Sony Corporation (Japan)

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During the 1990s, Sony transformed itself from electronics manufacturer to global entertainment company, establishing a leading position in music, movies and computer gaming. But those new ventures distracted attention from the company's core business, which is now struggling to maintain its position in the rapidly changing marketplace. Sony invented the concept of portable personal music players and dominated that sector for almost 20 years before its lead was snatched away, virtually overnight, by Apple's iPod. At the same time Samsung and LG usurped Sony's position in televisions and home entertainment appliances, myriad mobile phone manufacturers eviscerated Sony's digital cameras and camcorders, and Microsoft's Xbox and Nintendo's Wii slashed the profitability of PlayStation. A series of restructurings have failed to restore Sony's lead, although at least the broad spread of operating businesses allows the company to offset poor performance in one division, usually a different business each year, with gains in another. For the past few years, the group's strongest division has not in fact been any of its electronics or content subsidiaries, but its financial services arm. But even that business has not been able to offset woes elsewhere and in 2015 the group reported its sixth net loss in seven years. It was finally back in profit for ye 2016.

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Adbrands Weekly Update 5th May 2016: Sony reported an annual profit for virtually the first time since 2008, helped by exceptional performance from its PlayStation gaming division, as well as improved profitability from cameras and other imaging products and even Sony Music. There was also a strong recovery from the hitherto ailing TV and home entertainment business. However, the smartphone business and Sony's components division both reported operating losses. The latter was hit hard by a plunge in demand and prices for smartphone image sensors, of which Sony is the leading global supplier. Full year revenues were down around 1% to Y8.1 trillion - around $68bn at annual exchange rates for the year - but the prior year's Y126bn loss turned into a Y148bn ($1.2bn) net profit. Playstation became Sony's single biggest business, accounting for revenues of around $12.3bn, overtaking mobile communications on around $10bn and home entertainment & sound on $9.6bn. However Sony's most profitable division by far remains financial services, which still contributes close to 40% of the group's combined operating profits.

Adbrands Weekly Update 4th Feb 2016: Mediacom is the big winner, and Carat the main loser, in the global Sony media review, currently drawing to a close. Precise details have yet to be formally confirmed but initial reports indicate that Mediacom has captured consolidated global duties for Sony Mobile and Sony Playstation, as well as Sony Electronics outside North America. It's unconfirmed yet whether UM will keep the account inside North America. However the Interpublic agency has retained Sony Pictures in the Americas. OMD has won Asia Pacific, to add to its existing EMEA role, and is also keeping Sony Music internationally. The Playstation account was previously shared globally with OMD and Carat. So far, Carat has come away empty handed from the review.

Adbrands Weekly Update 17th Sep 2015: Ads of the Week: "Made For Bond". Sony gets the party started in anticipation of SPECTRE - the new Bond movie - with a cool spot for its cameras and smartphones, featuring the movie's co-star Naomie "Moneypenny" Harris. Which agency? "The name is DDB... Adam&Eve DDB."

Adbrands Weekly Update 6th Aug 2015: Struggling Sony reported much better than expected results for 1Q of its new fiscal year as a result of booming compnent sales. The group supplies image sensors for the camera units used in both the iPhone 6 and Galaxy S6 as well as other high-end smartphones. Sales of these soared by more than 60%, offsetting a slump at the group's own handset business and at Sony Pictures. PlayStation was another a bright spot in the latest results. As a result, the group's CFO Kenichiro Yoshida told the FT it will now consider acquisitions to speed up the turnaround. “Until now, we rarely turned to mergers and acquisitions for our research and development, but we will be looking for those opportunities to take on new challenges."

Adbrands Weekly Update 7th May 2015: Sony's annual results showed the struggling Japanese giant to be still treading water, not drowning any more, but still not conquering the waves, though it claims to have overcome the worst of its problems. Reported revenues for the year to March rose 6% as a result of the effect of exchange rates, but at constant currency they were flat, and the US$ equivalent was down slightly to around $74.8bn. There were improvements in several divisions, including a long-awaited operating profit in the TV and audio business, thought to be the first for almost a decade. It was also another stellar year for Playstation and there was a big boost in the components unit, which makes image sensors for iPhone, Galaxy and other mobile cameras. As a result, operating profits were up sharply, but a variety of exceptional costs and charges resulted in another net loss, the sixth in seven years, of Y126bn, about $1.2bn.The biggest contributor to the loss was the mobile phone division, where Sony wrote off $1.6bn in impairment charges. The group's most profitable division, for the fifth consecutive year, was financial services, which generated a $1.8bn operating profit. Sony is forecasting a return to net profit for the current financial year.


