In recent years, Sony employed myriad strategies to restore profitability – restructurings, asset sales, mass layoffs and increased productivity. Only now is the Japan Inc icon realizing what was missing: a pandemic.
But 2020’s shelter-at-home zeitgeist has provided an unexpected tailwind for a company that long ago lost its innovative mojo. Sony expects a 37% jump in full-year net profits in the fiscal year ending March 2021.
The reason is a massive Covid-19 boost to gaming revenues.
Chief Financial Officer Hiroki Totoki is telegraphing a net-profit jump to US$7.6 billion, aided by a 3% revenue jump in revenues to $81 billion.
This gaming boom is helping Sony offset painful losses elsewhere. Its image sensor line, typically a key profit center, is lagging as smartphone sales lose momentum amid lockdowns and job-security concerns. Suddenly, Sony’s impressive 50% of the global sensor market share has become a liability.
The US-China trade war has been another nightmare. US President Donald Trump’s assault on Huawei Technologies, one of the globe’s biggest smartphone makers, puts roughly one-fifth of Sony’s image-sensor sales in harm’s way.
Trade war-related supply chain disruptions hardly helped.
Sony’s movie arm has also taken a hell of a beating. Planned new releases and the production of new content are collateral damage amid coronavirus social-distancing norms. “The negative impact” on the movie businesses “was quite big and will remain sizable for the second half,” says analyst Hideki Yasuda at Ace Research Institute.
And when it comes to its electronics division, there’s been a decline in sales of digital cameras – people are not out and about shooting their vacations – and electronics for office use – people are evading the office and working at home.
But thanks to global social-distancing priorities, subscription-based gaming services are picking up the slack.
PlayStation Plus subscriptions, for which users pay monthly fees, hit the 46 million mark in September. That marked a 24% jump from the year-earlier period. Popular game titles like Ghost of Tsushima are flying off the shelves. Demand for software is getting a lift, too.
This hot streak might not be over. On November 12, Sony is releasing the $500 PlayStation 5, its next-generation gaming console. The company anticipates a strong debut.
“We aim to sell more than 7.6 million units by the end of this fiscal year and surpass PS4’s shipments in its first year,” CFO Totoki says.
Analyst Atul Goyal of Jefferies Asia is “extremely bullish” on Sony. His “buy” rating sees Sony’s shares rising to 13,230 yen per share – 50% higher than the current price.
The question, though, is whether Sony can keep raking in profits that eluded the company over the last several years.
It’s a tough call.
Sony’s latest turnaround attempt started around April 2014, when then-CEO Kazuo Hirai named Kenichiro Yoshida CFO. In April 2018, Yoshida was promoted to CEO.
In the preceding four years, then-CFO Yoshida went to work stopping the multi-year hemorrhaging of red ink that was sending shareholders toward the exits.
Yoshida deployed a scalpel in ways that might impress Carlos Ghosn of Nissan infamy, “Le Cost Killer” himself. He cut Sony’s loss-leading computer business and the flailing television unit. He slashed staff and engineered a $1.7 billion write-down on smartphone operations.
Simultaneously, Yoshida pushed to up investments in microchips, a priority that would later pay off.
Assertive changes also were made to Sony’s notoriously dysfunctional corporate culture, one where different silos compete for resources and attention.
That internal squabbling helped deaden the once-fabled innovative spirit that gave us the Walkman, the Trinitron color TV, the CD player, the robotic toy dog and other pace-setting gadgets.
But Sony lost not only its innovative mojo – it also lost its nerve.
When Steve Jobs dreamed up Apple’s iPod in 2001, he was in many ways riffing off the Walkman with which Sony founders Masaru Ibuka and Akio Morita changed the tech world.
Yet 19 years later, the CEOs who followed Ibuka and Morita still hadn’t designed or commercialized a globally competitive answer to the iPod. Make that the iPhone and iPad, too. Neighboring competitor Samsung’s ubiquitous Galaxy line of smartphones and tablets largely left Sony in the dust, too.
Ironic, considering all the musical content Sony can load onto its devices, ranging from Beyonce to Katy Perry to Pink Floyd to Vampire Weekend. Sony Pictures also has a decades-long back catalog of films in all genres.
These days, PlayStation is to Sony what the iPhone is to Apple. PlayStation 4 sold 113 million units, morphing gaming into Sony’s most important business unit.
