Sony: Time for a transformation

newsmakers Talk about picking a time to undergo a major face-lift. The global economy's uncertainty is on the rise and consumer electronics sales are in the tank. But Sony is nonetheless going full-bore to pursue an ambitious transformation, regardless of the economic circumstances.

And the economic circumstances for the consumer electronics giant aren't great. Sony has twice revised its earnings forecast this year and now expects full-year profits to be about half of those in the previous year. In the meantime, the company recently reported a $107 million loss in the September quarter instead of the small profit expected by analysts.

But as the company waits--and hopes--for a rebound in consumer demand for home electronics by Christmas, Sony is concentrating on streamlining its operations as part of a wider effort to coordinate its divisions and products. Heading this meeting of minds and devices is Kunitake Ando, the company's president and chief operating officer.

The 59-year-old Ando is a highly regarded executive who's widely viewed as the successor to Sony Chairman and Chief Executive Nobuyuki Idei, who is two years away from the company's traditional retirement age of 65. If--and when--he does inherit the mantle, Ando will head a Sony that's more well-rounded than the one historically known as purely a consumer electronics supplier. Under Idei, Sony has been working to transform itself into a broadband networking company.

A slower-than-expected acceptance of broadband by consumers has slowed that transformation. Still, that hasn't stopped Ando from getting the company ready for the day when many consumers have broadband access. He talks about the "ubiquitous value network," through which consumers will be able to receive personalized services anywhere, anytime, on any device.

In the immediate future, Ando, who oversaw Sony's successful re-entry into the PC market with the Vaio line of PCs, will deliver a keynote speech at Comdex next month where he's expected to demonstrate new technologies that will make it easier for consumers to access digital content--including a NetMD Walkman Player, which was announced in Japan in mid-September. The device is expected to allow for an easier transfer of content from a PC and improve the popularity of the MiniDisc format in the United States.

Ando chatted with CNET News.com from Tokyo just before Sony's release of second-quarter results.

Q: Where is Sony in its transition into a broadband networking company?
A: In 1995 when (Idei) became the president, he promoted the concept of the convergence of audio-visual products and information-technology (AVIT) products. Then later he promoted networked AVIT products where all Sony products should be network-ready for the Internet.

At this point, there has been some indication of growth of the broadband age, but in the United States it's still a narrowband and PC-centric age. And while Sony has been promoting four gateways--TV, Vaio, PlayStation and other mobile products--for network access, the problem is that each one of them is not really connected to the other.

How do you envision the development of broadband?
My vision for the broadband age is what we call the ubiquitous value network, meaning you can connect the Internet seamlessly from home, outdoors and even from the car. Sony has been working aggressively to connect all products to the Internet, not just Vaio PCs, but also AV products. For many people, PCs are sometimes cumbersome and some still feel almost allergic to them--maybe not so much in the United States, but (in) many other parts of the world. In the broadband age we are trying to promote more non-PC and mobile products that can be connected to the Internet.

Essentially, Sony is an entertainment company and we are trying to combine hardware with our strong content. And for the delivery of rich content, you need broadband. So we are really welcoming the broadband age.

What has the company been doing to get more value out of its considerable holdings in music and video content?
We've been trying to combine digital assets, mostly music and pictures from Sony Pictures, with hardware. For the first time in the last ten years, we've been trying to realize this kind of joint activity.

These two sides have quite different cultures, but finally, in the network age, the music group realizes that if they remain still they may be losing business by the free ripping of content. So now they really feel the strong need to work with the hardware side, especially for copy-protection purposes. Some early signs of these efforts are our upcoming NetMD players, which is a copy-protected MD product.

MiniDisc has been a big hit everywhere, particularly in the Asia-Pacific region, but not in the United States. Why is that? And is the company trying to change that?
One reason is the CD. CDs are relatively inexpensive in the United States and cassette tapes are even less expensive. In Japan and (other) Asian countries, packaged media has been very expensive. That's why they have to have hardware with recording capabilities, and MD is an ideal solution. MD media has been very cheap.

We are now connecting MD with the PC in our NetMD products, and with the success of the PC in the United States we expect that by bundling the two it will allow them both to sell better.

Given what's been going on in the technology market this year, what's Sony doing to ride out the storm?
We're getting back to basics on the operational side. We've been known for growth strategies for some time, but now we are improving the total efficiency of our operations by creating more efficient supply chains and controlling inventory, just like Dell. In fact...our PC business has been very efficient and that is why Vaio has been so profitable and is growing so well.

But at the same time, we are being very aggressive in introducing many Net-ready products--especially in the digital camcorder, digital still cameras, digital audio and what we call our AV PC products. The Vaio group has been promoting not only strong notebook products, but in desktops they're incorporating strong AV technologies, such as digital video recording technology.

Many competitors are focusing on large businesses as consumer spending slows. What do you think about that?
Our strength and core competence is still in the deep understanding of consumer mentality, behavior and taste on a global basis. And our hardware sales have been almost equally distributed in each of the major regions, so we are not shifting our emphasis. Our No. 1 priority is the consumer business.

However, we are receiving information that some of our businesses are making an impression in business markets. Vaio has been selling well into the SOHO market, and videoconferencing has been selling very well. I think we are always developing new markets. We realize there is growth there and we are looking forward to that.

Do traditional consumer electronics companies have to look to digital content as the future?
Yes, I think so. They have to transform themselves into digital content. And in that sense, we have a great advantage because we started many years ago and many others have followed us.

New products would have to be able to use digital content; do you think those products are cannibalizing sales of current products?
Certain products, yes, such as the VHS market, but they are being replaced by the DVD market. More and more, hard disks will be utilized in the consumer electronics market, such as hard disks attached to a set-top box. Digital television or the PlayStation also will be more standardized to incorporate hard disks. And so digital content will be part of the biggest application or attraction for many of these consumer products.

I'm not so much concerned about cannibalizing older products. I don't think this will kill other parts of our business that aren't really growing.

You're giving one of the keynote speeches at Comdex this year. What should people be looking out for?
My main objective is to demonstrate to the audience how easy it is to use Net-ready products in the broadband age. As long as you have a PC, it's great, but there will be easier ways to connect to the Internet. We will be introducing mobile products that will allow people to seamlessly connect to the Internet and we are calling it the ubiquitous value network.

Compare the Sony of today with the Sony of the future.
Right now, I'm promoting within Sony the building of an integrated business model, which is the integration of hardware, applications and content. This will not only develop synergy between the divisions, but also build a new business.

Our business model will change so that we're not just getting money at hardware sales, but maybe shifting more towards a subscription model, such as music downloads and video on demand, and then our ratio of revenues from software and subscription services to hardware revenues will be more than it is now.