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November 21 - November 27,2011

Bloomberg BusinessWeek

ir Howard Stringer remembers when 2011 2013. Samsung, Vizio, and other upstarts have driven prices so
was going to be wonderful. "This was the low that one Sony executive says the company charges less for
first year of the payoff," he says, "and next some TVs than it cost to ship them a few years ago.
year was going to be the second." As chair- Sony has been trying to adapt to the Internet Age for
man, president, and chief executive officer at least a decade, yet remains a gargantuan and unwieldy
of Sony, Stringer had spent six years trying tomanufacturer, with 168,200 employees, 41 factories, and more
return the Japanese icon to its former glory than 2,000 products from headphones to medical printers to
and open a new era of growth. Sony expected an annual oper- Hollywood-grade 3D movie production equipment. Jeff Loff,
ating profit of at least $2 billion, its best in three years. A batch
a senior analyst with Macquarie Capital Securities in Tokyo,
of new products was headed for store shelves, including its points out that Sony sells nine different 46-inch TV models
first tablets, a compact 24-megapixel camera, and a portable in the U.S. and its mobile-phone joint venture with Ericsson
PlayStation player. Sony was also preparing to launch a global ofiers more than 40 handsets. "Can you imagine how dilu-
network that would connect the company's movies, music, and tive that is to your R&D?" he says. A Sony spokesman says the
video games to all its televisions, tablets, PCs, and phones-an number of phones is being reduced, and notes that Samsung
iTunes-like digital platform. "I honestly and truly thought I was has 15 different 46-inch TVs.
going to have a year to remember," he says over breakfast in his
Stringer's time as CEO is running out. He's 69 and his latest
14th-floor apartment on New York's Upper East Side. "And I did,
but in the wrong way." three-year turnaround plan ends in March 2013, at which
point Hirai will probably take over, according to several people
The feeling of imminent triumph ended abruptly on Mar. 11. interviewed for this story. Stringer acknowledges that change
Stringer was in New York, having flown in from Tokyo the night has never come easily at Sony. Japanese laws and the country's
before for emergency back surgery. Around 4:30 a.m., he lingering culture of lifetime employment limit companies' abil-
opened a text message: An earthquake followed by a tsunami ity to close Japanese plants and shrink payrolls. And Sony's very
had devastated eastern Japan. Japanese tradition of consensus building doesn't always help
He considered returning to Tokyo but decided against it. it battle competitors who respond quickly to the orders of a
"They didn't need me there," he says now, taking a sip of tea in strong leader. "People mostly say to me, 'You don't need to do
his Fifth Avenue pied-à-terre. Stringer doesn't speak Japanese this. Why are you doing this?' " says Stringer between bites of
and concluded that he'd be more hindrance than help. On the his cantaloupe. "Because I made a commitment to put Sony on
phone with deputies, he learned that nobody from Sony was this road where the company would have a safe, secure future.
hurt and that employees had dived into rescue efforts. Workers It would be very hard to foresee a triumph at my age, but if we
at the company's technology center in Sendai fashioned boats were actually able to take advantage of a combination of our
from foam shipping containers and used them to save victims assets, we would be a very powerful company."
and ferry supplies. Stringer was so moved that he wrote an
essay in the Wall Street Journal extolling the Japanese spirit of CEOs of multinationais travel a lot, but there can't be many
fukutsu no seishin, or "never give up." who log as many miles as Stringer. One recent trip took him
The earthquake and tsunami forced Sony to temporarily from Tokyo to Los Angeles to London-his wife lives in Eng-
shutter 10 plants, disrupting the flow of Blu-ray discs, bat- land-to Paris to London and back to Tokyo, all in one week.
teries, and other items. The disaster also meant a big charge
against earnings-and that $2 billion in operating profit
Stringer looked forward to announcing turned into a net loss
of $3.1 billion, the company's largest deficit in 16 years. Sony's
misery had only begun. A hacking attack forced the shutdown
of the PlayStation Network. The strong yen battered profits, « e t c To TÍIKE
the sluggish global economy hurt sales, a CD and DVD ware- OF n comaiMfiriaN OF OUR
house burned in London riots, and floods in Thailand shut WOMLO
component plants.
