Resuscitating Sony: Why new CEO Kazuo Hirai has his work cut out for him

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Sony has announced that former PlayStation chief Kazuo Hirai will be taking over as both president and CEO of Japanese electronics giant Sony, replacing former CBS executive Howard Stringer as of April 1. Although few industry watchers are surprised to see Hirai advance to the top position at Sony, he is doing so at a time when the once-unstoppable company is facing major challenges and dwindling prospects in almost all of its core markets, from video gaming and entertainment to home electronics and mobile devices. What kind of Sony is Hirai inheriting — and how can he hope to turn it around?

Money talks

The primary goal of a business like Sony is to make money — and that means the primary goal of its chief executive is to maximize the value the company returns to shareholders. (You’ll notice responsibility to things like consumers or the environment isn’t anywhere in that sentence — like all other secondary goals, those things only matter if they help the company make money.) And money is undoubtedly the primary reason Sony moved to replace Stringer. Stringer took over as Sony’s CEO in 2005. Under Stringer’s leadership, Sony went from a mammoth, profitable company to a firm that posted its first losses in 14 years: 2009 and 2010 saw the company lose a $1 billion and $440 million, respectively. That number jumped to $3.1 billion in 2010, and Sony has forecast it’ll lose another $2.2 billion in its 2011 fiscal year. That’ll be four years of losses in a row on Stringer’s watch.

It’s not just that Sony’s finances have been rocked by the global economic downturn and significant one-time events (which, to be sure, they have). The long-running Japanese recession, the U.S. financial crisis, and the percolating series of debt crises in Europe haven’t done Sony any favors — nor did the 2011 Tohoku earthquake and tsunami. But perhaps more seriously, Sony has seen its worldwide sales volume and net income decline precipitously because its core businesses have been eroded by competitors. The combined effect is not just that Sony is on the verge of its fourth consecutive year of losses, but that it’s seeing its total sales and net income decline, even as its competitors like Samsung and Apple are successfully growing their businesses in Sony’s core markets.

sony-fy-financials-2005-2010
Source: historical financial data from Sony

Portable media

Sony used to command the portable music player market, dating all the way back to the 1980s. The term “Walkman” nearly become generic for any portable music player — CDs or (shudder) cassettes, thanks to Sony’s success. Now, of course, the term “iPod” is almost generic for any portable music player, and while Sony long-since went digital and tried to compete in the market on the basis of style and quality, it only succeeded against the Apple iPod as well as everyone else: not in the slightest.

ps vita price drop confirmed and borderlands 2 goes handheld the top 10 most anticipated gamesGaming

But the Walkman and the iPod largely predate Stringer’s tenure at Sony. How about something near and dear to incoming CEO Kazuo Hirai’s heart: gaming. Sony has always been a strong player in the console and handheld gaming market, with its original PlayStation console helping define a generation. The company experienced explosive success with the PlayStation 2, which was launched in 1999. It is still on sale, and remains the best-selling game console of all time, having moved over 150 million units since launch.

However, Sony fumbled with the launch of the Blu-ray-enabled PlayStation 3 back in 2006. The product was beleaguered by a high price tag, a lack of must-have titles exclusive to the platform, and — perhaps most importantly — was utterly sideswiped a year later by the inexpensive Nintendo Wii.

Yes, PS3 sales have gradually picked up as Sony has iterated the product and lowered its price. Before the 2011 holiday season, about 56 million PS3s had sold worldwide, which was becoming comparable to Microsoft’s Xbox 360 (both of which are still far behind the Wii in total sales). However, the company was still selling the consoles at a loss well into 2010, which did nothing to help the bottom line of Sony’s gaming business.

sony-kaz-hirai-apologyThen there was the disastrous breach of Sony’s PlayStation Network (and Qriocity media service), which not only carried $170 million in direct costs and shut down the service for weeks, but substantially tarnished Sony’s reputation. Sony can no longer bill itself as a top-flight provider of online entertainment and media: Instead, it’s the only major player that’s been successfully attacked. And while Sony has been trying to compete in the portable gaming market, its PlayStation Portable offerings never gained serious market share compared to Nintendo’s handheld offerings. Now the entire portable gaming device market is being seriously threatened by smartphones, which has no doubt impacted prospects for the recently-released PlayStation Vita.

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