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Sony hits play for new game plan

PlayStation powerhouse looks for an assist from video downloads. Will its upgraded Connect service score?

At the Consumer Electronics show in Las Vegas last month, Sony Electronics executives feasted at a five-star restaurant, toasting their businesses' double-digit growth and hoping the profits would lift the fortunes of the ailing conglomerate.

But the boom in electronics wasn't enough to offset weak results for Sony's other properties, when the company reported its quarterly earnings a few weeks later. For the company's top brass, the disparity underscored the need for Sony to go double time with a convergence strategy that it has been incubating for nearly a decade. The strategy: Make its movies and games accessible on its gadgets, to help it beat Panasonic, Samsung Electronics and Royal Philips Electronics in an increasingly competitive consumer electronics market.


What's new:
With the North American release of the PSP on March 24, Sony will get to float a test balloon on a convergence strategy that it has been incubating for a nearly a decade.

Bottom line:
Key missteps by Sony's electronics division are leading to a new sense of urgency for the company's convergence strategy. Success could help revitalize the company, but will consumers take to portable video the way they've taken to totable tunes?

More stories on Sony

"A device without content is nothing but scrap metal," Howard Stringer, chief executive of Sony Corporation of America and the parent company's vice chairman, said at a CES press conference.

Stringer expressed optimism that Sony is making progress toward convergence, as its electronics and entertainment units overcome longtime disputes to work in concert. "We're working together in real harmony now. We understand each other's problems, and we have a better chance of solving some of these issues," Stringer said in an interview with CNET

Sony's convergence strategy is finally getting some true believers in the company, after years of infighting between groups over digital-rights management. Apple Computer's success with the iPod and iTunes may have forced Sony's hand, but the company's faith in the endeavor is real, Stringer said.

The company will be sending up a test balloon on March 24 with the release of the $249 PlayStation Portable. The first million PSPs will come bundled with the Sony movie "Spider-Man 2" on the company's proprietary Universal Media Disc. A hit movie on a portable device that's likely to be a hit itself should help the company grease the skids for the launch of a service delivering movie, music and game downloads.

With its high-quality screen, the PSP would be an ideal video player, and the buzz behind the device preceding its North American release would help any service trying to make a name for itself. However, Sony has denied that a PSP-branded content service is in the works.

"They have to get back to something close to the iPod in terms of buzz, and the PSP may be it," said Richard Doherty, an analyst with research firm Envisioneering Group. "Tying that device to a great service could play a significant role in revitalizing the company. PSP would be a real star attraction, and Connect would finally have a place to go."

Credit: Sony
A hit movie on the PSP should help
Sony grease the skids for the launch
of a download service.

While the company is making strides toward integrating content with electronics technology--it's planning, for example, to make the soon-to-be-acquired library of MGM movies available on Blu-ray Disc, a next-generation DVD format--the Connect service represents the most prominent example of a companywide effort. Currently, Sony Connect is a distribution service for digital music, but the plan over the next three years is to build it out into a full content service that includes movies and video games.

"We're expanding the level and scale of Connect," said Phil Wiser, chief technology officer of Sony Corporation of America. "This is a companywide working group, and there is a clear priority across the company to take the next step. It's critical, and all Sony understands and supports it."

So far, Connect has only been only been advertised on a limited basis, such as at industry events, but Sony plans to throw more weight behind the service by stepping up marketing efforts throughout the year.

It has also created Connect Company, an internal offshoot of the Tokyo-based parent company that has Wiser as its co-president.

End of an era?
Fueling the move to a download service is a feeling by some Sony executives that the era of packaged media is in decline--quite a statement for a company that helped popularize the CD and gained immensely from licensing royalties for it. Internet access to media, on the other hand, is rising.

Still, any decline in packaged media will likely take awhile, according to Michael Gartenberg, an analyst with Jupiter Research.

"New buying models, such as more convenient individual track sales, are resonating?with consumers, but downloadable content services won't be replacing CDs. There will be coexistence," Gartenberg said.

Coexistence should provide Sony time to work out the kinks in its Internet service.

Critics have derided the Sony Connect music service for its clunky interface and lack of popularity, but executives say they have learned a lot from it and are slowly introducing updates. Major changes, they say, will arrive by the middle of the year.

"Whatever failings we've had in music, we've got to move quickly to solve them in video," Stringer said. "While we may be behind the eight ball on delivery of music, on video, we have plenty of time to improve and grow faster."

The question is: Will consumers take to portable video like they have to portable music?

An early Sony foray into portable video, a TV Walkman called the Watchman, flopped. But times are different now, and with music, Sony has a template for what can work.

Other companies, meanwhile, are working on similar services and devices. Microsoft has developed a version of Windows Media Center for portable devices from Samsung and Creative with content services from CinemaNow. Reception has been cool because there hasn't been much content for devices--at least, in these early stages. The entrance of a company like Sony, with its extensive entertainment libraries, could change that.

As for Sony, key missteps by the electronics division, the largest contributor to the company's overall revenue, is leading to a new sense of urgency. The electronics industry is plagued by shrinking margins and increasing competition. At the same time, Sony was late to market in two product categories it has traditionally dominated--televisions (it did not identify the flat-panel television craze early), and hard drive-based portable audio players (it only recently came out with units, and it finally decided to support MP3 files in its players).

Years of bickering between Sony groups has allowed companies that weren't on Sony's map five years ago to dominate the market.

While Sony still believes it has advantages because of its diverse properties, those advantages are deteriorating. For example, its once sterling brand, while still among the tops in the United States, is waning in its native Japan, as well as in China.

However, executives believe more companywide cooperation will help prevent miscues such as Apple taking over the portable audio player market, which once was the domain of Sony.

"We were well aware of the changes in the (player) market, and we were very clear on how to address those changes. We just didn't move fast enough," Wiser said.

With a common understanding and better communication between divisions, Sony executives hope to make improved performance not just a matter for its electronics business, but something the whole company can profit from.