By fall, Kazuo Hirai, Sony's executive deputy president and
Stringer's heir apparent, was speaking publicly of "a sense of
crisis" at the company. Sony predicted a $1.2 billion loss for
the fiscal year ending next March. Its share price recently hit
a 24-year low; its $17 billion market cap is half of what it was
when Stringer became CEO.
There's more to Sony's problems than acts of God and cur-
rency traders. The maker of the Walkman and the Trinitron
hasn't driven pop culture for years. Sony thrived in an era of
stand-alone electronics. When the Internet arose and digital
began to mean connected, iPods became the center of people's
entertainment lives, then smartphones and tablets-which Sony
was late to produce. Even the quintessential Sony product-the
TV set-has become a millstone. Sony has lost nearly $8.5 billion Sir Howard
on TVs over eight years and expects to keep losing at least into Stringer
S0MY MAKES loses)
A weak yen and strong
sales of TVs and For the past nine fiscal
Sony's divisions and operating cameras made for a years, the business
income by year very profitable year that's accumulated more
profit than the rest of
Sony combined: financiai
services

Sony's pretax profit for...
• Music and all other segments Selling the PS3
Motion pictures at a loss drove
• Finance the games
• Games and network-connected products --$2b- division into
• Electronics the red

1997 1999 2001 2003 2005 2007 2009 2011
GRAPHIC BY BLOOMBERG BUSINESSWEEK; DATA: SONY

Luckily, a stop in Beijing was canceled. "I do take a lot of and Columbia Pictures. The company behaved as if its past su-
sleeping pills," he says. periority could never be challenged. So it clung to its Trinitron
It's not lack of sleep, though, that irritates him when it's cathode-ray-tube TVs when Sharp, Samsung, and others were
suggested that Sony is not thought of as the innovator it once making flat screens the new industry standard in the early
was. "Oh, f-k, we make so much more than we used to," he 2000s. Sony eventually responded, but today Samsung and LC
says. He ticks off some of the products coming out this year, both sell more TVs than Sony worldwide. Likewise, the compa-
including binoculars that can record video and goggles for ny yawned when Nintendo came out with its motion-sensing
watching 3D video games and movies. "Don't tell me that Sony Wii game in 2006. Bloomberg News later quoted Stringer as
technology isn't great." saying he saw it as a "niche game device" but not as a competi-
Sony sprouted from the post-World War II rubble ofJapan to tor. The Wii became a smash hit and remains the best-selling
become the embodiment ofthat country's recovery and rise as a game console today. The PlayStation 3 is third.
world economic power. The company was founded by two char- No product haunts Sony more than Apple's iPod. Before
ismatic men who could get almost anything they wanted done. Apple introduced it in 2001, followed by the iTunes Music Store
Masaru Ibuka was the restless inventor who pushed Sony's in 2003, Sony was working with other companies on devices
engineers to new heights of technical prowess. The equally that would download music. Stringer says. "Steve Jobsfiguredit
gadget-happy Akio Morita supplied the vision of what consum- out, wefiguredit out, we didn't execute. The music guys didn't
ers wanted-sometimes before consumers themselves knew it- want to see the CD go away." In his biography of Jobs, Walter
and transformed audio and video devices into money printers. Isaacson writes that Sony had "all of the assets," including a
Sony's "Founding Prospectus," handwritten by Ibuka in record company, to create its own iPod. "Why did it fail?" he
1946, described "a stable workplace where engineers could writes. "Partly because it was a company ... organized into di-
work to their hearts' content in full consciousness of their joy visions (that word itself was ominous) with their own bottom
in technology and their social obligation." It also established lines; the goal of achieving synergy in such companies by prod-
the primacy of engineers in the Sony culture, presaging the ding the divisions to work together was usually elusive."
