Sony has lost money on its TV business for several years in a row yet company executives continue to believe that the cutthroat business is critical to its identity. Sony's stubborn streak on the TV business could sink its plans going forward.
It's not a good sign when profit margins are much thinner than the TVs you produce.
The consumer electronics giant reported a dismal third quarter earlier this week and its TV business was the biggest reasons. Sony just can't get the TV business right and the industry is in a race to the bottom on pricing. Toss in weak demand and Sony's TV business is a mess.
In the tech world, the TV parallel is the PC business. IBM ultimately decided that the PC market wasn't worth chasing even though its identity used to be tied to computers. Sony is in the same situation. Unlike IBM though, Sony keeps rolling that HDTV up a hill. Sony appears to be fighting an unwinnable TV war and the decision to stick it out appears to be driven by emotion more than anything.
An analogy to HP keeping its PC business doesn't apply to Sony. Why? HP is making money on its PC business. TVs have been a sinkhole for Sony for years.
Unfortunately for Sony, its emotional ties to the TV market keep it from really making a play for the digital living room. Yes, Sony has a four screen strategy (TV, phone, tablet, PC), but the first one on the list isn't worth the hassle. Simply put, Sony's affection for the TV business may be the quintessential case study on what technology companies shouldn't do when innovating. Also:Sony controls its smartphone fate, but will still fail
Macquarie analyst Jeff Loff explained in a research note:
Sony said TV sets are core to the company. This to us seems a legacy view. We worry its competitors will re-envision “TV,” seeing value in semiconductors, software, interfaces, content and services. In this framework we think Sony would be better served to re-define TV itself, leveraging its hardware, software and media/game content (capturing value in a $100–200 box rather than a commodity TV set). We find little justification for operating a TV business when we think Sony can accomplish the same goal (integrated entertainment experience across devices) without selling money losing sets.
The logical choice for Sony is to ditch the TV business and use those funds to compete elsewhere. But there's nothing logical about Sony's affection for the lowly TV business. Here are from choice quotes from Sony Computer Entertainment Chairman Kazuo Hirai on a Nov. 2 conference call with analysts in Japan.
We believe that the TV business is essential for Sony's future growth strategy. That's our perception about the TV business. The entire management team has a great sense of urgency regarding the fact that the TV business has continuously recorded losses for the last seven fiscal years.
I will take the lead in implementing the plan to improve the profitability of the TV business with the aim of extricating us from this loss-making structure as soon as possible. The entire Sony Group will be involved in this profitability improvement plan, as it cannot be achieved by the TV business alone.
The problem: Sony's entire company will be focused on curing the TV business and miss opportunities elsewhere.
Hirai continued about how Sony misjudged demand and then said:
It's obvious that we need to design and manufacture at an appropriate cost only the volume of units that we sell, and we need to have a level of fixed costs that is appropriate for the size of our business. We also need to provide customers with products and services that will sell.
The problem: Sony can't be cost competitive today and it has already cut the low-hanging expenses.
Hirai then laid out a TV fix-it plan:
TV business sales for this fiscal year are expected to be JPY875 billion, and we expect to record an operating loss of JPY175 billion. In fiscal '12, we aim to reduce the operating loss by about half, and return to profit in fiscal year '13, assuming no increase in sales.
The problem: Hirai thinks he has the time to take two years to fix the TV business. By then, Apple will be in the market. The chances that Sony will turn a TV profit in fiscal 2013 are slim and none.
Then there's the Sony leapfrog courtesy of new undisclosed technology. Hirai said:
Regarding product differentiation, we will deploy unique technology such as super resolution high image quality engines that create the industry's best picture.
There will come a time when a next generation panel will take the place of LCD panels. So that we can lead the industry in this transition, we have accelerated the development of our next generation TV. Due to competitive reasons, I cannot discuss today what type of technology we are focusing on.
The problem: Hail Mary passes in the TV industry don't last long.
We have made a business unit for the Group that is developing and designing the next generation TV. Here, we will create the next generation of home entertainment that fits with the entire Company's next generation product strategy.
The problem: We've heard this before from Sony.
The bottom line is that Sony is attached to the TV business for no logical reason. Loff---in addition to most analysts---certainly isn't convinced:
Sony’s TV turnaround plan gives us no confidence we will see TVs profitable within a two-year time frame.
A lot can change in two years---in fact a lot will---Sony's obsession with fixing the TV business is a threat to the entire company.