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Sony's brave Sir Howard

With the PS3 and Blu-ray by his side, CEO Howard Stringer says Sony is set to vanquish its foes and keep consumers happy.

Sony has been in the news a lot in the last year, but mostly for the wrong reasons.

The electronics giant had to recall millions of notebook batteries. The hotly anticipated PlayStation 3 came out, but in lower volumes initially than expected. The fight over Blu-ray and HD DVD crimped sales of future high-definition players. Sony has picked up momentum in flat-panel TV sales, but the whole industry is experiencing fierce price competition.

Clearly, Howard Stringer, CEO of Sony and a Knight Bachelor in the British honors system, has his hands full. The former CBS newsman, however, was as ebullient as ever when he sat down with CNET News.com's Michael Kanellos and other reporters at the Consumer Electronics Show in Las Vegas earlier this month. Stringer, along with CFO Rob Wiesenthal and Sony Electronics President Stan Glasgow, discussed this year's product lineup for Sony, future products such as OLED televisions, the PlayStation 3 and an upcoming plan to right Sony.

Q: What are the current status and the goals for the electronics group?
Stringer: We set out a year and half ago (in June 2005) when I became the CEO to recover the electronics business to profitability. You will remember that for the first time the electronics side of Sony was unprofitable. Well, in the space of this time we are now at 4 percent margin on electronics, and that's significant. The cost of the PlayStation has raised some challenges on the consolidated numbers that we have promised, but we have to find a way to reach those targets as well. And that's what we'll be working on over the next few months, deciding how to get to the 5 percent consolidated number.

Despite understandable concern about the cost and so forth, the whole purpose of PlayStation 3 is to create future opportunities.
--Howard Stringer, CEO, Sony

You all know about the (PlayStation) delays because you all covered that thoughtfully and elegantly and unkindly--but we've now reached a million PlayStations shipped to the United States, as ultimately promised.

And we're now very comfortable with our research program for PlayStation 3, which one researcher recently described as the Mercedes of games players, for obvious reasons. The million is more than we delivered of PlayStation 2 so, for all the anxiety, I think PlayStation 3 is well on the way to living up to that promise. That's a good sign.

What are the goals for this year for PlayStation?
Stringer: I think it's 6 million units by the end of the quarter, worldwide. And then we have got the European launch in spring, which is very important to us. (Editors' note: Stringer intitally said it would launch in April, but Sony later clarified it would occur in the spring.) I think we have 20 games out there. I assume we're going to increase the number of games.

Lost in the shuffle is the fact that the current games that are out there are only using about 20 percent to 25 percent of the bandwidth. Once the publishers' excitement reaches a level of intensity that they start using more of the bandwidth, that will create additional excitement.

Secondly, there now are 1 million Blu-ray players in the market, and each of those in the United States has a Blu-ray disc because we put Talladega Nights inside. I'd say 90 percent of the people who (own) PS3s are playing that Blu-ray disc on it or playing other Blu-ray discs on it. Contrary to some of the reports, it is an effective Blu-ray player. The people who like Blu-ray are the people who play PlayStation 3, just as people who play PS2s were the early proponents of the DVD format. It drove the DVD format.

The Cell chip group is beginning to come up with Cell applications that are quite exciting. And I don't mean just the Stanford supercomputer (type of application) but beyond that.
--Stringer

I did read all the HD DVD excitement, but I think they sold 60,000 players, and we actually put out a million Blu-ray players. (Editors' note: Stringer initially said 60,000 HD DVD discs, but Sony clarified that he meant players.) So Blu-ray format is a strong format. You have to have a high-definition television; you have to have an HDMI link-up. But if you've seen the Blu-ray disc on the PlayStation, on the television set attached to PlayStation 3, it's a remarkable image.

Do you think the PlayStation 3 might become a vehicle for other applications or other forms of entertainment?
Stringer: Absolutely. Despite understandable concern about the cost--the whole purpose of PlayStation 3 is to create future opportunities. The early anxiety is that the Cell chip is expensive for consumer electronics applications. But prices come down, and for the first time in the last few months the Cell chip group is beginning to come up with Cell applications that are quite exciting. And I don't mean just the Stanford supercomputer (type of application), but beyond that. We're clearly at the stage where the opportunities for that high-powered processor are gathering momentum.

Somebody said to me before Christmas, "Well, yes, but this is very risky." Well, on the one hand you tell us we're not innovative enough, and on the other hand you tell us if we are innovative, it's too risky. It's a wonderful balance, and it is true. In the short term it's risky. But between the excitement of its potential and the availability of bandwidth that you have unused for interactivity as well as movies and 3D, it's worth the price of admission.

When do you hit a break-even point with the cost of the console?
Stringer: Well, I think Kutaragi-san (PlayStation chief Ken Kutaragi) said that it would be break-even by the end of the year, at the end of '07. PS2 was not profitable in the first year. You make it up on the content as the content gathers momentum, the licensees from that and so forth. But the current understanding is that it will be break-even by the end of '07.

