investorplace.com/2012/04/whats-missing-from-sonys-turnaround-plan/
  5. researcher iSupply: http://www.isuppli.com/Display-Materials-and-Systems/News/Pages/Samsung-Widens-Lead-in-US-LCD-TV-Shipment-with-Record-High-Market-Share-in-Q4.aspx
  6. single-lens reflex and mirrrorless: http://fstoppers.com/editorial-can-sonys-digital-imaging-division-restore-profits
  7. Xperia Tablet S,: http://reviews.cnet.com/tablets/sony-xperia-tablet-s/4505-3126_7-35426708.html
  8. have complained: http://www.engadget.com/2012/02/13/playstation-vita-review/
  9. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  10. Xbox 360: http://www.zdnet.com/xbox-360-tops-u-s-console-market-for-18th-consecutive-month-but-sales-continue-to-fall-7000000888/
  11. NTDOY: http://studio-5.financialcontent.com/investplace/quote?Symbol=NTDOY

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