conflicts at the turn of the century when software became
at least as important as hardware. Those engineers doubt- By 2004, Sony was looking for a new leader. Net income
ed Morita when he insisted that they build a portable music had fallen to $851 million from $1.51 billion in 1999, and
player. "Morita was immovable," writes John Nathan in Sony: Samsung was about to surpass Sony for the first time as the
The Private Life. "He had watched teenagers on vacation in most-recognizable name in consumer electronics, according to
Japan and the United States lug their radios with them to the a BusinessWeek-lnterhTund survey. Stringer was running most
beach or into the mountains. How could they resist the op- of the company's U.S. operations. He'd restored the movie
portunity to immerse themselves in their music while they business to profitability with the help of the Spider-Man fran-
played, exercised, or simply walked down the street?" In 1979, chise and had overseen a restructuring that involved laying
the Sony Walkman was born. off 9,000 workers. He wasn't eager to leave that post and, as
There were missteps-among them, the Betamax loss in the a tall Welshman with a tuft of reddish-gray curls atop his head,
VCR wars-but the Sony brand grew to mean products of styl- he hardly looked like the CEO of a Japanese company. "I was
ish design and the highest technical quality, attributes that fre- content to stay in America," he says.
quently allowed the company to get away with charging higher Sony worldwide, however, needed big changes. Its core
prices than competitors. Sony's revenue was $3 billion the year business, consumer electronics, was losing money. The job re-
the Walkman appeared. Eleven years and 50 million Walkmans quired "someone who was very gifted in his interperson-
later, Sony had $25 billion in revenue and owned CBS Records al skills," says Peter C. Peterson, then senior chairman of
November 21 — November 27,2011
Bloomberg BusinessWeek

Blackstone Group, who was advising Sony on its CEO search. pushing movies and music. "Whenever I mentioned content," he
As president of CBS earlier in his career, Stringer had gained a says, "people would roll their eyes because, 'This is an electronics
reputation as an "affable hatchet man" for meeting individu- company, and content is secondary.' " That resulted partly from
ally with people he fired, according to a report by the Asia longtime rivalries between engineers in Japan and generally bet-
Case Research Centre. Friends and acquaintances describe ter-paid movie and music people in California. Sony's consumer
him as charming and intelligent, with a self-effacing sense of electronics unit sometimes declined to send products for use in
humor. At his apartment, he says he's reluctant to boast of his Sony movies even as Samsung was generating buzz with place-
view of the reservoir at Central Park because it might suggest ments of its phones in blockbusters like The Matrix.
he's rich. (He shows it off anyway.) Later, in his corner office Stringer was alarmed to learn that there were software de-
at Sony's U.S. headquarters in midtown Manhattan, he points velopers working on different product lines who had never even
out 9 of the 11 Emmy trophies he shared as a CBS journalist, met. He threw them a cocktail party so they could exchange busi-
then grins and says he doesn't count the others because those ness cards and ideas. At Sony's annual management conference
"were for lifetime achievement, and that just means it's the at Tokyo's Grand Prince Hotel New Takanawa in 2006, he set
end." Nearby, a sculpture of a cowboy on a bucking bronco aside prominent seats for software developers to stress their im-
bears an inscription from Burt Reynolds calling Stringer "the portance to the company's future.
only network president I can hang out with and still love." Perhaps the most walled-off of Sony's product silos was Sony
Stringer became chairman and CEO of Sony in June 2005. Computer Entertainment, the unit that produced the PlayStation
He didn't get the title of president. That turned out to be a prob- video game system. PlayStation debuted in 1994, the bastard
lem. The company he took over had too many product fiefdoms child of a joint Sony-Nintendo project that didn't work out. Ex-
that weren't being held accountable, or even talking to each ecutive Ken Kutaragi, an engineer and rabid gamer, urged his
other. Most important was Sony's electronics business, com- bosses to go ahead without Nintendo. They reluctantly agreed.