How do you achieve your financial goals with that in mind?
Wiesenthal: What we said to the analysts is that just like the PS2, in its second year PlayStation 3 will get profitability. Given the income that we're expecting from PS3, there are other things that we'll have to deal with in the corporate environment to achieve our margins, and we're evaluating those right now.

Stringer: We have two or three months of discussions to figure out how to achieve the target that we promised everybody.

You have to get the company used to the idea that the left hand can make the right hand money and vice versa, and that's part of the cultural change that Sony United represents.
--Stringer

Wiesenthal: Unlike PS2, there's a third leg of economic value which is not only the box and the software, but also the online service. In PS3, which is Wi-Fi enabled, people are buying games right now. We're very happy with what we've seen so far, and we're hoping in the future to have their own content television and music. There is a third revenue stream to help you achieve your economics.

Stringer: Yeah, there's also a lot of optimism about renewed momentum for the PSP. PS2 performed far better than expected for Christmas, and we don't know what profits will generate. The electronics company is feeling very bullish, but that's for me to assess, and to decide whether that alone will get me where I want to go. But we have to have a lot of contingency plans.

When will Blu-ray players drop in price to become a mainstream product?
Glasgow: If you go back to when DVDs came into play, it took about three years until they got into price points of $299 to $399. I suspect it's about the same thing here with Blu-ray. I think it's going to take up to three years to get down to those price points, possibly a little longer. But I would assume it's similar to DVD.

We have some control over (the cost of the) components. There are a lot of components in that product. Once you get volumes up, you get yields up, and you get efficiencies up; the prices go down on the components.

It sounds like you have a lot of questions in your mind over where the profit will come from to hit your financial goals. Are you going to try to decide where to do it over the next three months?
Stringer: No, I only say three months because announcements come in three months. Every decision doesn't take three months at Sony. It only seems like that. Actually, I know where I can get the money, and I have ideas where I can get the money. But we have to achieve a consensus in an organization about how to get to those numbers, and we need a review of where we stand.

The electronics company has had a very strong December. I haven't seen the rest of the organization's December yet. There are lots of different elements that enter into the equation before deciding how to get to that 5 percent. I go to Japan for a month starting next week. I made a promise to find a way to get to it.

How does the electronics company fit into the big picture?
Stringer: The whole company, it's Sony United these days--I don't want to think of Sony United as separate P&Ls (profit and loss statements) that ignore each other. That was part of the problem over the last three or four years. We are a shared environment today.

In the digital world one of the difficulties has been that one company can lose money so that another part of the company can make a lot of money. That's something that we've had to educate people about. That's the difference in the digital world. In the analog world, self-contained P&Ls made sense. In a horizontal digital world, they don't.

Now we have software architects in every product lineup. We didn't used to. I don't think everybody really knew what a software architect was two years ago.
--Stringer

For example, we have $4,000 projectors for movie theaters. Those are short-term expenses, but it saves $160 million for the movie company across studios. So, how do you make a decision on whether to go forward with the $4,000 projector with all the cost implications of a more sophisticated product? If you make it in the narrow analog decision P&L, you probably make a decision not to do it. But when you're going to save $150 million in another part of the company? You have to get the company used to the idea that the left hand can make the right hand money and vice versa, and that's part of the cultural change that Sony United represents.

You've all had a hundred discussions and thoughts about integration and convergence, but there is a certain inevitability now about content driving hardware sales. Talladega Nights was released with PS3 before its normal window of release in the video department. That's one part of Sony working very hard to the advantage of another part of Sony. We didn't do that before. We lived in separate worlds.

What are some of the other cultural changes you've had to make?
Stringer: We still have software technology improvements that will make us competitive going forward in video players. We can't afford to let anyone else beat us in that market. So how we will use the PSP in the future is a huge opportunity.

We transformed the software technology development at Sony. We really do now have an integrated approach in the United States, Tokyo and Sony Online Entertainment. Tim Schaff and Shimada-san (Keiichiro Shimada, president of the technology development group) from Tokyo are now in constant communication about software technology. There are a number of people in their 40s instead of their 50s and 60s. I don't mean to downplay age, but we are pushing Sony first past the digital world and, for example, now we have software architects in every product lineup. We didn't used to. I don't think everybody really knew what a software architect was two years ago. So now we have a relationship between software engineering and product design from the beginning of products.

You are going to say, "What took you so long?" and that's irrelevant. We are doing it. For the first time, particularly from the spring onwards, (for) the products coming into marketing, like the IPTV television, there's more and more understanding at Sony and in the content companies that working together is a big advantage for us that nobody else can manage.

