How the sun went down for Sony

CINEMA audiences in North America have responded well to Sony's latest release Are We There Yet?, a family-focused comedy starring rapper-turned-actor Ice Cube. The film topped box-office takings on its opening week despite gruesome winter weather in many parts of the US.

Its positive reception stands in sharp contrast to the overall health of the Japanese corporate giant that made it. Sony was once widely regarded as the colossus of the consumer electronics world with a brand that was a byword for innovation and quality.

But many analysts now say the iconic group has lost its way, and are asking not whether the company has arrived - like Ice Cube and co-stars - but whether it is on the right road at all.

The assessment from Mark Lanyon, an analyst for Chicago-based research house Morningstar.com, is biting. 'Sony lost its innovative-technology oriented focus beginning in the mid-1990s. You would be hard-pressed to find competent execution in its core electronics franchise - with the notable exception of the highly successful PlayStation console - since the 1980s,' he says.

'The majority of the company's profits have been redeployed into an eclectic and unrelated group of businesses including financial services, movies and so on.'

In Japan, there's a similar swipe from Mitsubishi Securities analyst Masahiko Ishino, who says the company that once brought the world the wildly successful Walkman personal stereo, has since taken its eye off the ball.

'For Sony's history over the past 20 years they've only had one product that's been really successful,' he says.

The problem with the core electronics division, which still accounts for about two-thirds of the company's sales, has been recognised by Sony, too. Last week it brought investors a fresh round of appalling news, slicing the pre-tax profit forecast for the year to this March by 18% to 140bn yen (£720m).

The operating profit picture was darker, with the full-year forecast pared back by almost a third to 110bn yen. Yesterday, Sony paraded figures for the quarter to December that were just as bad, including a slump of almost a quarter in operating profit for electronics.

'They have really steered away from their core competency, which is to make good electronic products,' says Standard & Poor's sector analyst John Yang. 'They've purchased the film business, they've tried to make money in games, music, what have you. But now it looks like it's taking its toll.'

In a rare admission that Sony is failing to match Apple Computer and other rivals in bringing out new lines - such as Apple's iPod music player, a global hit - Sony Computer Entertainment president Ken Kutaragi noted this month that Sony's original spirit of innovation had been 'diluted&'. He added: 'We have to concentrate on our original nature - challenging and creating' in what adds up to a call for a back-to-basics rescue plan.

In truth, however, Sony's problems extend far beyond its own, in-house failure to remain a provider of must-have nifty gadgets. While it has been standing still or pouring energies into its film and music businesses, rivals such as Korea's Samsung Electronics have been pressing ahead with their own product ranges.

The ferocious drive has eroded the once-dominant power of the Sony brand and, critically, triggered a slide in selling prices of the electronic goods at the heart of the Sony stable. The price tags for televisions, DVD players and video cameras are all heading south, and fast.

Katsumi Ihara, Sony's chief financial officer, said this month that price erosion was now occurring "at a speed that could not have been imagined in the past'.

S&P's Yang, who recently cut his Sony rating to hold from strong buy, says: 'Sony used to charge a premium for having the label 'Sony' on its products but these days you have all these Koreans, the Taiwanese, the Chinese: the quality of their products are as good as Sony. So from a consumers' point of view, they don't really care if it has Sony's name on it or not.'

In reply, Sony has been taking the axe to its cost structure. Under president and chief executive Nobuyuki Idei, executives have been trying to curb outlays from the electronic division faster than asking prices for electronic products have been sliding.

In March 2003 - when Sony also lifted the veil on a grim set of numbers in what is dubbed The Sony Shock - Idei vowed a three-year drive to cut costs, reduce headcount and plough more funds into research and development. He also promised to restore profit margins to that Sony's renaissance remains a distant goal.

Goldman Sachs' Yori Fujimori told clients that while costs were not yet being cut as fast as product prices were retreating, Sony itself appeared to have lost its edge.

Sony genuinely appears to be suffering from the innovator's dilemma - listening to the marketing side's views means product development will be one step behind,' Fujimori said, adding that there wasn't yet much confidence about an earnings recovery.

Merrill Lynch's Hitoshi Kuriyama was also downbeat, arguing that 'the latest revisions reveal difficult fundamentals and another delay in recovery timing'.

Standard & Poor's Yang said the next couple of years will be crucial for Sony and boss Idei. 'These [electronic products] are supposed to be Sony's cash-cow products. It's not looking good.' He reckons investors will zero in on Sony's profit margins and Idei's promise that they would stand at a relatively healthy 10% by 2007.

'Let's say if [by then] Sony's operating margins are around 8% or 9%, I don't think that the market is going to punish Sony and Idei. But if they are less than 8%, I think they're going to ask for a big change in the board, including Idei. March 2007: that's the big test for him.'

Man who must deliver

NOBUYUKI Idei, Sony's chief executive, once remarked that 'technology is the language that inspires dreams'. Sadly for the 67-year-old, technology and the way it is now changing is more likely to be triggering nightmares at the venerable Japanese group.

If Sony is to work through its current slump successfully, much of the solution is going to have to come from Idei, a company veteran on whose watch the current crop of problems has materialised so painfully.

Tokyo-born Idei is the son of an economics professor. He himself studied economics and political science, joining Sony in 1960 after graduating from Waseda University in the Japanese capital.

Since then, he has devoted his working life to the group although many of his early years were spent away from its Tokyo headquarters. After further studies in Switzerland, he was sent to establish Sony France in 1968.

The trilingual manager's ascent to the top of the Sony corporate ladder caused friction. Named president in 1995 and chairman and chief executive in 2000, he was regarded by some as an outsider whose skills lay more in marketing and communications than in technical matters.

Often described as edgy or tightly wound-up, he has embarked on a round of cost-cutting as profits come under pressure, rivals raise their game and the prices of electronic goods slump.

He is targeting at least a 10% reduction of the worldwide workforce and has pledged to deliver profit margins of 10% by March 2007 compared with less than 2% today.

'In an environment changing as quickly as this, you have no time to create a business model,' Idei said last year in clear testimony of how rapidly Sony's crowded core market place is changing. 'People used to talk about game plans but you can't even do that today.'

Sony is likely to pull out all the stops to mark its 60th anniversary next year. Whether there's much to celebrate then or in following years depends on Idei.