Is Sony the Next Kodak?

By Tom Gibbs - February 2, 2012 | Tickers: AAPL, BBY, SNE | 0 Comments

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Sony (NYSE: SNE), once the image of premier consumer electronics, retains but a shadow of its former glory.  Newly appointed CEO Kazuo Hirai, who takes over the lead post this April, recently made it clear that investors should expect a much larger hit than the previously announced $2.9 billion loss for the most recent fiscal year.

The news, which would be unwelcomed to any investor in any firm, presents a much larger sting to the rather mediocre modern-era Sony.  Over the past ten years (at least), the corporation has lacked consistency not only in its operations focus, but in its execution – sales, margins, and overall profitability are all over the board, and the company's return on core operating assets has hardly covered its cost of capital requirements.  Similarly, the stock’s price has fallen by nearly 59% per year over the same period. 

RNOA = return on net operating assets.  Defined as post tax operating income divided by net operating assets.  Net operating assets = (total assets – financial assets) – (total liabilities – financial liabilities)

Whereas Hirai’s recent announcement seems to point out that a bulky management structure has hindered the firm’s ability to innovate, Sony’s problems undoubtedly run much deeper.  Much like Kodak, which was operated on the cusp of imaging technology, Sony has lacked a clear direction.  The corporation has continued to produce high quality products – sharp flat screen televisions, laptops and other consumer goods with positive consumer reviews, and a new tablet that is touted the best in the Android market – but it is far from retaining a dominant position in any of its markets. 

Instead, much like the result of Kodak’s growth-through-acquisition strategy, Sony has ended up relying on a shotgun approach to product design and launch.  The definition of a meaningful and immersive customer experience has been blurred by Sony’s mediocre execution in far too many product spaces.  The easy comparison would be against a corporation like Apple (NASDAQ: AAPL), which has efficiently tied its core products together with a consumer-friendly operating platform.  All of the products in AAPL’s portfolio communicate with one another, share information/files, and make a sincere (and successful) attempt at making consumers’ lives more convenient and fun. 

A look at some of Sony’s recent products in its expansive portfolio shows quite the opposite approach:

• PlayStation 3
• Consumers were undoubtedly thrilled upon the announcement of the long-awaited PS3’s late-2006 release.  However, aside from a very narrow group of consumers – the “hardcore gamer” segment – the product never really made sense.  The original PS3 model was equipped with a powerful cell processor, 4 USB ports, flash drive ports, Wi-Fi, Bluetooth technology, Blu-ray/DVD/CD capabilities, backwards compatibility for PS2 and PS1 game support, and a slew of other features. Undoubtedly this “I can do anything” product approach looks great on the drawing board, but the exorbitant entry price makes each additional feature add-on that less attractive to the average consumer.  This goes without mentioning the additional components needed to connect to the PlayStation Network (which has its own customer satisfaction issues). In the end, the PS3’s 50% plus price drop to date, and its rather mediocre worldwide profitability, shows that Sony’s generally consumer-unfriendly catch-all tactic was executed with minimal success.
• PlayStation Vita
• Available in the United States later this month, the Vita has already received some negative customer feedback due to the package’s lack of some necessary equipment (such as memory cards) and its requirement for users to purchase digital PSP game copies that have already been purchased in their physical format. 
• Sony Tablet S
• Sony’s new entry into the tablet market has been received as well as most other Sony products – great hardware, but mediocre software makes for a lackluster consumer experience.  The Sony Tablet S has been praised for its sleek, ergonomic “fold over” design, which is said to be excellent for screen viewing and keyboard use.  However, even though many say the Tablet S is one of the best in the Android market, it has not gone without criticism.  Again, an all-inclusive customer experience seems to be lacking.  The tablet ties together all functions rather clumsily, and requires different logins for its various functions, almost as if the different divisions of Sony seek to avoid unity – PlayStation Store, Music/Video Unlimited services, and the Sony Reader ebook content.  Reports regarding the tablet’s sluggishness and random error messages rounds off the forgettable (for some) user experience.
• Sony Walkman
• Sony’s continued production of the famed Walkman implies that there is still a market for legacy personal music players.  However, the corporation’s lack of a vastly popular digital music player is somewhat reminiscent of Kodak’s continued production of 35mm film throughout the rise of personal digital imaging products. 

All of these products, however superior their quality may be, are failing the corporation due to their lack of an integrated consumer experience.  More than ever before, consumers tend to seek brands toward which they can associate meaningful portions of their daily lives – AAPL has become the brand image, among other things, for the best way to keep and share memories, communicate with friends and meet new ones, and express creativity through music, art, and literature.  Other than a portfolio of products that may enjoy a degree of success in their individuality, the entire brand has been greatly diluted due to its lack of a common focus. 

The example extends even further to the system of Sony retail outlets.  Historically receiving rather mediocre reviews, an examination of Sony’s retail concept seems to follow more of an impersonal Best Buy (NYSE: BBY), or big box equivalent, approach than the customer-engaging and mutual teaching approach of an AAPL retail outlet. 

A large portion of AAPL’s continued popularity is the integration of all of its core products through the retail segment.  With minimalistic designs, a product focus, and sales personnel trained to engage in thoughtful discussion with consumers, AAPL has been able to effectively manage the way it wants consumers to view the brand.  Sony management has obviously received the hint, and have initiated their own store redesigns across their smaller store base.  The corporation’s plan to remodel all of their stores in this fashion over the next two years is definitely a positive direction to saving the brand’s once-positive image.

Starting the Long Trek

Sony still has a long way to go before it can potentially reach a portion of its former glory and profitability.  In hiring a new leader in CEO Hirai, the first steps in cutting the fat from the bulky management structure have already been taken.  However, to ensure its long term success, Sony needs less of a shotgun approach to hitting each consumer electronics niche, and more of a long-term operational focus that engages, attracts, and retains a meaningful base of loyal customers. 

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