Stringer banking on HD strategy for Sony rebound
NEW YORK -- Eight months after being crowned Sony Corp.'s new warrior king, Howard Stringer is preparing to do battle with upstart rivals like Apple's iPod using an arsenal of new Blu-ray-enabled, high-definition portable and interactive devices and a marketing blitz designed to reinforce Sony's primacy in the next-generation media marketplace.
Clearly, Sony is banking on its much-anticipated PlayStation 3 to be the digital Trojan horse that will allow the company to triumph in the emerging world of personalized, interactive, multimedia products and services.
Stringer, the first non-Japanese chairman and CEO of Sony, already has scored a major victory in making its Blu-ray Disc next-generation DVD technology the de facto industry standard by enlisting the support of five of Hollywood's six major studios. The ultrafast super CELL microprocessor Sony helped create also will drive a spectrum of HD products -- from cutting-edge LCD television sets to HD camcorders and musical cell phones to the relaunched Walkman -- that are Sony's most potent weapons.
"We have an HD value chain that no one else in the business has," Stringer reflected during his first extensive sit-down interview since announcing Sony's restructuring in late September.
"Nobody talks about convergence anymore because it is a day-to-day reality," Stringer said on a recent Friday afternoon in his New York office. "We're living it, whether it is (PlayStation Portable) or phones or Walkmans or iPods. They are all finding new ways to deliver content."
In a demonstration of the swift collaborative response to consumer-driven marketplace changes that a revitalized Sony can deliver, the company soon will unveil a line of compact, portable video devices to fill the time gap before PlayStation 3 launches in Japan in March and in the U.S. a year from now.
Unlike the PlayStation Portable, which has been elevated to a benchmark multimedia player with numerous upgrades since its launch eight months ago, these new, smaller devices will focus primarily on video and transferring user-selected content from digital video recorders and other devices using Sony Memory Sticks, direct downloads and preloaded fare. Sony's plans are still being developed under tight secrecy, but it is clear that the company's hope is to remind consumers that Sony already is active in the spaces where Apple wants to go with the video iPod.
Stringer believes the company's electronics expertise and aggressive, expansive content holdings uniquely position Japan's largest global icon at a time when technological standards and formats are being sorted out in Darwinian fashion in a marketplace where the clout of the individual consumer never has been greater.
"The company is worth fighting for," said Stringer, who describes himself "a Sony warrior" to investors dismayed by Sony's lagging stock price and $90 million in projected losses this fiscal year, compared with the $90 million in profits previously forecast.
The vital war plan is being executed by Stringer just a month after he unveiled a three-year restructuring plan that will eliminate $2 billion in costs, 10,000 jobs and the structural "silos" that have made the Japanese giant as insular as the country in which it is headquartered.
Sony's array of hardware and software products is creating a new "high-definition value chain that starts with cameras and goes through projectors and television sets and ends up with the PS3. You can see an HD necklace with all the pearls connected," Stringer said.
"Owning the content as we do is all of a sudden part of an integrated relationship with the device. Each understands the value of the other. And that is what makes Sony so unique, since we make them both," Stringer said. "More and more, you will see Sony's fully integrated HD strategy."
That dual advantage is why the company is in talks with major players including Comcast Corp. (an equity investor in Sony's recent acquisition of MGM), Yahoo!, Google and others about alliances involving services such as search, content licensing and the creation of niche content platforms.
If anyone has got the people skills and the strategic sense to pull it off, it is Sir Howard, as the 63-year-old Welsh-born executive is known affectionately throughout Sony. (He was knighted by Queen Elizabeth II in 1999.) Stringer made his mark as president of CBS News and later CBS Corp. before he joined Sony Corp. of America in 1997 as head of operations.
Although he is a U.S. citizen, Stringer makes his home in Oxfordshire, England, with his wife and two children. But he spends most of his time traveling every other week between New York and Sony's Tokyo headquarters. Stringer is quick to show Japanese-style reverence to Sony founders Masaru Ibuka and Akio Morita by telling investors and shareholders that one of Sony's new goals is to "reclaim the primacy of our brand and the fighting Sony Spirit of Ibuka-san and Morita-san."
The undervalue of Sony electronics and the Sony brand in general is underscored by the fact that the company's current $36 billion market capitalization largely reflects Sony Entertainment (at more than $10 billion) and the PlayStation business (valued at about $20 billion), analysts said. Still, Sony's Japan-based electronics business contributes nearly three-quarters of the corporation's total $65 billion in revenue.
Stringer has made his mark in Tokyo in a short time, Sony insiders say, by becoming a part of his own team. He promptly moved his executive office at the company headquarters there from the seventh floor to the sixth floor, where he can freely walk the halls and converse with staff. Monthly huddles with next-generation executives keep new ideas flowing and the lines of communication open, and Stringer has placed well-regarded veteran electronics engineers in key posts to execute his plans.
