SONY’'S PROBLEMS AND RECOVERIES: FLAMING LAPTOPS, APPLE AND SAMSUNG AND THE 2011 HACKER ATTACK

SONY’S DECLINE

In June 2012, Malcollm Foster of AP wrote: "Widely admired in the 1980s as an innovative power, Sony fell behind when digital music players and flat TVs became hits. Its gadgets have lost popularity as consumers flock to products from Apple such as the iPhone and iPod. It's also lost out in the TV market to South Korea's Samsung and other Asian competitors. In 2010, Sony stopped Japanese production of its Walkman, which sold 220 million units worldwide."[Source: Malcolm Foster, Associated Press, June 4, 2012]

“Sony once hit home runs, but now it’s lost its touch,” Akihiko Jojima, an analyst and author of the book Sony’s Sickness told the New York Times.’sony still makes competent products but they’re all just boring ground balls.”

Hiroko Tabuchi wrote in the New York Times,”In the last few years, its position as a consumer electronics titan has been usurped by more nimble competitors.The iPod from Apple dominates digital music players. In gaming, both the PlayStation 3 and its PlayStation Portable consoles from Sony trail the competing Wii and DS machines from Nintendo---and the DS is about to get a 3-D upgrade. Samsung Electronics leads in the global flat-panel TV market, a traditional stronghold of Sony.” Sony’s pioneering e-book reader lost its early lead to the Kindle from Amazon.com..” In the meantime Sony has also “failed to leverage the wealth of content at its music and cinema arms to the advantage of the wider company.” [Source: Hiroko Tabuchi, New York Times, March 28, 2010]

Sony Shock in the Early 2000s

Sony has endured its share of trouble since the 21st century began. In 2000 it began cutting 17,000 workers, 10 percent of its workforce, and reduced factories and facilities by 20 percent. In October 2003, Sony announced it was cutting 20,000 jobs by 2006. It also announced it would cut the component lines for traditionally television from 17 to five in the same period.

Sony’s attempt to get into the cell phone market has been a struggle. In 2001, it recalled 1.1 million cell phones over worries that the battery could melt the plastic case and because the phones had a software flaw that made them incompatible with the NTT DoCo Mo network. In the end it lost $360 million and was forced into a joint venture with Ericsson. Sony was also a late comer to the flat screen television market and had to make a deal with Samsung to get a piece of the action.

In 2001, Sony announced some its first quarterly losses ever, much it due to a slump in sales of electronic products, which accounts for three fourths of Sony's business. In fiscal 2001-2002, Sony squeaked by with a profit of $118 thanks mainly to strong sales of PlayStation 2. In fiscal year 2001-2002, electronic made up the bulk of its sales but brought in profits of only $125 million, compare to $579 million in games, $203 million in music, $147 million in film and $91 million in insurance.

After Sony announced a $927 million loss in the first three months of 2003, its stock plunged 24 percent in two days and the company lost $3.8 billion of its value. Sony blamed the loss on restructuring costs, sluggish sales and a lack of a hit movie. Other factors included competition from cheaper foreign competitors of basic audio and video equipment and delays its it Internet projects.

The “Sony shock” sent shudders around the globe. Moody dropped Sony’s credit rating. Investors began examining Sony’s short term results more closely. Afterward Sony CEO Idei said that maybe Sony could learn something from competitors like Dell and Samsung.

Sony Rebounds

Profits for fiscal year 2003-2004 were about $800 million and $1.5 billion in 2004-2005, mainly due to success in its movie and division, which produced Prince’s Musicology and popular films like 50 First Dates, Big Fish and especially Spiderman 2. Sales of digital cameras and flat screen televisions rose but sales of traditional goods such as audio equipment were down. PlayStation 2 was also down.

The successes seem to bear out that Sony’s effort to diversify was a sound business strategy. The financial services, especially the insurance wing, was doing well. The joint venture with Ericsson was paying off. There were also down sizing efforts.

Sony managed to make a profit of $605 million in 2005. Sales of Bravia felt-screen televisions and PlayStation video game consoles and a good performance by the financial sector put the company in the black after the company had projected its first loss in 11 years a few months before.

Flaming Laptops and Other Problems for Sony in the Mid 2000s

In recent years Sony has been hurt by increased competition, falling electronics prices, and several expensive and humiliating recalls.