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Background

Free for all users | see full profile for current activities: The Sony Corporation was founded in 1946 as Tokyo Tsushin Kogyo (or Tokyo Telecommunications Engineering Corporation). Founder Masaru Ibuka (who died in 1997) was an engineer who had worked in film processing plants before the war. With partner Akio Morita, he began to experiment with several chemical processes, one of which led to the development of magnetic recording tape in 1949 (made from paper coated with magnetic powder). The company launched its first tape recorder the following year. Ibuka oversaw research and development while Morita took care of sales.

Unlike its Japanese competitors, Sony set out to develop new technologies rather than simply adapt Western ideas. The company also irritated domestic rivals because it chose to work alone or in partnership with non-Japanese firms, rather than as part of the traditional local cartels. In 1953 Sony bought the rights to use Western Electric's miniaturised transistors for $25,000. The US company thought it had made a killing on the deal, believing the device was so limited in its power that it could only be used for hearing aids. But Ibuka set out to use the components as the basis for a portable radio, and he succeeded two years later. Billed as a "pocket" radio, it was actually too big for any normal pocket. Master salesman Morita redesigned the shirts worn by the sales force with extra-large breast pockets to accommodate the device. 

To capitalize on its rapid growth the company changed its name to Sony Corporation in 1958. The name was chosen to suggest connections to sound, but also the derivative "sonny" or little son. (In fact, the company name was originally pronounced as "sunny" rather than the current "soany"). In 1960, a US office was established and Ibuka developed a portable transistorized television, followed by the first VCR in 1963 and the Trinitron colour system in 1967. The latter bypassed US patents on the colour television process by firing the three electronic beams needed to produce a colour picture through a single gun, focusing them with a single shared lens. Not only did this mechanism take up less space, allowing for smaller sets, but it gave a sharper, brighter picture. In 1969, the company acquired a large shareholding in rival developer Aiwa, which was experimenting with a form of cassette tape. (The standard format used today was actually introduced by Philips in 1972). 

Sony quickly moved on to develop a system for recording video images, developing a special form of tape for this in 1971. This 3/4-inch format, named U-matic, was subsequently compressed to form the first home video recording system in 1975, under the name Betamax. However, this was to lead to Sony's first major error of judgment. The company was already in fierce competition with Matsushita, owner of the Panasonic brand. Matsushita had launched its own video recording technology, VTR, a year after Sony, based on a different form of tape. In 1976, Matsushita launched the VHS system and the two companies went head-to-head for domination of the home video market.

It was an expensive war. Sony quickly lost the battle in Europe but fought long and hard to maintain its foothold in the American market. One key factor gave VHS the lead. Matsushita had cleverly anticipated that consumers would use their tapes to record films and sport, so it concentrated on developing cassettes with a 90-minute running time. Sony's more compact Betamax tape had an optimal one-hour running time. Popular legend has it that Americans finally ditched the system in favour of VHS when they realised they couldn't record the Superbowl on a single Betamax tape. 

Despite the bloody nose it received over Betamax, Sony had two further aces up its sleeve. The first was the launch of the Walkman portable cassette player in 1979, a massive worldwide success. In the years preceding its launch, Philips' cassette tapes had been used primarily for live recording and playback. Sony engineers spent some time in the 1970s trying to develop a compact cassette recorder, but found it hard to combine both recording and playback heads in a small unit. Instead they developed a unit that was capable of excellent playback and was also completely portable. Initial feedback from retailers was very poor - most felt that a tape recorder that couldn't record would never sell. However Akio Morita was convinced of the product's value, promising to resign as chairman if it was a flop. In fact quite the opposite was true. The company sold out its first Japanese production run of 30,000 units in under three months. On the back of this success the product launched in other countries under a variety of different names - the Sony Stowaway in the UK, Soundabout in the US and Freestyle in Australia. The Walkman brandname was adopted in all territories in 1980, by which time Sony had sold more than 1.5m units. Its success ushered in a new boom period for the music industry, which managed to persuade consumers to swap their existing vinyl records for this new ultra-portable format. With sales now approaching 300m units, the Walkman remains the single most successful consumer electronics product ever made. 

Even more significant was another new concept Sony began designing in partnership with Dutch electronics company Philips: the Compact Disc. That system was launched in 1982, with Sony responsible for designing and manufacturing players for the storage medium developed by Philips. The success of the format was unprecedented. Even now, the two companies continue to divide a royalty of 5 US cents on every CD sold. Later, Sony took a huge leap into the unknown by negotiating the purchase of CBS Records in 1988 followed by Columbia Studios a year later. This marked a key turning point in the group's history as it set out to own the entertainment content for its hardware. [See Sony Music and Sony Pictures profiles for more]. The purchase of Columbia was one of the last deals under the management of Akio Morita, who more or less retired from the group in 1989. (He died in October 1999).

