Sony’s Comeback

By Ichiro Suzuki

Sony’s shares are rising lately. It is the highest since the height of the tech bubble in early 2000. The company has staged a rare comeback for a tech firm that was once the darling of the market and fell hard. In its heyday, Sony was the company that inspired Steve Jobs. He dreamed of creating a company like Sony, and he far exceeded his dream. Jobs adored Sony cofounder Akio Morita so much that in November 1999 a few days after Morita’s death, he paid tribute to Morita, praising his achievements in front of Morita's picture on the screen (as in photo) preceding Apple’s product presentation. Apple today dwarfs Sony. Nonetheless, Sony in its own right is doing well the last several years. Its equity market capitalization at $120 billion at Thanksgiving is its largest ever except for a few months 20 years ago. Sony is larger than IBM for the first time ever, and is more than twice as large as Hewlett-Packard and Philips, which Morita once saw as his goal for his then fledging company. On his very first overseas trip, business or personal, Morita visited Philips headquarters in the Netherlands, trying to learn something from them. Sony is definitely outperforming those former star tech firms that once ruled the world before the advent of the Internet  in the mid-1990s.

After a meteoric rise in a frenzied tech bubble, Sony fell hard. Though dreams of the Internet sent its shares soaring, Sony’s management had little idea about how to thrive in the new age. Founded right after WWII, Sony was already over half a century old at the outset of the 21st century, and the company was beginning to lose its groove. Its organization was becoming a big bureaucracy with many silos where engineers retreated into and worked narrowly-focused. Sony’s products were not connected each other at the dawn of the network era, a common problem for Japanese electronics companies. When there was an idea, Sony was not able to bring it into the market in the form of attractive products. Sony’s brand no longer glittered and its products were losing market share to South Korean competitors.

Sony has not delivered a life-changing product since the Walkman in 1979. It was revolutionary back then that music can be brought out of a house to be enjoyed outdoors. Lingering images of the Walkman’s stunning success have been attached to Sony firmly. When Apple introduced the iPod in 2001, Sony management said “we had all the technologies to do it.” Sony may have had the technology but what mattered was an ability to imagine something totally new and Sony didn’t have it. Sony was supposedly a leader in e-book technology at one point but was never able to make its e-reader equipment commercially successful. It was Amazon that popularized it with the Kindle. Ownership of a film studio and a music label had turned out to be a liability rather than an asset in the age of the iPod and later the iPhone. In the old days it looked great for Sony to own both hard and software as seamless offerings. With the advent of Apple’s iTunes Store, music no longer had to be played with a gadget made by the owner of the music. Worse, such ownership turned out to be an obstacle in negotiation with other labels to create its own music library. 

Due to bloated costs and and a lack of hit products, Sony shares plummeted. Near the end of 2012, Fitch had downgraded Sony’s debt into junk, literally making the company a fallen angel. By that point, Sony shares were trading at a whopping 95% below the peak price in early 2000. The downgrade had made a low point. Then at last, bleeding had stopped. The new management team headed by Kazuo Hirai went on an aggressive restructuring of an overextended company. The restructuring plan featured streamlining product lines, closing unprofitable ones to be specific. Sony has decided that sprawling product lines of audio-visual products were hard to carry, and chose to focus on those that were in the high-end segment with reasonable profit margins. It was a right decision since many of these hardware products were increasingly commoditized and were not worth committing capital into them. Focused product lines meant large scale factory closures that came with massive layoffs. Axing people appeals to few management teams in general. Especially in Japan, the land of lifetime employment, laying off employees leaves large scars to the organization and stakeholders. But this needed to be done.

The new management team’s turn-around strategy worked. The PlayStation many not have been as disruptive as the Walkman, but it still had lots of innovation in it and appealed wildly to a younger segment of Sony’s fan base. Besides the PS and games, the company focused on semiconductors (image sensor chips), entertainment (film and music), financials as well as audio-visual hardwares. By the end of the last decade, Sony has comfortably eclipsed profits registered in the last century. However, there seems to be an air in Japan’s business community and the fan base in general that they are not willing to fully embrace the company’s achievements. At shareholders meetings, baby boomer shareholders cry that they want to see really Sony-like products as soon as possible. Wait a minute. Isn’t the PS really Sony-like? It’s original, innovative, profitable and keeps evolving. Not to them. The PS doesn’t change the lives of those who don’t play games. These people are still living with amazing experiences brought by the Walkman when they were young. These people are unhappy that Sony didn’t create the iPod, the iPhone or the Kindle. Instead, to them, Sony is degrading itself by slipping into such frivolous things as game consoles. In a broader sense, Sony is retreating from making things, by discontinuing so many product lines, and this may not be deeply appreciated in Japanese society. Sony is staying competitive in image censor chips that go into the iPhones and other smartphones’ cameras. Sony has been holding onto a leading edge on these chips ever since the company developed early chips more than half a century ago for its own camcorders. These chips are great, but this is ‘Sony Inside’, and that’s not Sony since it is no longer cranking out gleaming new, cool products, they disgruntle. Many people never give up images of Sony in its heyday as a serial disrupter. However, many decades after it was a leading and trendy tech firm, “The Sony as they knew it”no longer exists. The company has changed so much. It had to change in order to survive in a changing tech world where software is taking the center stage. 

Following the burst of the tech bubble at the outset of this century, Japanese word “monodukuri” (making-things) came to be seen and heard often in the media. Making things is where Japan has excelled for decades and continued to do well. The country is so proud of its ability to create beautifully made products, and it is perfectly legitimate to be proud of such skills. However, there seems to be so much nostalgia attached to this word about good old days when Japan’s manufacturing industries dominated the global market. Worshipping of manufacturing has gone too far and is hurting the broader economy. It is very backward looking, too tied to the glory of the past and too hardware-centric in perhaps waning years of manufacturing that is felt not only in Japan but also elsewhere in the developed world. (Donald Trump’s empty promise of bringing back manufacturing jobs was a case in point.) While it is good to promote manufacturing jobs, those jobs alone can no longer carry the country’s economy in the digital age of the 21st century. The nostalgia about making things appears to have proliferated at a time when Japan has found itself on the losing side in the new tech age. Management does not afford to be tied to such a nostalgia, regardless of how Sony’s fan base and Japan’s broader society feel about today’s world.

While Japan has lost out in global tech competition in general, Sony remains determined to hang in, and managed to have executed its comeback plan successfully. Its profits are hitting all time highs, and share price is highest it has ever been except for a few months at the height of the frenzied tech bubble. Well done, even though these achievements are not openly congratulated. While Sony is not on the cusp of dropping manufacturing altogether, the share of making things continues to become smaller in its business. The PlayStation still presents a visible hardware but the company’s plan to expand into games in the cloud space drives Sony further away from “the Sony as we knew it”. The market is favorable to Sony, giving premium on its valuation, probably on its intangible software prowess rather than the ability to make tangible things. Sony is on a right track, regardless of how hardware-centric Japanese people and society receive it.

About the author: Mr. Suzuki is a retired banking executive based in Tokyo, Japan.