Despite the language and cultural barriers, many of Sony's 160,000 employees have embraced the restructuring plan Stringer and Sony president and electronics CEO Ryoji Chubachi presented in September as radical moves long overdue: tearing down internal silos, fostering horizontal communications and establishing a significant level of goal-tracking and milestone-setting. Software and hardware development now occur simultaneously. These were not goals in two other failed restructuring efforts under his predecessor, Nobuyuki Idei, who stepped down in June.
"Howard is very approachable. He doesn't have airs about him. Even though he is a knight, you don't have to bow or curtsy in front of him," one high-level Sony executive remarked. "There used to be a lot of ceremony with the CEO position at Sony. There's not that much any more, but there is respect."
Blu-ray warrior
An early strategic victory in Stringer's tenure has been winning support from Warner Bros. and Paramount Pictures for Sony's campaign to make Blu-ray the standard for next-generation DVD production despite those studios' initial backing of the rival HD-DVD format, backed by Toshiba.
"Our alternative format ... is based on the premise that if you are going to take the DVD to the next generation, the customer experience better be more exotic. So, Blu-ray offers far more capacity and the potential for 3G (third-generation wireless technology) and interactivity. The Blu-ray package has greater selling power than transitional technology. But our studio's support for it, with so much of (the studio's) content digitized, was a selling point," Stringer said.
Although no money has changed hands and no major concessions were made, sources say that Sony has provided caps on Blu-ray disc manufacturing costs and timetable guarantees.
And it didn't hurt that Sony planned on making its own Blu-ray splash next year with the powerful PS3, with or without the support of other studios. As such, it will be a critical springboard for Sony to advance its product line, consumer relationships and balance sheet.
However, Blu-ray's higher capacity and improved quality next-generation DVDs will help stimulate consumer interest in advanced high-definition devices such as DVD players, televisions and hand-held units to provide continuity of the new experience. Such consumer upgrades would boost Sony's entire HD value chain of products -- from the Sony Panasonic Genesis camera used by film studios, 4K digital theater projectors, HD camcorder and the Bravia and SXRD rear projector screen televisions.
"The reason Sony has suddenly gained support for Blu-ray is simple," said a high-level studio executive close to the discussions. "PS3 is a subsidized Blu-ray play that will sell 20 million units. The first HD player will be on the market for $1,000. PS3 could be at $300 or $400. Sony will be selling them at a loss the first six months to a year just to get Blu-ray players out in the market. So studios realize they need to have their content on it."
That stands in sharp contrast to PS2, which exclusively offered Sony content simply because other studios could not be convinced it was a platform that would make money, company executives said.
"We own two studios. I don't think we would have been able to push Blu-ray through without them because the initial enthusiasm for HD-DVD was because it was cheaper," Stringer said.
The ability to control the flow of its own expansive content archives, as well as those of competing content producers, onto its open electronics platforms provides another lucrative revenue stream. That is a huge advantage over competitors, as underscored by Apple's decision to recently launch its long-awaited video iPod complete with select paid content, such as ABC hit series "Desperate Housewives" and "Lost."
"Why would someone want to pay $1.99 per download of one TV series episode on a closed system like a video iPod when they can transfer all the content they want from their own devices like DVRs to our multimedia portable player at no extra cost? Consumers already can do this with the PlayStation Portable," Stringer said.
Indeed, packaging Universal Media Discs of "Spider-Man 2" with the new PSP in March convinced Sony that its PlayStation franchise had the potential to be much more than a game player. The PS3 and portable new multimedia devices will feature original short-form content, Internet messaging and other functions.
The total number of PlayStation models in the world equals the populations of Japan, South Korea and Australia, Stringer likes to note in speeches. "That's roughly 200 million machines all speaking the same language," he says.
The promise of PS3 already has served as a catalyst for new business alliances for Sony. Comcast is in talks with Sony about ways it can joint venture on the PS3 and other Sony portable video devices to extend its brand into the wireless interactive space.
Sony is discussing content search and management, advertising and other common ground alliance with Google and Yahoo!, which soon might begin paying to be the welcome screen on Sony's sleek Vaio laptop computers.
"If there are any gaps in that chain, the Googles and the Yahoos of the world might be able to help us fill in to drive customers and content opportunities," Stringer said. "(They) have big advantages. In a world in which there is increasing commoditization, we need more and more differentiation. And they could provide some of that."