In August 2006, Dell recalled 4.1 million batteries used in the laptop computers because of risks they could overheat and cause a fire. It was the largest recalls ever in the electronics industry. Ten days later Apple recalled 1.8 million batteries used in Mac laptops. Both recalls involved lithium-ion batteries made by a Sony subsidiary that introduced small metal particles in the manufacturing process that could can cause computers to short circuit or catch fire.

The recall ended up affecting almost every major maker of laptop computers, which were all using Sony batteries. In all 9.6 Sony million batteries, most of them in 7.74 million laptop computers made by Dell, Apple, Lenovo, IBM, Toshiba Hitachi, Fujitsu and Sharp, were recalled. Toshiba recalled 830,000 computers and was contemplating suing Sony over decline in sales and impairment to its brand image. Hewlett Packard and Gateway computers used the Sony batteries but were not involved in the recall because the batteries were configured in such a way there was no risk of overheating.

The problem first surfaced when someone video-taped a computer catching on fire at conference in Osaka in the spring. Sony was aware of the problem several months before that but didn’t act. The video of the fire was widely circulated on the Internet. Altogether there were 10 reports of computers with Sony batteries overheating. The recall cost Sony around $500 million and badly damaged its reputation.

In August 2007, Sony recalled 66,000 digital cameras to fix a defect in the adhesive strength of their bottom that cold cause minor hand injuries. In September 2008, 440,000VAIO TZ series laptops were recalled to repair a defect that could cause overheating. According to Sony, seven people in Japan and abroad had been burned due to overheating, In October 2008, Sony recalled 100,000 of its lithium ion batteries used Helwett-Packard, Dell, Acer, Lenovo in laptop computers due to overheating concerns. On top of that Sony was overtaken by Apple in portable music and Sony, Fuji film and Maxell were fined $110 million for forming a cartel to fix the price of videotape sold in Europe.

Sony was caught off guard and it reputation as an innovator was tarnished by Apple’s release of the iPod and iPhone and Nintendo’s release of Wii. Some complain that Sony products have become over-engineered, and too complicated and expensive, scaring off ordinary consumers. In 2007, Sony ranked 41st on Fortune’s list of most admired companies, much lower than it had ranked before.

Sony Recovery

Sony recorded losses in its game divisions despite good sales in late 2006 because of PlayStation 3's high production costs. The loss offset gains made by good sales in consumer electronics like televisions and digital cameras and hit movies such as Casino Royale, The Da Vinci Code and Spider Man 3.

Sony returned to annual profitability in fiscal 2007-2008 for the first time in three years. The company posted record high net profit of ¥369.4 billion on record high sales of ¥8.87 trillion.Cost cutting and shedding peripheral businesses seem to work. Since 2005 Sony had exited or downsized 15 product categories, reducing 10,000 global workers and shutting down 11 manufacturing sites.

Sales and profits rose in late 2007 as flat screen televisions, digital cameras and consumer electronics began selling well and PlayStation 3 started to sell well and become profitable after a price cut. Stock prices drops over concerns over a strong yen in the beginning of 2007 but rose towards the end of the year when a Dubai fund bought a substantial chunk of the company.

Cyber-shot cameras and Vaio personal computers sold very well. The sales of Bravia LCD televisions picked up but the television business remained in the red because price declines amid global competition.

In June 2008, Stringer said the top priority for Sony was returning the gaming and television divisions to profitability by the end of fiscal year 2008-2009. He outlined a strategy for Sony to regain its lead in televisions, return the gaming industry to profitability and release movie service for Internet users.

Sony and the Economic Crisis in 2008 and 2009

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Sony post $2.27 billion in losses in fiscal 2008-2009, the first annual loss in 14 years and the largest loss ever, as a result of the global financial crisis. The electronics division was particularly hard hit as consumer spending dried up.

In December 2008, Sony announced a major restructuring plan to deal with global economic crisis that included 1) cutting 16,000 jobs worldwide (about 8,000 regular workers (5 percent of its workforce) and 8,000 temporary workers), 2) reducing the number of manufacturing sites to five or six by March 2010, 3) cutting purchasing costs by 20 percent by halving the number of parts suppliers, and 4) cutting investment in the electronics division by 30 percent in fiscal 2009. The measures helped Sony reduce costs by more than $1.1 billion in fiscal 2009. In April management was reshuffled in the unprofitable game and television businesses.

