5 things Sony must do to stage a comeback

Kazuo Hirai, the man who transformed the company’s PlayStation division, is now CEO -- and facing a much bigger challenge.

By MSN Money Partner Apr 11, 2012 1:18PM

By Brad Moon for InvestorPlace

 

Sony‘s (SNE) new CEO is in an unenviable position. Kazuo Hirai has faced an uphill battle before, when his predecessor, Howard Stringer, called upon him to turn around the company’s money losing PlayStation division back in 2008.

 

InvestorPlaceThrough cost cutting, outsourcing and by jettisoning features such as backward-compatibility with the previous generation PS2, Hirai transformed the PS3 into a slimmer, cheaper and profitable console -- one of the few bright spots in Sony’s bottom line.

 

The challenge he faces now is of an entirely different magnitude, however: how to reverse a decade-long slide and four years in the red, capped by a yearly loss now projected to hit $6.4 billion. Tough choices will have to be made to right this ship, and Hirai has proven that he’s willing to make those. What does he need to do to save Sony? Here are five issues he has to tackle.

 

1. Reduce staff

 

This is perhaps the most straightforward of the five measures and something that has already been suggested through rumors that have pegged the cuts at 10,000 jobs (6% of Sony’s global workforce). While this will help reduce operating costs, it should be noted that Sony cut 16,000 jobs under Howard Stringer in 2008; that measure proved insufficient to have any lasting effect in turning things around.

 

2. Simplify product lines across the board

 

The company currently sells more than 2,000 different products and many of them compete for the same basic market. Is there a need to have 10 different consumer level camcorder models (many of them only $50 apart)? Why are there 27 different TVs in Sony’s lineup? Having too many models within product lines confuses consumers, annoys retailers and adds to manufacturing and marketing costs.

 

3. Make the PS4 an affordable hit

 

The PlayStation 3 video game console started its life as being much more machine than was needed for the task at hand. True, the Blu-ray player it incorporated helped to introduce the high-definition format into living rooms, but the cost to Sony was extremely high, both in the money it lost on every PS3 sold (until Kazuo Hirai launched the slimmed down version) and in the market share lead it ceded to Microsoft‘s (MSFT) Xbox 360 and Nintendo‘s (NTDOY) Wii, both of which were priced significantly lower. Microsoft has proven that a video game console can become the focal point in a living room, not just for gaming, but for multimedia content delivery. (Microsoft owns and publishes TechBiz, an MSN Money site.)

 

Sony needs to prevent a repeat of the PS3 launch: its next-generation console needs to be competitively priced; Sony needs to be able to sell it from day one as a break-even proposition (and ideally make money immediately); a full complement of games needs to be available at launch to entice gamers; and Sony needs to up its efforts in online gaming and multimedia content delivery. PlayStation Home is considered a runner up to Xbox Live -- and that’s not even taking into account the weeks Sony’s service was offline after being hacked.

 

4. Fix the TV business

 

Kazuo Hirai reportedly feels strongly enough about this one that he’s taking direct control of the division. While the Sony Trinitron line of CRT televisions was synonymous with high quality in the 1980s and 1990s (and commanded premium prices), Sony’s LCD offerings have been less successful, to put it mildly. Eight straight years of losses clearly indicate that something is wrong.

 

Sony has been trying to compete in the premium market, but also selling mass market models that are priced at the level of off-brand sets. Consumers are confused. Does Sony make high-quality TVs and sell them at a loss to maintain name recognition? Does it make cheap TVs, stick a few of them in more attractive looking cabinets, drastically mark them up and call them premium models?

 

Are there multiple lines, some better than others. How do you tell them apart? According to Businessweek, one tactic Sony plans to implement is to limit the amount that retailers can reduce the price of Sony sets. The idea is that this will prevent a “race to the bottom.” While there’s nothing inherently wrong with having TV sets that compete within different price points, Sony should decide where it want to be primarily and focus its efforts there. Premium sets would be the best option.

 

Sony still has some brand name recognition and if it can deliver a superior TV product, that’s where it should aim to reclaim its reputation. Premium quality sets have a higher profit margin as well. Keep a midrange product line, but clearly differentiate it from the premium models, and if an entry-level model is to be offered to make sure that Sony is still able to put TVs in Wal-Mart (WMT), keep it to a single model.

 

5. Abandon unprofitable product lines

 

This is a tough one because Sony has a long history of innovation, so there’s a certain pressure to want to lead the way in consumer electronics. However, in recent decades the company has sometimes made the mistake of confusing being different with innovating, and it then compounded the error by continuing to push a product that people simply do not want to buy no matter how clever or different it might be. The MiniDisc, the Memory Stick and the clamshell Tablet P come to mind. Most of these never should have made it past the concept stage, and when it became clear that they had fringe appeal at best, they should have been axed.

 

The company’s smartphone presence is worth examining too, after Sony paid $1 billion to Ericsson to gain control of their Sony Ericsson joint venture. The smartphone market at the moment is Samsung (SSNLF) and Apple (AAPL), with a few others like HTC, Nokia (NOK), Research in Motion (RIMM), and Motorola (MMI) hanging on to relevance. Given the brutally competitive market, maybe Sony should withdraw from selling smartphones altogether. In a few years, it’s possible that market share will be more evenly split among a range of manufacturers, giving Sony more maneuvering room to re-enter if it so chooses. If things have devolved to an Apple/Samsung duopoly by then, then Sony’s efforts to hang on to smartphone market share would have been doomed anyway.

 

Bottom line

 

Will Sony under new CEO Kazuo Hirai take any of these drastic measures? We may find out on Thursday when he is expected to formally announce initiatives that the Wall Street Journal reports have Sony targeting a comeback to the tune of a $2.2 billion profit over the next year. Layoffs are pretty much a given, and pretty much everything else is fair game at this point. The only thing for certain is that Sony cannot simply stay the course if it hopes to stage a comeback.

 

More from InvestorPlace:

 

Survey: Americans prefer Samsung over Sony
Facebook IPO date (almost) set
Why Alcoa report means it’s time to buy stocks

 

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