Sony breaks the mold

Surprise CEO appointment offers long overdue challenge to company's closed traditions. But can Stringer awaken sleeping giant?

Tech Industry
Sweeping management changes at Sony are offering the most potent sign yet of new thinking at the troubled consumer electronics giant.

Longtime company observers called Howard Stringer's appointment as CEO on Sunday over a handful of veteran Japanese executives a surprising but long overdue rejection of the company's closed corporate culture. Having pioneered groundbreaking new markets--such as television, CDs and portable tape players--in its early history, Sony has recently faced disappointing growth and earnings.

Among other things, critics have blamed the conglomerate's problems on complacency and corporate infighting that blinded it to new industry-changing trends, notably combining hard drive-based digital-audio players with downloadable content--a formula that single-handedly revived Apple Computer.

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What's new:
The surprise appointment of Howard Stringer as Sony CEO is a much-needed shift for the insular conglomerate, analysts say.

Bottom line:
Infighting among Sony's entertainment and electronics divisions has slowed moves to promote a convergence strategy. Will Stringer help the company become a leading gadget maker again?

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The resignations of top Japanese managers and the ascendance of a Welsh-born American hired less than a decade ago marks both a recognition of the depth of the problems and a commitment to new methods, analysts said.

"The fact that Sony now has a Westerner at the top, that's very surprising," said Michael Goodman, an analyst for research firm The Yankee Group. "It comes down to a recognition by the board that they need to do something differently...They're facing competition they haven't seen before, whether it's low-cost products from China or new technologies where they really haven't developed a presence. So far, Sony is failing the test as a company."

After initially being brought on at Sony as a diplomat with no authority over any operating companies, Stringer is now running the entire show.

The board of directors for the electronics and entertainment conglomerate unanimously approved Stringer's appointment as chief executive and chairman in a surprise move Sunday. The final approval is expected to come from shareholders in a June 22 meeting.

Related to Stringer's promotion are the resignations of some of the key executives who together represented the traditional guard that rose up through the ranks of the company--including former CEO and chairman Nobuyuki Idei, who was responsible for bringing Stringer to Sony and has been a supporter of the Welsh-born American. Among the other executives are Kunitake Ando and Ken Kutaragi, who were considered the leading candidates to succeed Idei. Ando and Kutaragi gave up their seats on the board. Ando resigned as president and Kutaragi is taking a reduced role--leading the video game division that he built up.


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Memo to Sir Howard: Build up
the digital-home markets
before you worry about
divvying up market share.

Ando and Kutaragi's reduced roles at Sony are a sign that the company is breaking out of its traditional thinking and owning up to its under-achieving performance over the last several years. Sony has long been viewed as having all the pieces to become a multimedia powerhouse--music and movies from its entertainment properties were to pump new blood in its stylish gadgets, allowing the company to take advantage of its once-sterling brand to distinguish itself from rivals.

The opposite has happened. Competitors with fewer advantages, such as Apple, and lesser-known brands emerged to push Sony to the innovation roadside. Stringer's new role is meant to bring in sweeping and immediate changes for the wayward company to get it back to the head of the pack.

Standardization of key parts and the increasing role of contract manufacturers in the electronics industry have led to falling margins and a tougher competitive landscape. Infighting among Sony's entertainment and electronics divisions has slowed moves to promote a convergence strategy that would use content to help sell gadgets, and vice versa.

While other electronics companies have flourished, Sony's fortunes have shriveled. Leading competitor Samsung's shares have soared 72 percent since early 2000. After reaching record highs five years ago, Sony's shares have lost almost three quarters of their value--the lowest point came two years ago when the company reported dreadful financial results and saw a 25 percent drop in share price. Analysts called that happening "Sony Shock."

Opening the door to rivals
"The interesting thing is that technology companies and pure content companies sometimes have contradictory impulses," Stringer said in a recent interview. However, "in the last year and a half, building a relationship between content and devices has taken on a new urgency as a part of Sony's convergence strategy."

The best example of that urgency is the company's acceptance of the MP3 digital-audio format for its portable players--something the company proudly resisted for years in favor of its own proprietary ATRAC format. By refusing to support MP3 natively on its players, Sony helped opened the door to rivals including Apple, the current market leader with its iPod player.

"Sony Music didn't want those players supporting something they viewed as the format of pirates," said Michael Goodman, an analyst at research firm Yankee Group. "But if you're looking to sell any of these devices, MP3 support is crucial. They made a very Sony-specific position on MP3, and it killed them in the market."

"He's really very well-equipped to go out and better mesh the divisions of Sony that have been grating against each other."
--analyst Richard Doherty

"Sony does those kinds of things over and over again," Goodman continued. "They put their desire to continue to use proprietary formats ahead of everything else, and they make these decisions that are in conflict with market forces."

Company executives have said Sony's proprietary formats are becoming less of a priority and that getting more content to play on its device is the key.

The company has been promoting its Connect service internally to make it a distribution channel for not just music but for movies. Sony's acquisition of MGM will also play a key role in making more content available on emerging technologies such as Blu-ray Discs--Sony's bet for the replacement of DVDs.

Stringer can help overcome divisional politics partly because he's not inextricably tied to one arm of Sony, Goodman said.

"Hopefully, Howard Stringer can inject a more market-driven viewpoint, because his entire life has not been Sony," he said. "He's been there long enough to make his mark at Sony, but not so long he's identified with one particular division. I would hope he's acquired this viewpoint that Sony is part of bigger ecosystem."

Stringer has been vice chairman of Sony and chief executive of the U.S. electronics and entertainment businesses, which have contributed nearly 30 percent of revenues to the parent company.

As the head of the entertainment properties, he's placated artists and executives when it has helped his efforts, and gotten rid of those who may have gotten to big for their britches. Well-known Sony Music head Tommy Mottola was replaced with Andrew Lack, the former head of NBC, in early 2003.

Stringer will be busy. The former journalist turned media executive will be commuting from his home base in New York to the Tokyo corporate offices of Sony.

He'll have help from Ryoji Chubachi, who will take over for Ando. Chubachi, a Sony executive with an engineering background, will help make up for Stringer's lack of technical training. Chubachi will be in charge of Sony's electronics division.

The two will face significant challenges as they try to transform Sony amid failing fortunes. However, analysts say that Stringer's ability to build consensus among warring parties has been his strength.

Richard Doherty, an analyst with research firm Envisioneering Group, said it's not too late for Sony to become a significant force in digital music. Stringer, a "renaissance man" with experience in marketing, content and, more recently, technology, is the one to make it happen, he said.

"This is a guy who has a very high social IQ," Doherty said. "He's really very well-equipped to go out and better mesh the divisions of Sony that have been grating against each other."

"Once Sony gets their resources working in the same direction instead of competing against each other divisionally," Doherty continued, "they're going to be quite a force. I think within a year, they'll be mentioned in the same breath as Apple in digital music."

If they are, it will be because the diplomat in Stringer was able to mend the fences and bring Sony together.

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