February 27, 2012 7:38 pm

Sony: Channels to choose

As the Japanese group’s quest for a return to Walkman-era glory continues, Sir Howard Stringer’s successor looks set to persist with the departing chief’s cultural and structural shake-up
Sony's incoming CEO Kazuo Hirai and current CEO Howard Stringer©Reuters

Thumbs up: Sir Howard Stringer (right) with Kazuo Hirai, named this month as his successor. A run of crises put paid to hopes of a 2011 profit revival

As he celebrated Sony’s sweep of Grammy awards at a star-draped after-party in West Hollywood on February 12, Sir Howard Stringer looked like a man relieved.

Adele, the Sony-signed British singer, had won six trophies, capping a year of music successes for the Japanese group and its Welsh-American chief executive, who had lured industry veteran Doug Morris to run his record labels, and pulled off a bid for EMI Music Publishing without committing much capital.

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Yet he had bigger reasons to look cheerful. The buzz and back-slapping at Cecconi’s – the low-lit restaurant where a barefoot Adele mingled with Sony executives – offered a welcome diversion after a gruelling year at the company’s Tokyo headquarters.

The 70-year-old’s hopes of going into retirement with the group restored to annual profits of $3bn had been shattered in 2011 by a succession of crises. Japan’s earthquake, cyber-hacking attacks, supply-disrupting floods in Thailand, London riots that destroyed a DVD warehouse and the yen’s relentless, export-squeezing rise all took a toll.

Even his victories had been hard won. Days before the Grammys, Sony’s board had accepted his recommendation that Kazuo Hirai – a calm, bilingual Japanese 51-year-old who had risen through the music and PlayStation video games divisions – take over in April as chief executive, while Sir Howard stayed on as chairman.

The warm body language between the two at Cecconi’s made the move look like the seamless conclusion of a succession plan that began in 2009, when Sir Howard promoted Mr Hirai and three other young “musketeers” to rejuvenate Sony’s management.

What few present knew, however, was that a month earlier Mr Hirai’s accession looked like it might be derailed by an old guard that Sir Howard’s supporters say has undermined his efforts to shake up the group since he took the top job in 2005. Four people familiar with the events say that, as it became clear the company would lose Y220bn ($2.7bn) in the year to March, a group of retired Sony electronics managers approached directors to try to block the appointment.

Their attempted coup provides an insight into how fortunes turn in technology, the pain still felt at a company that was the Apple of the 1980s, the still unsettled nature of Sony’s strategy and the cultural rifts between Japanese and western management styles that have survived decades of globalisation.

The retired executives had run Sony as it wowed the world with devices such as the Walkman, the Trinitron television and the Handycam video recorder, and still commanded respect and loyalty. But they had watched in dismay as the group that embodied Japan’s postwar manufacturing prowess lost out to cheaper, nimbler Asian electronics producers, including South Korea’s Samsung and HTC of Taiwan.

Now, they were suspicious of Mr Hirai and hostile to the cultural and cost changes he and Sir Howard say are needed to revive its competitiveness. They suggested several alternative CEO candidates with electronics backgrounds, including Ken Kutaragi, the PlayStation creator. “It was basically an attempt to turn back the clock,” says one senior manager familiar with the “conspiracy”. In the end, however, the board approved Mr Hirai’s appointment unanimously.

So if Sir Howard looked relieved that night in Los Angeles, it was because he had fended off the latest challenge to his authority, protecting his chosen successor and seeing off a backlash that might have reversed the course he has set for the company.

“I know there are some who want to look back, to go back to the old way of doing things,” he said when announcing Mr Hirai’s appointment, warning that his “tough-minded” protégé would resist this “wrong approach”.

Film and music

The appointment of Kazuo Hirai has reignited questions about the level of commitment at Sony’s Tokyo headquarters to its US-based media businesses.

Mr Hirai has stressed the value he sees in the film and music brands – calling them “assets that differentiate our company” – and has emphasised his own experience in the networked entertainment world of the PlayStation. But with a Japanese national again in charge of the group, some media staff in New York and Los Angeles fear a spin-off that could leave their volatile businesses vulnerable to a takeover.

Sir Howard Stringer, from whom Mr Hirai is to take over, has according to people close to him advised the film and music side to step up its collaboration with Sony’s electronics operations to prove it belongs. As digital services including YouTube and Netflix start to invest in original programming, Sony could use the films and television shows that its studios produce to make exclusive content available through its internet-connected TV sets and other devices.

For now, splitting off the film and music companies seems unlikely – if only because they are among Sony’s only profitable divisions, alongside a Japanese insurance business. Sir Howard never replaced himself in the role of CEO of Sony Corporation of America, but insiders speculate that Mr Hirai could appoint a US executive to a similar position to reassure his American entertainment colleagues.

In reviewing Sir Howard’s record, important numbers suggest the right verdict is a thumbs down. The group’s market capitalisation has shrunk by 70 per cent since his promotion from running its US entertainment business. Seven years ago, Sony’s market cap was two-thirds that of Apple, but today the iPad-maker is 20 times Sony’s size, and has usurped its reputation for innovation in electronics. In the four years to this March, Sony will have suffered nearly Y620bn in net losses. Its televisions business has never made money on Sir Howard’s watch, defying repeated predictions of a turnround.

