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Dear Sony, don't get out of smartphones yet

Sony has gotten knocked around in the smartphone business. CNET looks at why the company needs to stick it out.

There are 180 billion reasons why Sony should get out of the smartphone business.

The Xperia Z3 is Sony's latest flagship smartphone, part of a line that's found mixed success in the marketplace. CNET

That's the amount in yen ($1.67 billion) that the Japanese consumer-electronics conglomerate had to write off from its mobile division, the latest proof that its Xperia smartphones are hitting a wall. As a result, the company warned it would post a loss of 230 billion yen ($2.1 billion) for the fiscal year that ends March 31, 2015, and said it wouldn't pay out a dividend for the first time since it became public in the Tokyo Stock Exchange in 1958.

The negative results raise the obvious question: Should Sony give up on smartphones?

The answer is almost moot. That's because Sony needs to stick it out in mobile, regardless of cost or losses. Smartphones represent the one essential piece of technology for the consumer, acting as the starting point for wearables, gaming, the digital home and everything else that's connected. If Sony truly wants to continue being a global player in the consumer-electronics world, standing alongside Apple and Samsung, it needs to have a mobile business.

"The smartphone is the center of the computing and electronics market," said Avi Greengart, an analyst for Current Analysis. "Retreating from phones is a defeatist strategy."

Sony is already making changes. The company said in a statement that it plans to change its strategy in certain geographical areas, reducing its lineup of midrange devices, and focus on its premium lineup, all in a bid to deliver more-stable profits.

Sony enjoys the unusual position of a company with the kind of overall brand recognition that matches Apple or Samsung -- thanks in part to legacy hit products such as the Walkman, as well as its television line, PlayStation console franchise and Sony Pictures, which produces hit films such as "The Amazing Spider-Man." But when it comes to smartphones, Sony is off the radar for most consumers.

It shows in its market share position. Sony's share of the global market hovers at around 2 percent, according to Gartner. In comparison, Samsung owns nearly a third of the market.

An inconvenient partnership

Sony found itself in its current position partly because of a deal it struck with telecommunications-equipment maker Ericsson more than a decade ago.

It was 2001, and Sony was a minor player in the business. It decided it would have a better chance if it merged its mobile-phone division with Ericsson.

The result, Sony Ericsson, was successful for several years, focusing on multimedia phones that carried Sony brands such as the Walkman. The phones came in funky colors and unique designs. But as with many other handset manufacturers, Sony Ericsson was hit hard when Apple introduced the iPhone in 2007.

Sony Ericsson W760i
Older Sony Ericsson phones had a unique style. Sony

For its smartphone platform, Sony Ericsson had tied itself to Microsoft's now-defunct Windows Mobile operating system, churning out a number of smartphones with eye-catching looks but clunky software.

Similarly, the joint venture proved to be too clumsy to maneuver around the new smartphone era, powered by the iPhone and by Android smartphones built by HTC and Samsung. Sony couldn't fully work with the joint venture, since its operations were technically part of a separate business. In 2011, Sony said it would acquire Ericsson's stake in the joint venture for $1.5 billion, taking full control in early 2012.

Mobile became one of three "pillars" of Sony, the other two being digital imaging and gaming, as part of the company's .

At that point, Sony's presence in the smartphone business had almost dropped offscreen. In the US, it had a willing partner in AT&T for some of its midrange Xperia smartphones, but the devices flopped, and AT&T hasn't sold a Sony phone in two years. Sony couldn't find a partner for many of its more premium smartphones, opting to sell them through its retail stores or online, to little success.

Xperia's revival

Once Sony took full control of the business, it worked to narrow its focus on its smartphone line, coming up with the flagship Xperia Z. The smartphone utilized Sony's other assets, including video technology from its TV group and lens technology from its camera group, and it featured a sleek glass body that was also waterproof.

Having the mobile business in-house meant Sony could eliminate the barriers between the different businesses. The company is notorious for keeping its different businesses in the dark about their respective projects.

A waterproof body is the marquee feature of Sony's Xperia smartphones. Sony

While "One Sony" has helped get its different units working together better, critics note that the company could more smartly utilize its disparate assets. Sony, for example, hasn't taken advantage of the popularity of its PlayStation franchise and extended some of the gaming capabilities over to mobile (it has a PlayStation-certified library of Android games that falls short of the console's standards).

The Xperia Z line, meanwhile, continues to evolve with the latest iteration, the Xperia Z3. Prior to the Z3, Sony has struggled with getting its smartphones to consumers in a timely manner -- a problem when competitors such as Apple announce a product and launch it the following week.

With T-Mobile and the Xperia Z3, Sony finally has a smartphone that will ship shortly after the announcement, a contrast from the long delays in the past. Sony and T-Mobile said the phone would launch in the final months of the year.

Going big

Aside from T-Mobile, Sony lacks another US partner. That comes as its competitors, from HTC to LG, have struck deals with all the national carriers to sell their smartphones. An HTC One M8 or G3 can be had at any major carrier, but the Xperia Z3 is relegated only to T-Mobile.

Though the T-Mobile deal marks a step in the right direction, Sony is woefully behind the competition in awareness and distribution.

Sony's shift to more-premium products makes sense -- the company has some element of a premium reputation with its television and gaming products -- but the change puts Sony in direct competition with Apple and Samsung.

As a result, Sony will need to get much more aggressive in marketing its products. That means more than a quick television campaign and having James Bond use one of its Xperia phones in "Skyfall."

"They have to advertise like they never have done before," said Roger Entner, a consultant with Recon Analytics.

The company also has to better utilize its assets, whether that means exclusive access to movies and music (which Sony produces), to a more direct relationship with its hipper PlayStation 4 sibling.

Otherwise, the continued losses could force Sony out of smartphones for good (there's precedent for that -- the company has already shed its e-reader and PC businesses). And that's a position it doesn't want to find itself in.

"An exit can easily be viewed as a strategic blunder, as it closes that option for good," Entner said.