As a leading content producer, Sony can license its specially organized content to Comcast, Cingular and other distributors for what would be almost pure profit. The sky is the limit, Sony executives say. For instance, a snippet of a hit song by one of Sony's recording artists made into a cell phone ringtone recently racked up $1 million in sales in just 10 days.
However, Sony has had mixed results overall with such joint ventures. The most successful to date has been the Sony Ericsson mobile phones, which feature downloaded music and mini music videos and already are sold out through the holidays.
At the opposite end of the spectrum is Sony BMG Music Entertainment, a recently created recorded music joint venture with German media firm Bertelsmann AG. It is fraught with problems -- from BMG's recently filed lawsuit to its call for the ousting of Sony BMG chief executive Andrew Lack over management style. Stringer, a longtime acquaintance of Lack's, declined comment on all BMG matters.
Playing to win
Although recorded music remains a trouble spot for the company and film and TV production are inevitably volatile businesses, the pivotal PlayStation game plan epitomizes Stringer's long-held desire to fully integrate the company's free-spirited, sometimes warring electronics hardware and software operations.
A massive new marketing campaign is being spearheaded by newly appointed global marketing chief Andrew House to help reposition Sony in a brutally competitive marketplace by touting about a dozen of its top products, including the Bravia LCD TV, the next-generation Walkman, PS3, PSP, HDV Handycam, Sony Ericsson mobile phones and the Genesis digital camera system for studios created in cooperation with Panavision.
At their core, Sony's next-generation devices must be networked, interoperable and easy to use, Stringer says.
"Given all our HD technology, including Blu-ray, SXRD, PS3 and HD camcorders, in addition to all of our digitized Sony Pictures content and access to the MGM/UA libraries, no one is better positioned right now than Sony to offer a HD experience across a vast array of devices," said Robert Wiesenthal, executive vp and chief financial officer at Sony Corp. of America. "It's a long road. And even if we're not always early, we're always good once we get there."
The increased functionality and interoperability that has been added to Sony's wildly popular PSP since it was released in March provide a glimpse of what's to come in the PS3. Industry analysts say the PS3 will lead a three-way battle for the fast-growing video game market, joined by a soon-to-be released Microsoft Xbox 360 and Nintendo's Revolution.
Having already has sold more than 6 million units, Sony has transformed PSP into a multimedia device with a hard drive that makes it a portable DVR, with built-in WiFi that makes it more like location-free TV. PSP also now is packaged with a removable storage card capable of holding hundreds of songs, videos and digital photos in an effort to provide stiff competition to the iPod.
In keeping with the PlayStation business model, PS3 will roll out at a loss for the first six months, then rapidly turn profits on game-license fees. PS3 will be bundled with a selection of preloaded films, TV programs and games and sell for between $300-$400.
Sony's other secret weapon, which also will be showcased in PS3, is the CELL microprocessor. Developed in tandem with IBM and Toshiba, which allows for supercomputer-like performance, the CELL microprocessor is 35 times faster than the processor in PS2; it offers twice the processing power of Microsoft's new Xbox 360 and 10 times the power of a standard PC.
Digital rights management and piracy remain industry-wide challenges Sony is trying to help ameliorate. Sony is one of the few media giants that has been successful straddling countries and cultures with not only electronics but also content that includes hit animation on Japanese television, popular comedy series on German TV and successful TV channels in India.
Sony's ownership of so much desired film, TV and video game content is one reason Stringer confidently contends that he can overcome all obstacles. Some on Wall Street remain skeptical, though Stringer wields more clout in the investment community than his predecessors as a result of his nine-year track record at Sony Corp. of America, where he helped bolster the film and television businesses while trimming $700 million in costs and one-third of the division's work force.
Stringer's mammoth restructuring effort offers a "compelling risk/reward profile," Credit Suisse First Boston said in a recent report. However, Morgan Stanley analysts point out that the restructuring plan hinges as much on shrinking or eliminating unprofitable businesses as it does launching successful new products.
"Sony's new strategy will not have immediate results, meaning that it will take some time before profitability improves," Morgan Stanley said.
Sony's restructuring targets calling for 5% profit-margin growth and 5% revenue growth over three years will be comfortably achieved by recovering market share and growth with new products, Stringer said. Some industry analysts contend that the targets are too low.
Stringer predicts revenue spikes from next year's introduction of PS3 and from such upcoming films as "The Da Vinci Code" and "Casino Royale," the new entry in the James Bond franchise, with Daniel Craig assuming the mantle of Agent 007.
"Innovation and quality will win the day. It just doesn't hold the day as long as it used to because you are going to be copied faster and imitated faster. So your market leadership is more difficult to sustain over a longer period of time," Stringer said. "But eventually consumers are going to want devices that play everything and everybody's content in the end. And the customer is king. So, I have no doubt that Sony will prevail."
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