Subsequent technological innovations met with varied degrees of success. DAT (1987) entirely failed to take the industry by storm and MiniDiscs (launched 1992) struggled for several years to capture consumer interest before also fading away. Another major investment in the late 1990s was Super Audio CD (or SA-CD), a format designed to succeed CD, based on similar principles to the DVD video format which had been introduced by a consortium of manufacturers in 1995. The audio DVD concept had been conceived by the Sony-Philips partnership back in 1992 as a successor to the CD, but the two companies quickly found themselves in a race with another joint venture between Time Warner and Toshiba, who were developing their own SD format. During the mid-1990s, Sony attempted to join forces with Matsushita to avoid another embarrassing and costly VHS-Betamax war, but in the end the market was split between numerous different but largely compatible DVD formats from different manufacturers, each specialising in a different area - video, audio, data, recordable, rewritable and so on. After seven years of development, Sony and Philips launched Super Audio CD in 1999, but like MiniDiscs and DAT before it, the format failed to appeal to consumers. A foray into mobile phones also struggled to set the market alight, and was eventually merged with another struggling manufacturer, Ericsson, to form Sony Ericsson. Sony's move into computer entertainment, however, proved far more successful. Its PlayStation games machine single-handedly revived the console market after the decline of Nintendo and Sega. (See separate profile).

Reflecting the restructuring of several of its underperforming subsidiaries, Sony's financial performance for fiscal 2003 disappointed investors, coming in below the group's own mid-year forecasts. Although net profits rose dramatically, the increase was still well below the level anticipated. Adding to concern were a further 6.5% fall in sales at the group's core electronics business, increased losses within the Sony Ericsson mobile phone business, and continuing over-dependence on its games business, which contributed a disproportionate percentage of group operating profits. Sony's results for the first quarter of fiscal 2004 were even more disappointing, briefly rocking the Japanese stock market in what became known as the "Sony shock". Second and third quarter figures were only marginally improved, and full year performance remained poor. There was no noticeable upturn from the electronics division during 2004, and if anything the company fell even further behind in areas such as MP3 audio. As a result, the group's board reached a historic decision at the beginning of 2005 to appoint a foreigner, albeit one well-schooled in Japanese business practices, as its new head. Nobuyuki Idei retired as chairman and CEO of Sony Corporation in June 2005, and was replaced by Sir Howard Stringer, formerly chairman of Sony Americas. Later that year, Stringer unveiled a major corporate restructuring designed to cut around 10,000 jobs worldwide by 2008. The group announced plans to close or sell 11 of its 65 manufacturing plants in a bid to save around $1.8bn of annual costs.

By refocusing on core strengths from 2004 onwards, Stringer was able to deliver a considerable improvement in the performance of the electronics division, despite the impact of a costly and embarrassing product recall in 2006 of laptop computer batteries supplied by Sony's components division to Dell, Apple and Lenovo. Those three companies issued recalls of around 7m battery packs following reports that they could spontaneously burst into flames. Sony eventually made a provision of Y51.2bn to cover the cost of the recall. Nevertheless, combined sales for the year to 2007 increased, and the division reported an operating profit after three straight years of losses. Performance continued to improve in the year ending March 2008, before plummeting once more in the following period as a result of currency fluctuation and economic uncertainty. 

Among Howard Stringer's other important initiatives following his appointment was an attempt to negotiate a truce in another potentially damaging war over technology formats. Since 2002 Sony had been busy with the development of a high-definition successor to the existing DVD standard. Sony's system, known as Blu-ray, had won the endorsement of electronics manufacturers including Panasonic and Samsung, as well as the home entertainment units of Sony Pictures, Disney and Fox. Unfortunately Toshiba had developed a competing and incompatible format of its own, called HD-DVD, and had secured the backing of Paramount, Universal and Warner Bros home entertainment as well as NEC and Sanyo. Each side had spent the last three years trying to establish its own format as the industry standard, but without success. Another Betamax-VHS situation seemed inevitable. But in April 2005, common sense finally appeared to prevail, and the two sides agreed to negotiate some form of compromise. A month later, though, the two sides had still not agreed on which format was to be adopted, and negotiations stalled shortly afterwards, with both companies vowing to continue with their existing plans. Sony's position was weakened further later that year when Intel and Microsoft both added their support to the Toshiba technology. 

Sony and Toshiba both launched their rival systems in 2006, creating confusion among consumers. Gradually however, Blu-Ray gained the edge, helped by its inclusion in the group's PS3 consoles. By the end of 2007, Sony's Blu-Ray system was seen as the more widely supported system, with Blu-Ray players outselling HD DVD players in the key US market by three-to-one. In early 2008, Warner Bros shifted allegiance to Blu-Ray, and was followed by several retailers, who announced plans to stop selling HD DVD disks and players. Toshiba responded by making steep cuts in the price HD DVD players, but sales remained slow. The crunch came in February when Wal-Mart also shifted its allegiance to Blu-Ray. Toshiba announced plans to suspend production of the system a few days later. See full profile for current activities


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