Was his strategy wrong? Had Sony become so ossified and outmanoeuvred that no CEO could restore it to its Walkman-era glory? Or do all Apple’s competitors look like failures in the iPhone age?

Sir Howard faced high expectations, nurtured in Japan by the record of another foreigner: Nissan’s Carlos Ghosn steered the carmaker quickly from near bankruptcy to profit in the early 2000s. “A lot of people hoped Stringer would be another Ghosn, and would come in and make big, fundamental changes in a hurry, but that never happened,” says Osamu Katayama, author of books on Sony. “Sony and Nissan are different cases, though I do think Stringer could have been more aggressive.”

One former colleague says Sir Howard was worn down by Sony’s slow-moving culture in Tokyo, but should have stopped worrying about negative headlines and pushed harder. However, Sir Howard’s defenders argue that he has made as much of an almost impossible hand as anyone could have done. Sony’s performance, they say, cannot be seen in isolation from the woes of Japan’s other big electronics companies. All have suffered from the strong yen and natural disasters, and some have been even slower to adapt and cut costs. Both Panasonic and Sharp are forecasting multibillion-dollar losses this year.

“His performance might look like a C plus, but adjusted for difficulty it’s an A,” another colleague says. An adviser to Sony adds: “If it wasn’t for Howard, they might be bankrupt by now. He’s come up with the right strategy but he’s a mere mortal.” Sir Howard himself defended his record this month, saying: “If we hadn’t reformed Sony as we did, can you imagine where we’d be today?”

. . .

If Sony’s troubles arouse more passion than those of other Japanese technology groups, it is because it had been best positioned for the shift to the networked hardware and digital distribution model Apple has exploited. Sony made the devices – the music players, mobile phones and computers – and its movie studios and music companies produced the entertainment content. “But instead of working together, the managers of the different businesses fought to keep their independence,” Mr Katayama says. Early attempts to integrate products and create digital content stores to rival iTunes flopped, while Apple – a niche computer-maker with no entertainment assets – swept the field.

Sir Howard’s appointment was supposed to change that. After he took over Sony’s US entertainment business in 1997, the former CBS president earned a reputation for pushing through cost cuts and cultural change with the charm of a former journalist and the toughness of a man drafted to fight in the Vietnam war six weeks after landing in the US.

He was appointed CEO two years after the company’s misreading of changing TV technology led to the “Sony shock” of tumbling electronics earnings in 2003. Then, he talked of the urgent need to break down divisional “silos”, overhaul the scatter-gun approach to product development and respond faster to changing consumer behaviour. Some of those comments sound similar to his successor’s analysis of the task faced now. “I have an acute sense of crisis,” Mr Hirai said on his appointment, urging the company to step up innovation.

. . .

Japan’s consensus culture posed a far greater challenge for Sir Howard than Hollywood or record labels. Still, he cut Y200bn from Sony’s costs and 12,000 people from the payroll by 2008 to produce operating profit margins in electronics of 5 per cent. After what he calls the “Lehman shock” sent financial markets crashing that year, he cut again, reducing costs by another Y250bn and headcount by another 16,000 to 168,000.

The rewards were supposed to show through in 2011, before the seismic shock of March 11 destroyed several factories and warehouses at a cost of Y150bn. Such setbacks tested his resilience and, coupled with internal resistance, left him frustrated. But, he told the FT last week, “Sony keeps bouncing back and I’m confident the stage is set for a new era of growth.”

Sir Howard can point to strategic wins. Sony’s Blu-Ray won the DVD format wars against the Toshiba-backed HD DVD standard in 2008. It has done as well as anybody from 3D film and television, making everything from cinema projectors to TV sets for the format. In the past year, the growth of the Sony Entertainment Network, uniting games, music and videos, suggests his efforts to improve collaboration and software development are having an impact. He also bought Swedish telecoms group Ericsson and German media company Bertelsmann out of tense joint ventures; and extricated Sony from a costly liquid crystal display screens venture with arch-rival Samsung.

Reviews of new products – from the Sony S tablet to Xperia smartphones and the PlayStation Vita portable games player – have been positive. But none has taken off like an iPhone, iPad or iPod, and too many still come out late. “While they plan, others go and do,” one consultant says.

While Apple concentrates on a few devices at a time Sony juggles scores of lines, from medical imaging equipment to 3D binoculars. It leads in image sensors (supplying those for the cameras in the latest iPhone) and professional movie cameras. “That doesn’t mean anybody’s going to stop whining about the Walkman,” one senior Sony figure remarked last year.

Mr Hirai says his priorities will be to grow faster in digital imaging, smartphones and video gaming; turn around the TV business; and expand in networked services. “We are not shifting direction. We are shifting gear,” Sir Howard said this month, implying that investors will see a Japanese executive accelerating the strategy of the Welsh-American outsider.

But as Mr Hirai takes the reins, the question of what success Sony’s next leader can realistically aspire to remains. Investors would welcome stability and improving margins – average analyst estimates are for smallish net profits of Y70bn and Y120bn in the next two years – but until Sony finds another Walkman-like hit, he too may struggle to quieten the group’s vocal old guard.

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