With Howard Stringer's appointment as CEO, what is Sony’s new game plan?


Sony is transforming itself from a hardware maker to a software purveyor.

Sony’s fabled success story began half a century ago, in 1946, in a bombed-out basement in Tokyo. Although Akio Morita and Masaru Ibuka started the company (originally named Tokyo Tsushin) with the intention of manufacturing necessities, such as rice cookers and space heaters, for the war-ravaged population of Japan, they quickly found an export market in America for tape recorders. Sony, as the company was renamed in 1955, went on to introduce a string of remarkably inventive entertainment products--including the Trinitron color television, the Betamax VCR, the Walkman, and the CD (on which the company still collects royalties)--and became the world’s leading maker of branded consumer electronics. Although over the years it bought a few content companies–-notably, CBS Records, Columbia TriStar studio, and MGM–-as late as 2004 it was still depending on manufacturing for over 70 percent of its revenue.
The revenues from manufacturing, however, no longer produced profits for Sony.

The problem was, in a word, China. In the new millennium, Chinese manufacturers have clearly demonstrated that they can make the same consumer electronics, often using the same computer chips, and sell them at much lower prices in America and in Sony’s other main export markets. In 2004, for example, Chinese-made DVDs were selling to Wal-Mart and other retailers for $30 apiece--less than half of Sony’s wholesale price. As a result, the profit margin on DVD players fell to nearly zero. By the first quarter of 2005, profits from most of Sony’s consumer electronic products were in free fall. Even though Sony was selling more TV sets than ever, profits from these sales had plummeted a staggering 75%. Consumer electronics had turned into a commoditized rat race. To survive, Sony had no choice but to reinvent itself.

Sony's 2004 “new business model”aimed at taking advantage of “the network era”--an era in which a large portion of consumers in America, Japan, and Europe are expected to have broadband connections to the Internet. In a nutshell, the strategy is to use Sony’s hardware as a means to promote, protect, and boost the value of Sony’s games, movies, music, and other proprietary software, all of which are anticipated to be the engine of Sony’s future profits. Indeed, this was clearly the direction the company was headed even before the new business model was christened: in fiscal 2004, while its electronics division was losing money, Sony’s game division, although only a fraction of revenues, was highly profitable. Indeed, it accounted for over half of the company’s operating earnings, with the DVDs in its Picture Division providing a large share of the rest.

Two crucial pillars of Sony’s new game plan are the Playstation 3 and the Blu-Ray laser DVD player. The Playstation 3 may sound like a child’s toy but is in fact an incredibly powerful computer.  At its heart is a newly developed "Cell" chip, with more teraflops of processing power than IBM’s famous Deep Blue supercomputer has, can simultaneously support nine different operating systems for home entertainment and consumer electronics. It can thus function as a “home server,” supplying television sets, personal music players, and other consoles in the home with entertainment content. Aside from playing DVDs, videos-on-demand, games, and music, the new Playstation can also instantaneously navigate the Internet to access the Sony and other websites and download everything from high-definition movies to action games (while billing consumers’ credit cards for their use). In doing so, it offers Sony a portal, if not a Trojan horse, into consumers’ homes.

The Blu-ray laser player, already out in Japan, increases by an order of magnitude the amount of data that can be stored on a disc, thanks to having a much smaller beam spot than is found on conventional DVD players. This laser allows it to play completely re-engineeered discs, which though they are the size of conventional DVDs can store 20 times what a conventional DVD can store. Sony achieves this incredible storage capability on Blu-ray discs by using a top layer that is so hair-thin– 1/10th of a millimeter– that the blue laser can “see” eight layers deep. The real advantage of this layering for Sony is that now not only will it be able to reissue its movies in high-definition format and repackage entire series of movies–-such as the 20 James Bond films–-on a single DVD, but it will also be able to make some of the layers recordable. This means that any additional movie-related content that Sony wants to market on its website can be downloaded and recorded directly on to the movie’s DVD. As Sony envisions the near future, movies on DVDs will be gateways to further consumption. After buying the high-definition version of Spider-man on Blu-ray, for example, a consumer might choose to buy a Spider-man game and add it to the same DVD.

Balanced on these two pillars, Sony hopes to reemerge as a new giant on the entertainment scene: a cyberspace-based jukebox of games, movies, and other entertainments--all available at the click of a remote control.

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