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July 24, 2007 9:17 pm

Stakes high for Sony in its war of perception

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A stunning Japanese model holds up the latest version of Sony’s PlayStation Portable, the consumer electronics group’s handheld games player. But she cannot turn it on.

Before an expectant audience at a packed film theatre, she fumbles with the device before Kaz Hirai, chief executive of Sony’s games unit, calmly takes over and switches on Casino Royale. But even Mr Hirai cannot get the James Bond movie, which is playing on the PSP, to stream on to Sony’s flat-screen television.

The technical glitches at this month’s PlayStation premiere in Tokyo were symbolic of a bigger problem gnawing at the electronics group: how does Sony convince consumers that its games consoles are essential “living room hardware”, capable of seamlessly networking with other Sony devices?

The PlayStation 3 is integral to this vision. The idea is that a consumer will buy a PS3, connect it to a high-definition Sony Bravia LCD TV, use the PS3’s Blu-ray disc drive to watch movies, watch clips on Grouper, Sony’s video-sharing site via their PS3, and so on.

But consumers have yet to latch on to Sony’s vision.

“Sony’s whole idea is that it wants more of a cohesive strategy between all of its business lines,” says Hiroshi Kamide, an analyst at KBC Securities. “But I am not sure how feasible this is. Consumers still do not fully understand what the PS3 is capable of and balk at the price tag.”

Although Sony’s games unit only comprises 13 per cent of the company’s overall revenue, it plays a disproportionately large role in shaping perceptions about the Sony brand – particularly among the crucial 18-35 age bracket.

But the unit is dragging down the group’s profitability at precisely the moment when Sony’s key consumer electronics division is rebounding after a period of stagnation.

“The games business, and especially the success or failure of the PS3, holds the key to Sony’s earnings over the next few years,” says Kota Ezawa, an analyst at Nikki Citigroup.

Sony is on track to achieve a pledge made by Sir Howard Stringer, chief executive, of group-wide operating margins of 5 per cent by March 2008, thanks largely to robust sales of Bravia televisions, Cybershot cameras and Vaio computers.

But Carlos Dimas, analyst at HSBC, said if the games unit was slated to break even this year – rather than, as expected, report a loss of between Y60bn ($497.6m) and Y70bn – Sony’s overall margin would have been 5.7 per cent.

Sony’s five main business operations are consumer electronics, components and devices, games, movies and financial services. But the two main drivers of growth are its core electronics division and its games unit, say analysts.

Mr Ezawa estimates that Sony’s games unit will swing into the black by March 2009 with an operating profit of Y4.6bn and that profit for electronics will reach Y335bn, which will boost overall group profit to Y475.2bn from Y71.7bn in the year just ended.

Sony is set to unveil its quarterly results tomorrow. Analysts on average expect the company to post an operating profit of Y51.85bn for April-June, up from Y27.05bn a year earlier, according to Reuters Estimates.

“The games unit is arresting growth at Sony, at a time when everything else is becoming profitable,” says Mr Dimas.

“There is also the problem of perception. If they lose the console wars, the PS3 becomes yet another Sony device that’s lagging behind the competition.”

Although Sony put on an impressive show at this month’s E3 games summit in California, according to observers, it still has not won the “perception wars”.

Nintendo’s Wii is outselling the PS3 six-to-one in Japan and by a wide margin in the key US market.

Moreover, Sony’s reputation was further maligned this week in the blogging universe when it emerged that a much-touted $100 price cut on its 60 gigabyte PS3 was simply a strategy to phase out the console, which will no longer be produced.

A stronger software line-up and another price cut during the crucial Christmas shopping season should help spur sales of the PS3, say analysts. But whether it will encourage customers to link their other Sony devices
to the console is open to question.

After all, if the chief executive of Sony’s games unit cannot figure out how to link a handheld PSP player to a television, what hope is there for the mere mortals among us?

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