prised of eight groups with leaders who answered to Ryoji Chu- By 2000, the PlayStation unit was accounting for a third of
bachi, whom the board named Sony president and electronics Sony's operating profit. When PlayStation 2 came out that year,
CEO when Stringer came on. Sony had to shut down a website taking pre-orders when the
Stringer drew up a plan to streamline Sony by creating mar- number of visitors soared past 100,000 a minute. The compa-
keting, software, and other platforms common to all the busi- ny's stock leapt past $300 per share, an all-time high. Sony was
nesses. Progress was slow. He finally determined it was be- on a roll. There was talk that Kutaragi might be the next CEO.
cause he wasn't really in charge of electronics; Chubachi, the Sony's spending on PlayStation marketing events became
president, was. "President" can be a powerful title in Japan, the stuff of legend. For the annual E3 game expo, the company
connoting the day-to-day authority typically commanded by rented Dodger Stadium in Los Angeles and set up giant tents
a chief operating officer in the West. "I didn't know I wasn't designed to maximize views of Chavez Ravine and the down-
[in control]," Stringer says, a hint of sheepishness in his voice. town skyline. Gorging on sushi, mini hot dogs, Chinese food,
"I just thought it was a natural part of Japanese companies to and booze, gamers and Hollywood celebrities wandered around
be consensus-driven and I had to spend a lot of time trying to watching El Circo fire dancers and performances by Incubus
achieve consensus." He lost a year. and the Black Eyed Peas, while Kutaragi and his key U.S. lieu-
Stringer also encountered a hardware-worshipping culture tenant, Hirai, chain-smoked in a VIP area.
that mistrusted him because he wasn't an engineer. He was a "con- In retrospect, the PlayStation system, with its elegant blend-
tent guy" who supposedly cared less about making devices than ing of hardware and software, might have provided Sony an
early platform for competing with Apple's iTunes. Stringer him-
self called Kutaragi "the epitome of convergence," and Kutaragi
said he had aspired to create "a fusion of computers and enter-
tainment." But he cordoned the business off from other parts of
Sony, mostly ignoring entreaties from executives at other units
who wanted to work with his talented engineers. Kutaragi cul-
tivated a renegade image within the company, telling Business-
Week in 1999 that Sony suffers from "big-company disease." The
bosses tolerated him until the troubled launch of PlayStation 3.
Microsoft's Xbox 360 had been out for a year when the PS3
debuted in 2006. Hirai bragged, "The next generation doesn't
start until we say it does." The new system, loaded with a Blu-
ray player and other pricey gear, initially lost between $240 and
$307 for each unit sold, even though it was priced at least $100
higher than Microsoft's Xbox 360, researcher iSuppli noted.
Stringer put Hirai in charge of PlayStation. Kutaragi retired from
Sony. Reached by phone in Japan, he says he's working on a
"totally cool" project, but declines to comment further, saying
"many of the Sony old boys may be better to speak to."
Stringer's moves appeared to pay off in 2008 when Sony
Heir apparent posted an operating profit of $3.3 billion, a hair short of the
Kazuo Hirai
goal Stringer had set when he began. By then he'd found more
Personal 3D Viewer
than $2 billion in savings through job cuts, plant closings, and Tablet P Twin OLED dispiays
supplier reductions. A year later, Sony was back where it start- Clamshell duai-screen simulate a 150-inch
ed, reporting a net loss of nearly $1 billion. There were rumors device borrows technoi- screenVirtuai surround
ogy from Bravia TVs sound, too
that Stringer would step down. Instead, he consolidated his
power, finally adding the title of president, laying plans for
more cuts, and handing control of TVs, PlayStation, and other
electronics to a group of executives he called the "four mus-
keteers," including Hirai.
Two years later. Stringer argues that that losing year, too,
would have been a winner had it not been for the "Lehman
shock," his shorthand for the 2008 global financial crisis. He
chuckles about a public remark he recently made about Sony
being spared "toads and pestilence." But he looks uncomfort-
able about what many people-and certainly Wall Street-could
see as excuse-making. "You can't keep on saying that, 'I bad this
and I had that.' When the Thailand floods hit, I thought, well,
wait a minute. If you add to that the yen, you don't feel sorry
for yourself, but you do occasionally say, if some of my compe-
tition had the same experience...."