The job cuts were among the largest made by an Asian company in the crisis. Many analysts thought the move did not go far enough to streamline the company and felt a lack of investment jeopardized Sony ability to remain competitive in the future.

In February 2009 it was announced that Sony President Ryoji Chubachu would step down and be replaced by Stringer who would serve as both company chairman and president. To make up for losses in sales Sony raised money through the sale of $2.2 billion worth of bonds in the largest bond sales ever. In May 2009, Moody lowered Sony’s debt rating to A, citing the slumping electronics market and intensifying competition.

Sony Ericsson lost $245 million in the third quarter of 2009. In September 2009, Sony announced it was going to sell its LCD and television plant in Mexico to a Taiwan firm.

In 2008 Sony posted its largest ever annual loss, $3 billion. Sony posted a loss of ¥63.4 billion in the first half of fiscal 2009 (April-September).In late 2009, Sony said it probably wouldn’t return to profitability until 2013 and predicted that 3-D products will earn the company ¥1 trillion in annual revenue by that time.

Sony Business Situation in 2010 and 2011

Sony lost about $3.1 billion in fiscal 2010-2011. Sony had previously forecast a $800 million profit and said much of the loss was due to a $3.7 billion “non-cash charge” related to tax credits. At that time Sony estimated that losses associated with March 2011 earthquake and tsunami would be about $1.8 billion. At the end of 2010, Sony’s sales of televisions grew by 44% and those of its computers rose by 28%. Its gaming and mobile-phone activities turned profitable in 2010. The television business still suffers losses, but is in better shape than it used to be.

In May 2011 The Economist reported: “Before an earthquake walloped ten of Sony’s Japanese factories, the firm was expected to report a net profit of ¥70 billion ($817 million) for the year to March 31st 2011. But the quake will have cost it some ¥17 billion that year and ¥150 billion the next. The cyberattacks will also cost billions, says Sony. Analysts guess that the breaches could cost Sony ¥100 billion. Adding to the misery, Sony was forced to revalue the tax breaks (accumulated from previous losses) that it expects to deduct from future tax bills. The company reduced these “deferred-tax assets” by a hefty ¥362 billion. This does not affect its operating profit or cashflow, but it forced Sony on May 26th to report a net loss for 2010 of ¥259 billion.

In June 2011, AP reported: “Sony is forecasting a return to profit in fiscal year 2011-2012 after logging three straight years of red ink. Along with the data breaches, the company has been battling production delays and sales losses after supplier factories were damaged by the March 11 earthquake and tsunami. It expects an 80 billion yen ($989 million) profit for the current fiscal year.”

Sony was stung by the global financial crisis. In 2009 things finally began improving after an aggressive cost-cutting drive and a revival in sales. In the final quarter of 2009, Sony surpassed analysts’ expectations with a sevenfold increase in profit to $853 million. In fiscal 2009 Sonay made a profit of ¥31.77 billion thanks to cost-cutting efforts, brisk sales consumer electronics, including televisions, especially middle priced version of products such as flat-panel televisions and strong sales in the gaming and personal computer divisions.

In the April-June quarter of 2010 Sony made a profit of ¥25.7 billion thanks to strong sales of televisions, Playstation 3 consoles and computers. In the July to September quarter it reported net profits of ¥31.1 billion ($385m), having made a net loss of ¥26.3 billion a year earlier. In the period from April 2010 to December 2010 it profits increasing eightfold.

While traditional strong points have been underperforming lately there are new signs of hope. As of fiscal 2010-2011, Sony has lost money in its core television business for seven years straight. But it is doing well I emerging markets. In India its is outperforming rivals such as Apple and Samsung. It has the No. 1 market share in flat screen televisions and controls a 34 percent share of the digital camera business. Sony owes is success to strong brand image, generous advertising spending, good relations with small and medium-size retailers and a strategy of targeting consumers with an annual income of $10,000 or more.

Ten Sony plants were crippled by the earthquake and tsunami in March 2011. In early June the 10th and last of these factories---a plant in Tagayo, Miyagi Prefecture that makes magnetic tape and blue ray and other disc media---restarted manufacturing in early June 2011.

