January 24, 2012 6:29 pm

Next Sony chief faces an uphill task

After being appointed chairman and chief executive of Sony in 2005, Sir Howard Stringer sat down with 60 Minutes, the flagship CBS News programme where he once worked. Asked how a Welsh-born American would mesh with the Japanese electronics and media group’s culture, he replied: “Taking care of somebody else’s culture is part of the joy and opportunity of this job.”

Nearly seven years on, as he prepares a staggered handover to his chosen successor, Kazuo Hirai, Sir Howard’s window of opportunity to achieve the “reinvention” he touted then is closing fast. The job never looked easy: while rising champions such as Apple were defined by software and smoothly integrated digital networks, Sony was fixated on standalone devices and crosscut by divisional rivalries.

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A year ago, analysts considered Sir Howard’s mission half accomplished. Recent events have provided less reason for joy: since March 2011, Sony has faced Japan’s devastating earthquake, additional disruptions from Thai floods, a remorselessly strong yen, hacking attacks on the PlayStation network and weak consumer demand.

In 2011, Sony’s stock tumbled 54 per cent. The list of challenges grew longer on Thursday, with news that Sony Ericsson’s mobile phone shipments had fallen by a fifth in its last quarter – knocking the venture into losses just as Sony is taking full control. On Friday, Moody’s downgraded Sony’s long-term credit rating by a notch from A3 to Baa1.

“It’s hard to focus on structural reform when you’re constantly dealing with crises,” says Osamu Katayama, author of several books on Sony. Sir Howard cut headcount by 7 per cent, closed 15 factories in the three years to last March and halved Sony's suppliers in a year. Mr Katayama is nonetheless “disappointed”, saying: “He never presented a clear vision of what sort of company Sony should be.”

Before the tsunami, Sir Howard had expected to put two years of net losses behind him. Instead, Sony reported another loss for the year to last March, of Y260bn.

In February 2011, analysts expected this financial year to produce a Y310bn ($3.9bn) operating profit. But in November Sony said the losing streak would continue, in part because of write-offs as it trimmed its lossmaking television business. In December, Sony said its exit from an LCD panel joint venture with Samsung would trigger a non-cash charge of Y66bn.

November’s warning was delivered by Mr Hirai, who runs Sony’s consumer products businesses. Sony has not commented on reports that he could be made president in April, with Sir Howard remaining chairman and CEO, but insiders expect the board to approve the promotion. The bilingual Mr Hirai, 51, appeared with Sir Howard at the Consumer Electronics Show this month, sounding relaxed and fluent, and his elevation could set the stage for his 70-year-old boss to hand over full control as early as 2013.

Sir Howard told journalists after Mr Hirai’s promotion to executive vice-president last year: “I would like to make [the transition] systematic and I don’t want to delay.”

Sony’s travails in 2011 masked important strategic advances. Restructuring TV production and extricating the company from the Samsung venture were essential moves for restoring profitability. Sony was paying Samsung hundreds of millions of dollars in fees and penalties because poor TV sales meant it was buying too few panels from the shared business.

In entertainment, Sir Howard hired industry veteran Doug Morris to run Sony’s record labels and allotted cash to a takeover of half of EMI that would strengthen its music publishing business. Sony Pictures should release the next instalments in the lucrative Men in Black, Spider-Man and James Bond franchises in 2012.

Buying Sweden’s Ericsson out of Sony Ericsson should give Sony a clearer brand with which to attack the competitive smartphone market, and a better chance of connecting its mobile efforts with its TVs, tablets and personal computers, and with its games, films and music. But Sony Ericsson’s recent sales fall highlights the challenges it still faces.

“Sony still seems to be lagging top makers in terms of development speed,” said analysts at Goldman Sachs, and other analysts worry that its products are too expensive. The Sony S tablet launched more than a year after Apple’s iPad, and at no discount. Rivals such as Samsung in South Korea enjoy a currency advantage despite Sir Howard’s battles to shift more production outside Japan.

At the CES, Sir Howard and Mr Hirai touted products such as Xperia smartphones, the Sony P foldable tablet and the handheld PlayStation Vita. Emphasising Sony’s new network mantra, Mr Hirai said: “Only Sony can offer a truly unique convergence of hardware, content and network services”, all accessible with one account.

About 900m Sony devices are already in use, he said, and 300m more network-connected gadgets should hit the market by 2015. Mr Hirai’s ability to prove the value of that convergence, and to excite consumers again about Sony’s devices, will be critical to his chances of finishing what Sir Howard started.

Analysts at Bank of America Merrill Lynch argued last week that Sony's finances could recover in the next year, saying "the worst is nearly over".

Mr Katayama, the author, added: “Sony still has a strong global brand and other valuable assets. It’s up to Hirai-san to figure out how to exploit them.”

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