Apple, Google, Microsoft, Samsung and Amazon have shown the advantages to owning multiple pieces of the pie, so they can create synergy and stick-to-it-ness in products and services. They made their assimilation of the pieces pay off, more or less. Sony is a member of that ‘synergy’ club too, but unlike the others never put the separate pieces into a whole. As one TV pundit asked on Squawk Box this week, ‘When is the last time you, or anyone, bought a Sony TV?’
We thought Sony would use its pieces to build an Internet powerhouse 12 years ago when broadband started. We now think it could do that with 4K, although that’s going to be a much smaller market than the Net has become.
This week, a Wall Street type and hedge-fund billionaire named Daniel Loeb who runs Third Point said his firm is now Sony’s third largest shareholder and wants Sony to sell off parts of its Sony Music and Sony Pictures businesses. He presented his proposal in an accommodating, non-confrontational manner but the impact on Sony’s directors and executives can only have been shocking.
Loeb personally delivered his proposal to Sony chief Kazuo Hirai in his headquarters’ office and gave Hirai 20 minutes to respond before Loeb made the letter public. Loeb said his firm still has the right to buy more Sony shares.
Loeb values Sony’s two entertainment operations at $10 billion and predicted that selling off parts of them will increase the price of Sony shares by as much as 60%, which would be a very good profit for Loeb.
In the letter Loeb said, ‘Many casual observers would be surprised to learn that while Sony is recognized for electronics, much of its current value is derived from a hidden gem ‘ Sony’s entertainment division. To maximize Sony’s overall success, we believe the company should change the structure of its ownership of Sony Entertainment.’
Loeb is the investor who last year forced Scott Thompson out as Yahoo! CEO along with several Yahoo! board directors, which led to Marissa Mayer being hired as Yahoo! CEO.
Bloomberg said that data it has collected showed that Sony Pictures accounted for 26% of Sony’s total operating income for the March 31 ending fiscal year and Sony Music accounted for 20%. Sony Pictures, Sony Music and Sony’s financial services accounted for about 30% of revenue in the most recent fiscal year but produced about 90% of its operating profit.
Two parts of Sony’s electronics operations seem to have some opportunities. One is the PlayStation, which Microsoft’s Xbox has passed in sales. There’s a new PS 4 about to be launched, but whether it can lead the PlayStation back to number one remains to be seen. In any event, many people now use their smartphones and tablets to play games. Sony is also going to increase marketing expenses to launch the PS4.
Sony’s other electronics operation that seems to have an opportunity is Sony Mobile, which produces mobile phones and PCs. Sony Mobile had an 18% sales increase in the most recent fiscal year. But: competition in mobile handsets is cutthroat with Samsung and Apple having the lead and Nokia, BlackBerry, HTC, LG and others fighting it out for third place. And PCs? Who can make money in that business these days?
Loeb suggests that Sony use the proceeds from the partial sale of its entertainment businesses to reduce overall debt and increase liquidity for the electronics business, which has been a millstone around the company’s neck. He also said that having the entertainment businesses trade as a public stock would bring financial discipline to them and increase their profits.
In its public response to Loeb’s letter, Sony said its entertainment operations are ‘important contributors to Sony’s growth and are not for sale.’ However, Sony said it would continue to have a ‘constructive dialogue’ with its shareholders. It would have been interesting to have been a note-taking fly on Hirai’s office walls for several hours after Loeb left.
Loeb owns enough shares of Sony that he offered to guarantee a rights offering for up to $2 billion, about 20% of the entertainment business, without taking any fees.
Prior to its return to an overall profit in the year ending March 31, 2013, Sony corporate had lost money for four consecutive years and its operation that includes TV sets had lost money for nine straight years including once again for the most recent year.
Sony shares at their height in 2000 were worth over $120 billion. They are now worth $18.7 billion.
Sony has predicted it will increase sales of TV sets from 13.5 million in the just-ended fiscal year to 16 million in the current fiscal year. It said it would do that by focusing on 4K sets but their sales are limited in the short run by four factors, availability of 4K content; the ability of local TV stations, pay TV companies’ and OTT services to transmit 4K videos; 4K appears limited to TV sets that are 46-inches and larger. Smaller 4K sets don’t show much, if any, resolution improvement over traditional HD sets.
Chips that can handle the HEVC compression that’s required to reduce by half the bandwidth that 4K needs to make it viable will not be shipping in quantity until 2014.
What Loeb’s proposal does not do is show a way that Sony’s electronics operations can emerge from what has been a long slide in red ink. The big question is: Can Sony ever develop a strategy for its TV set-making business that will return it to a profit? Samsung, LG and a coming wave of Chinese TV set-makers may have doomed Sony’s TV set operations.
It may be that Sony has been forced into being serial restructurer. It certainly seems to have lost its ability to develop, design and produce ‘gee whiz’ products. Even the mighty Apple seems to have shown how hard it is to stay on top in CE gear.
How much more in expenses can Sony cut? How will the cost cutting impact innovation? How can Sony compete in a TV set market that has become commoditized? Even 4K TV sets seems headed to being a commodity very early in their lifespan. How does Sony counter the lower costs that China-based set makers have, when already most of its components are made in China? Can 4K somehow lift Sony TV sets back into the ‘must have’ category? Is the TV set division even viable as a standalone business? In short, can Sony ever again be a world-leader in innovating ‘ making and marketing next generation consumer electronics? It has certainly not shown those skills in recent years.