What are Sony's plans for Web 2.0?
Stringer: The first example is the IPTV opportunity. (Editors' note: At CES, Sony showed off a Bravia TV that can play content directly from select Internet sites.) Basically, we've made the television the center of the Internet world instead of the computer, by bypassing the computer and taking the Internet direct to that television screen. Now, there are a lot of implications for what that will do inside the television set. It's a sea change for Sony to be the first to do that because two years ago you were all muttering at us for being software-illiterate.

Glasgow: We had to build the application layers of software to be able to put a module to connect to the Internet and stream content. All of that is 80 percent software-controlled, and that includes streaming high-definition content, so we can stream high-definition movies through this, and that comes through cooperation with Sony Pictures. What we wanted to do is seed all of our televisions with the capability of having this but not burden the cost of a TV for those consumers who are not ready to adopt this extra option. That's why we did it as an optional module.

The content at this moment is free. There may be premium content in the future.

Stringer: Nothing is free. It's not free to us. If we put the movies from the studio on, as we did with Blu-ray, someone has to pay for it. In this case, it's an investment. We have the opportunity to use content to drive the success of hardware products--again, something that would not have been possible three, four years ago.

All we are really demonstrating is that we are no longer behind the curve; we are ahead. I think you have to keep enhancing technology to stay ahead.
--Stringer

What are the implications for IPTV for broadcasters? Is it going to spell trouble for them?
Stringer: That's very hard to say. Content is coming to you in every different direction in every different device. All devices with Wi-Fi can deliver content of one kind or another. The customer has to decide first what's convenient. We have to respect the integrity of copyright because we own a lot of copyright. We also have our brothers at our studios to figure out how to use the content most successfully. All we are really demonstrating is that we are no longer behind the curve; we are ahead. I think you have to keep enhancing technology to stay ahead.

The movie theater has to change to be attractive to the baby boomers and middle-aged customers. Young kids will probably always go dating in the movie theater. This year, the box office in the United States went up, so there's still demand for the movie experience.

What do you think of the LG combo Blu-ray HD DVD player?
Stringer: It's an expensive way of showing universal discs. The three biggest box-office winners of this year were, in order: Sony, Disney and Fox. Those are the three Blu-ray players. When you consider that those three successful studios will be delivering last year's successful box office in home video this year, then that's an enormous advantage. The fourth is Warner, and they release in both formats, so it doesn't hurt. If you are going to be buying discs, you are going to be buying an awful lot of Blu-ray discs going forward--if you want Pirates of the Caribbean or James Bond or Da Vinci Code or Spider-Man. Universal is the only one with HD DVD. I don't feel terribly intimidated.

How far in the future are OLED TVs for Sony?
Glasgow: OLEDs are being produced right now in very small sizes. I think we'll probably be doing something in the next year.

Stringer: You really need to look at it because it is one of the few products that stops you in your tracks. It's so breathtakingly bright and clear and original and microscopically thin. Strangers stop in the street, stop by the booth (at CES) all the time to look at it.

But do you think by next year you can reach a level of price compared to other TVs?
Stringer: I think that's the issue. We showed it to you because we want to show you the promise. The reality is connected to price and availability and mass production because it's also a quite complex technology. But it is so beautiful we want people to see it. Excitement comes first, you know.

What's the situation with LCD TV prices?
Glasgow: The best answer I can give you is that it's going to remain very challenging. We were able to compete over this holiday season effectively in LCD and not get into financial trouble and maintain No. 1 market share (in the U.S.) in both dollars and in units. So we're just going to have to continue to come up with new systems and new ways of driving costs down.

We're going into a generation eight fab at the end of this coming year. That will give us tremendous economies going forward. Those are huge investments. Not many companies are doing that.

When does it open?
Glasgow: It's been announced for September-October. It takes a couple of months for them to really ramp up production, and it's a joint venture with Samsung.

We've actually had increasing ASPs (average selling prices) in LCD year to year, because we're selling the highest screen sizes. We're not going after the lowest price points or the lowest possible size in LCD. We're trying to add the features to make it optimal for consumers. So we have a chance to be considerably better off financially by being that way.

Could you give us an update on the Sony Reader?
Stringer: We are very happy with it. It's selling as fast as we can make it. We're not making enough. We've been very cautious in launching it because, as you know, it failed in Japan two years ago. This is a totally different version with totally different economics and software, and we understand that Amazon is also coming on with something in the relatively short term. So, we need to get a second reader out. We probably need a Wi-Fi component.

But we're very pleased that the acceptance from the consumer is unusually strong. I don't want to be a salesman, but people love the device. How many ultimately can be sold is a question mark. I think the next iteration will be the educational marketplace. We've sent some to England. I haven't heard back from the English publishers that I've sent them to, but clearly there is a component in the English-speaking world where you can stack so much educational content that kids can take (the entire content of) their whole (collection of) textbooks (in their Sony Reader).

We didn't go there (into education) at first because there was a lot of caution. A lot of my contemporaries in Japan weren't sure about this. This has been a peculiarly American dynamic. We're well aware of the potential publishing costs and paper costs, and it has a unique ecological advantage.