Sony Cell Phone and Smart Phone Blunder

Norihiko Fujita, a former Sony executive who is now a lawmaker in Japan’s governing party, told the New York Times that Sony’s biggest mistakes was to misread the importance of mobile phones and fail foresee to fast-growing smartphone market, important engines for future growth. What is even worse is Sony can’t even tap into to some of best technology as enters these markets today. Under a 2001 deal that spun off its mobile phone operations into a joint venture with Ericsson, Sony has been prevented from offering cellphones that draw heavily on its own other technologies. [Source: Hiroko Tabuchi, New York Times, March 28, 2010]

In 2001, when Sony spun off its cellphone business into the joint venture, “There was the sense that mobile phones were weighing down the company,” Fujita, who helped negotiate the deal, told the New York Times. “My heart still hurts to think about it.”

Hiroko Tabuchi wrote in the New York Times, “With Sony’s mobile engineers dispatched to the venture---and an agreement that forbids Sony from competing in the business---the company found it difficult to work on multipurpose handsets that drew heavily on its other technologies. For example, Sony’s video games arm was prevented from developing a PlayStation phone, according to a person with knowledge of the situation.”

In February 2010, at the Mobile World Congress in Barcelona, Spain, Stringer said that cellphones are now “the world’s most ubiquitous computer” and indicated that Sony would somehow get back in the game. “We are building a new network service that will connect many more network-enabled products,” he said. “We are committed to extending that service to Sony Ericsson mobile phones.”

Eiichi Katayama, a technology analyst at Nomura Securities in Tokyo, told the New York Times that Sony needs to focus on building one blockbuster multifunction device. “It needs to build a network, but it also needs to make sure consumers have a ticket to play.”

Sony Playing Catch Up with Apple

Despite creating the market for portable music with the Walkman, Sony has largely missed the shift to digital music-players. Between August 2002 and July 2010, Ipods outsold in personal music devices in Japan. In August 2010, Sony finally regained the No. 1 position in portable music players in Japan.

The iPod from Apple dominates digital music players. The iPad dominates smartphones and the iPad dominates tablets. Even in Japan between August 2002 and July 2010, Ipods outsold in Sony’s personal music devices. In smartphones and tablets Sony is now a bit player. Compared to Apple, Sony seems to have lost its touch for coming up innovative products that people crave for and have to have. Plus it also seems to have lost its ability to effectively market the innovative products it has produced.

Reporting from a new Sony store in Nagoya, Hiroko Tabuchi wrote in the New York Times, “The airy new Sony store in this central Japanese city has floor-to-ceiling windows, sleek white counters and friendly employees, called stylists, who offer advice and tailored counseling on Sony gadgets... Some visitors found the similarity to Apple’s retail outlets notable. The store’s copycat design, although more hip and up-to-date than the company’s traditional Sony Style retail outlets, is emblematic of Sony’s struggle to regain its footing against Apple.” “It’s just like the Apple store,” laughed Yuka Hara, 23, a publishing company employee, told the New York Times. She was one of thousands of visitors on the store’s first day of business this month. [Source: Hiroko Tabuchi, New York Times, March 28, 2010]

“Sony quality has always been the best,” Yusuke Takagi, 20, a design student in Nagoya, told the New York Times. He owned a PlayStation 3, a PlayStation Portable and a CyberShot camera but said he was also intrigued by the iPad tablet. “I think Sony can make a global comeback,” Yoshio Kamiya, a university lecturer in computing, told the Times. “I’m hoping that soon Sony and Apple can finally play sumo.”

New Strategies, and Sony Coming Back?

One of Sony’s main strategies is to integrate is hardware and software businesses and utilize the Internet to do this. Although video game hardware and software sales have declined globally, the PlayStation Network---a system that links gamers worldwide in live play--- is a key initiative for the electronics company, which brings in an estimated $500 million in annual revenue. The network---which allows users to upgrade and download games and other content’serves both the PlayStation video game machines and Sony's Qriocity movie and music services.

With increased competition in North America and Europe, namely from Samsung, Sony has accelerated market development efforts in emerging markets in countries like India and China, where price competitiveness is crucial and every effort must be made to cut costs, This focus was behind, for example, Sony’s decision to pull of making LCD screen with Sharp in Japan.

In March 2010, the New York Times reported, Sony unveiled a new retail concept in Nagoya, which the company plans to introduce worldwide if it is successful. The Apple-store-like stores are an effort by Sony to showcase its entire network of products. Displays at the store show how various gadgets can work together: a camcorder, Blu-ray player and TV, for example, or a camera, Vaio laptop and digital photo frame. The store got off to a flying start. More than 300 people lined up for the March 17 opening of the sleek space, designed by the architect Tadao Ando. A line quickly formed in front of Sony’s new 3-D televisions.