From cost cuts to value adds
What’s missing, though, is a game-changing new Sony product, gadget or invention that wows the world. After years of cutting, CEO Yoshida and his team are finding it harder to restructure their way to profitability.
In recent years, Sony managed to make its annual numbers here and there by selling real estate and living off cash from banking and insurance units. It is time, in other words, for Yoshida to play offense. Now that Sony has rightsized itself, Yoshida’s team must prove it can build and create as well as cut.
Sony needs to come up with splashy new hardware and software that turns heads globally. Even better if it appeals to parts of the consumer market with little interest in gaming.
Quantum leaps in smartphones, tablets, wearable technologies or something completely out of the blue would help Sony regain the innovative force that once changed the world.
Part of the challenge is putting competing silos to good use. Under Sony’s roof are armies of engineers, designers, programmers and networkers. If properly empowered and incentivized, this wealth of HR could unlock the company’s true potential.
Yoshida aided former CEO Hirai immeasurably in returning Sony to profitability. But Yoshida is a suit – he is not a jeans-wearing visionary or gadget man in the Steve Jobs mold.
Before his death in 2011, Jobs dismissed the competitive threat from one-time game-changer Microsoft. His argument: Microsoft’s board had erred by replacing the visionary Bill Gates with a salesman – Steve Ballmer.
In 2018, doubts were raised that finance guy Yoshida might not be a great fit to take Sony to a higher level. Now that Sony has stabilized, it’s time Yoshida tried. He needs to put designers and programmers back into the driver’s seat.
Prime Minister Yoshihide Suga can certainly help.
What Suga can do
Since taking office in mid-September, Suga pledged to increase competitiveness and hasten economic growth. He’s promised to reduce trade barriers and tweak taxes in ways that catalyze a wave of new research and development and investment.
The risk is that Suga, like the half dozen premiers before him, focuses instead on weakening the yen. Sony is Exhibit A for why that’s a bad idea.
Clearly, a higher exchange rate is a worry right now given the yen’s 3% rise this year. But historically, Tokyo’s decades-long obsession with a falling exchange rate has taken the onus off Japan Inc to raise its competitive game or innovate. Why bother when Tokyo has your back?
It’s corporate welfare on a giant scale. And it has left Japan poorly positioned to take on China.
Here, Berlin offers Tokyo timely pointers.
Germany is a high-labor-cost nation with a track record of adapting to strong currencies. Its manufacturers don’t tend to bellyache about a rising euro. Instead, CEOs see it as an excuse to recalibrate corporate structures and raise productivity, thus boosting competitiveness.
Nothing snaps complacent CEOs into action quite like a big currency rally – but not Japanese CEOs. They have become all too used to government support via exchange rates.
More aggressive corporate governance reform could help, too.
Between December 2012 and September 2020, former Prime Minister Shinzo Abe imposed a UK-like stewardship code on Japan Inc and encouraged companies to give shareholders a bigger voice and add outside directors.
Suga could supersize the process by demanding companies remove takeover defenses that protect mediocrity. Suga could end the decades-old practice of cross-shareholdings between friendly business groups.
That might increase the odds that overseas activists get a better hearing. A case in point is the efforts by Daniel Loeb’s Third Point LLC hedge fund to engineer “A Stronger Sony.” Among Loeb’s suggestions was spinning off its lucrative semiconductor business.
“As a standalone public company listed in Japan, Sony Technologies would be a showcase for Japan’s technology capabilities,” Loeb argued. “Rather than just an uncut rough stone buried inside Sony’s portfolio.”
The company has strongly resisted this, and other ideas to alter internal dynamics. Loeb, however, was not alone in highlighting that Sony enjoyed “high-quality underlying businesses, numerous options for portfolio optimization and a capable management team.”
Loeb also was not alone in believing that Sony “… remains one of the most undervalued large-capitalization stocks in the world.”
At the moment, that valuation is getting a boost – up 29% this year – thanks to prosperous populations hunkering down in bunkers and gaming away their boredom.
But Sony’s peers are getting similar boosts. Microsoft and Nintendo, with its wildly popular Animal Crossing game, are also riding the stay-at-home rally lifting the stocks of social media and online entertainment outfits.
Now is the time to act boldly. The unexpected Covid-19 dividend offers Yoshida a window of opportunity to reorient Sony toward where the global economy will be in 2025, rather than resting on the very tired laurels of the company’s glory days of the 1980s.