Digital Recording Xperia arc S
Both Stringer and Hirai have vowed that Sony will stay in Binoculars Android, 8-megapixel
the TV business, despite calls for the company to consider World s first binoculars camera, lots of social
dumping it. Stringer talks about Sony's profusion of products with built-in high-def networking features
as if it were a badge of honor or a competitive advantage. "Why camcorder
don't you sell?" Stringer asks himself, rhetorically. "Because
that's tbe Sony legacy, I can't do that. Everybody at Sony is very lish, sounding like a man in a hurry, and commutes between
proud of tbe bardware they create." Hirai says Sony has lowered Tokyo and California, where his family lives. His experience
TV sales targets and will continue to shed assets, cutting staff running the PlayStation business and early years working with
and factory capacity as it outsources more production. Echoing Sony Music Entertainment give him an "understanding of how
Stringer's view that Sony needs to produce a "different kind of hardware and software need to be in lockstep," he says.
TV," he says Sony is working on prototypes that replace com- He and Stringer say everyone at Sony is now rowing togeth-
modity LCD and plasma TVs. "We're going to move onto these er. Last year, Hirai moved hundreds of PlayStation employees
new technologies sooner rather than later," Hirai says. Sony from the hip Aoyama section in Tokyo to Sony headquarters
hopes to get its cool back witb ultralow-power, glasses-free 3D in grittier Shinagawa. The move was symbolic-breaking down
sets that double today's resolution, though they're not expected the old PlayStation isolation-as well as practical, saving money
to be mainstream until at least 2013. and making it easier for everyone to work together. Hirai says it
In October, Sony bought Ericsson's share in the compa- made him briefly unpopular.
nies' mobile-phone joint venture. The rapidly growing smart- Jeft' Loff, the Macquarie analyst, wonders why Sony doesn't
phone market presents ample opportunity, seeing as Sony take bolder steps to right its TV business-perbaps a huge round
is far behind Samsung and Apple with virtually no presence of layoffs. "I don't think they know what to do," he says. Loff
in the U.S. Sony must rely on Google to continue to improve started covering Sony earlier this year, around the time of Ja-
the Android operating system that underpins Sony's tablets, pan's earthquake. His early assessments of the company were
smartphones, and some TV efforts. kind. After he ranked Sony as an "outperform" stock, Macqua-
Consumers should expect to hear more about Sony Enter- rie sales staff asked him if he was nuts. "They said this company
tainment Network, the company's most ambitious effort yet to always overpromises and underdelivers," Loff says.
connect all of its devices with all of its content. In addition to As summer went on, the 34-year-old analyst became more in-
movies and music delivered through the disaggregated magic clined to agree with the sales staff. His reports got crankier. In an
of the cloud, Hirai, who's overseeing the project, is pushing his Aug. 30 report titled "Pushing Reset," be downgraded his rating
team to create additional services and exclusive content. That to "neutral" and noted something remarkable. For the past nine
could include everything from Sony-produced TV shows to ex- years, the business that has accumulated more profit than the
tended scenes from movies such as The Amazing Spider-Man rest of Sony combined is financial services, mostly life insur-
and Arthur Christmas. ance, with some auto insurance and banking. "Sony," Loff says,
"The plan is to bring everything under the Sony Entertain- "is a life insurance company with a money-losing TV business."
ment Network umbrella," Hirai says, including the PlayStation Informed of this analysis. Stringer shrugs and says, "Yeah, it's
Network and its 45 million unique users. He adds that only been a big moneymaker." Breakfast over. Stringer is headed to
now has bardware become powerful enough to deliver Sony a memorial service for Andy Rooney, then to the Sony offices in
content across all four screens of TVs, smartphones, tablets, Midtown. Rumors have againfloatedthat his resignation might
and computers. be imminent. Not true. Stringer says. "I'm still here because I love
As Stringer's probable replacement, Hirai is crucial to Sony's the place. 1 completely believe in the vision and I think we're get-
future. A tall native ofJapan, the 50-year-old speaks perfect Eng- ting there. But you can't expect people to be patient." ©
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