In May 2011 The Economist reported: in 2011 “Sony has unveiled new smartphones, along with a clever strategy to persuade developers to produce video games for them. The firm has designed innovative tablet computers that could compete with Apple’s iPad. Sony’s Vaio notebook computers offer an alternative to Apple’s laptops. The hardware is important because it is a gateway to online services, where Sony’s future is thought to lie. That is one reason why the cyberattacks hurt the company so much.” [Source: The Economist, May 26, 2011]

Sony Loses a Record $5.8 Billion in Fiscal 2011 as Stock Dips below 1,000 Yen for First Time since 1980

In May 2012, Jiji Press reported: “Sony Corp. said it logged a record group net loss of 456.66 billion yen ($5.8 billion) in the fiscal year ending in March 2012, due to the poor performance of its television operations, the effects of the strong yen and widespread flooding in Thailand. The loss also stemmed from appraisal losses on deferred tax assets in the United States. However, it was smaller than the 520 billion yen loss projected by the electronics maker last month. The company had a net loss of 259.59 billion yen in the previous year. The company recorded an operating loss of 67.29 billion yen, down from the previous year's profit of 199.82 billion yen, as sales fell 9.6 percent to 6.49 trillion yen. [Source: Jiji Press, May 11, 2012]

“In June 2012, Malcolm Foster of Associated Press wrote: “Sony's stock price fell below 1,000 yen for the first time since 1980 in a symptom of weak global markets and the company's decline after huge success with the Walkman three decades ago. Sony's shares dipped to 990 yen on the Tokyo Stock Exchange and closed at 996 yen.The company said it was first time that its stock price had traded below 1,000 yen since August 1980---the year after it introduced the iconic Walkman portable cassette player to the world in 1979. The stock had peaked at 16,950 yen in March 2000. [Source: Malcolm Foster, Associated Press, June 4, 2012]

“Battered by competition from Apple Inc. and Samsung Electronics Co., Sony has lost money for four straight years---and for eight years in its core television business. A strong yen, which erodes overseas income, and natural disasters at home and in Thailand, a key manufacturing hub, have added to its woes. [Ibid]

“Hiroko Tabuchi wrote in the New York Times: “The losses underscore---the grave challenges facing Kazuo Hirai, who succeeded Howard Stringer at Sony’s helm this month. Once a much-emulated and coveted darling of the technology industry, Sony is a shadow of its former self, its problems mirroring a wider decline in the Japanese consumer electronics industry. But the fall has been most spectacular at Sony, which has long lost its dominance in portable music players, unable to translate its Walkman success into the modern era. Sony’s television business, which has not been able to recover from a delay in developing flat-panel models and has more recently been badly hurt by price competition from rivals, has not posted a profit in years. [Source: Hiroko Tabuchi, New York Times, April 10, 2012]

“2011 has been a painful year for Sony, with much of its troubles caused by misfortune. It was forced to halt production at 10 factories in the aftermath of Japan’s earthquake and tsunami in March, including a Blu-ray disc plant completely overrun by waves. A few weeks later, a massive computer hacking attack that compromised more than 100 million accounts on the PlayStation Network exposed embarrassing weaknesses in the company’s online defenses, forcing the company to shutter the popular video game service for more than a month. [Source: Hiroko Tabuchi, New York Times, November 2, 2011]

“In August, rioters in Britain set fire to a north London warehouse containing CDs and DVDs, burning it to the ground. More recently, devastating floods in Thailand submerged a digital camera factory and forced Sony to halt production at a semiconductor plant because of supply shortages. All the while, the punishing strength of the yen against the dollar and euro has weighed on Sony’s earnings, making its products less competitive globally and eroding its overseas earnings. The yen soared to a post-World War II record in October 2011, prompting the Japanese government to intervene in currency markets to try to tame its rise. [Ibid]

Image Sources:

Text Sources: New York Times, Washington Post, Los Angeles Times, Times of London, Yomiuri Shimbun, Daily Yomiuri, Japan Times, Mainichi Shimbun, The Guardian, National Geographic, The New Yorker, Time, Newsweek, Reuters, AP, Lonely Planet Guides, Compton’s Encyclopedia and various books and other publications.

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© 2008 Jeffrey Hays

Last updated October 2012

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