As former U.S. technology giant Kodak Corp. tries to restructure its way back to profitability, another one-time technology superstar is trying to do pretty much the same thing on the other side of the globe. Does it make Kodak feel any better knowing that former Japanese titan Sony Corp. is also behind the eight-ball, struggling to remain relevant as its competitors pass it by? Probably not – nor is Sony likely to feel any solace at watching Kodak. They're both preoccupied with survival.
According to several media reports out of Japan, including a report in the Financial Times, Sony is expected to announce a wave of layoffs this week – up to 20,000 employees or about 12 per cent of the company's global workforce – as part of a major restructuring. The Japanese newspaper Nihon Keizai reported that the staff reductions would take place over the next two years, and that Sony is also planning to close several of its plants that make cathode-ray tubes for television sets.
The reports of cuts will come as little surprise to anyone who has been following Sony over the past year. When it reported its disastrous first-quarter results in April, the company said that it was planning a significant reorganization, a move designed in part to bring its costs down, but also to refocus on products that might get Sony back into the forefront of high-demand technology markets. Industry critics say the company has lost ground to its more nimble competitors.
Sony's first quarter was definitely a wake-up call for anyone who had grown used to the idea of the Japanese firm dominating the personal electronics business, a business it helped to virtually invent with products such as the Walkman and the compact disc, in the same way that Kodak virtually invented the consumer photography business. In the April to June period, Sony's net profit fell by 98 per cent over the same period the previous year, and revenue dropped 7 per cent.
Those dismal results came on top of a fairly depressing fourth quarter, when Sony reported a much larger than expected operating loss of 116-billion yen or almost $1-billion (U.S.). This caused what has come to be known as the “Sony shock,” which drove down not only the shares of the electronics and entertainment giant – which fell by almost 25 per cent in the two days following the April announcement – but also helped push down the Nikkei index, which fell by 2 per cent.
Many Sony-watchers were hoping for a better first quarter, but the drop of 98 per cent in net profit – and 68-per-cent drop in operating profit – showed that the company's problems were much deeper than expected. Sony not only saw sales fall in its electronics division, where revenue dropped by 9.8 per cent in the first quarter, but also in its video-game unit, where revenue fell by over 18 per cent for the period.
The performance in the video-game unit no doubt came as a surprise for those who have come to think of Sony as the king of the console gaming business with the industry-leading PlayStation 2. In the third quarter of last year, after the crucial Christmas shopping season, Sony's profit more than doubled compared with the previous year's quarter, and a majority of that profit came from its video business (although Sony Pictures also had hits with Spider-Man and Men in Black II).
In a way, Sony is paying now for its early success in the game console business. It has been outselling both Microsoft's Xbox and Nintendo's GameCube for so long that sales of the PlayStation 2 have begun to slow, and analysts say Sony needs a blockbuster followup to the unit to get its sales moving again. The company has announced the PSX, a unit that includes a digital video recorder and other features, but Microsoft is also working on a souped-up Xbox sequel.
Meanwhile, Sony's traditional electronics business is in need of serious work. Much of the disappointment in the fourth and first quarters came from a falloff in sales from Sony's Trinitron television operations, which is no doubt why they are the main focus of the cuts that are expected to occur when the company reports its latest quarter on October 23. Meanwhile, companies such as Sharp that jumped on the LCD-panel market early have been watching their sales climb dramatically.
Sony recently announced a joint venture with Korean electronics manufacturer Samsung to make LCD-panel TVs, but some analysts are skeptical about this move. As Deutsche Bank put it: “We struggle to understand why a Japanese company would enter into an arrangement that will eventually end up strengthening a Korean competitor.” The firm said the project is “a long-term negative” for Sony.
The company's Vaio PCs, which aim at the higher end of the consumer computer market, have also been losing market share to lower-priced PCs from competitors. And even in the personal entertainment category, which Sony all but pioneered with its Walkman tape player and Discman CD player, the company has been losing ground to smaller, low-cost competitors – perhaps in part because of Sony's fondness for proprietary formats such as the Memory Stick data storage card.
Sony has come a long way from when its name was synonymous with electronics. Its PlayStation 2 dominates the video game market, but its reign may be ending and its profitability is clearly declining – and meanwhile, Sony's other assets are either volatile (the movie business) or behind the technology curve (the TV and electronics business). It should come as no surprise that of the 20 analysts who follow it, 10 rate Sony as “underperform” or “sell” and 9 have it rated a “hold.”
E-mail Mathew Ingram at mingram@globeandmail.ca
For past columns and a brief biography, click here
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