The remaking of Sony

The real debate around Sony Corp three years ago was how severe the restructuring might be and who would buy the parts in a fire sale. Mainland Chinese firms such as Lenovo Group, Haier Electronics Group, GOME Electrical Appliances Holding and Xiaomi, eager to get their hands on an established global brand, were sniffing around its consumer electronics unit; US telcos, cable companies and private-equity firms were reportedly interested in its motion picture and music entertainment unit; and Lenovo kicked tyres at its VAIO PC unit just before it was eventually sold to a private-equity group.

Back from the abyss
Over the past couple of years, Sony has begun to crawl back from the abyss. In late April, it reported a net profit of ¥73.3 billion ($926 million) for the fiscal year ended March. Operating profits for its January-to-March final quarter were the best for that quarter in nearly 30 years. Subtracting one-off charges of ¥256 billion and one-off gains of ¥37 billion, says Atul Goyal, an analyst at Jefferies LLC, Sony’s actual operating profits were ¥483 billion, or just shy of the ¥500 billion promised under CEO Kazuo Hirai’s audacious three-year turnaround plan that ends in March 2018. “Sony has disappointed investors for so long that everyone has been very sceptical of the ¥500 billion target, but we are almost there one year ahead of schedule,” Goyal says.

The Jefferies analyst is projecting operating profits of ¥601 billion for Sony in the current fiscal year, or the highest ever in its 71-year history. “After years of promising a turnaround, Sony is finally delivering,” he notes. “Mobile phone, TV, camera units that had been making losses have all turned profitable.” Goyal, who a few years ago wrote down Sony’s electronic assets (excluding games and semiconductors) to zero, now sees a huge upside as the company boosts profits in that division.

In an era in which FAANG (Facebook, Apple, Amazon.com, Netflix and Google) are soaking up all the attention and investors are focused on Artificial Intelligence (AI), machine learning and deep learning, does Sony really matter? Aware that a mere cyclical rebound won’t move the needle, CEO Hirai has begun reimagining Sony as the next new company at the cutting edge of technologies such as AI. He wants to remake Sony into a major force in autonomous cars, robotics and the Internet of Things with its proprietary sensors, semiconductors and other components even as he nurses its traditional low-performing units back to health. “For Sony to be able to continue generating high profits, each of our group’s divisions needs to strengthen their efforts to build new businesses rather than maintaining the status quo,” Hirai said on May 23.

Sony a robotics player? Before you start sniggering, remember that Sony was actually a pioneer in consumer robotics. It introduced the cute robot dog Aibo in late-1999, at the height of the tech bubble.

Founded by Masaru Ibuka and Akio Morita in 1946, Sony became a household name with its pioneering transistor radio. In 1979, it introduced the iconic Walkman, the world’s first portable music player, and later launched the Discman, extending the brand to portable CD players. Its hifi “Boombox”, with powerful speakers, became the icon of the 1980s pop culture. Sony’s dominance in music players ended 15 years ago, when Apple’s iPod, powered by its iTunes store, ran away with the market.

The irony is that Sony was once a major player in just about every segment of consumer electronics before it lost its way. Long before Apple began making its sleek MacBooks, Sony dominated high-end laptops with VAIOs; decades before Samsung Electronics and LG became top sellers of sleek large-screen TVs, Sony had a hammerlock on TV sets; and before Microsoft’s Xbox took a large chunk of the interactive gaming market, Sony’s Play- Station console had the market to itself. Yet, one by one, in almost every product category, Sony has been elbowed out of its pole position by nimbler, more innovative rivals.

The only area in which Sony had actually faltered was in video cassette recorders, where its Betamax was trounced by Panasonic’s much-inferior VHS technology with savvier marketing. Yet, Sony remained focused on winning the war as the era of media convergence loomed. In 1989, it bought Columbia Pictures, a major Hollywood studio, as well as an array of music firms, to become the world’s biggest producer and distributor of films and music, and then began gradually boosting its TV programming capabilities. Make no mistake, Sony is literally coming back from the edge of the precipice. It was bleeding so much money that credit rating agencies were forced to warn that they were considering downgrading Sony’s bonds to junk status, the ultimate insult to the once-iconic giant. But asset sales, restructuring and a dogged determination to stick with its winners — and some of its losers — have paid off.

Sony’s dramatic turnaround comes four years after billionaire surfer and activist investor Daniel Loeb amassed a 7% stake in the company in an effort to break it up and “unlock value”. Loeb argued that by selling up to 20% of its movie and music business in an IPO and refocusing attention on its core consumer electronics unit, Sony’s management would dramatically boost its stock. His theory was that Sony’s privately held entertainment unit was vastly undervalued relative to peers such as Walt Disney Co.

In the end, Hirai rejected Loeb’s proposals, insisting that the entertainment unit was an integral part of Sony and spinning off part of it, or indeed even the whole of it, just did not make sense. Loeb eventually sold the stock, more than doubling his money, but investors who have kept faith in Sony have made a lot more. Sony’s stock is up 33% this year, or about as much as Apple, Amazon, Facebook and Netflix, which have all risen more than 32% since January. Sony’s stock has gained 236% since early 2013, but is still down 76% from its peak in March 2000. As a comparison, Apple’s stock has surged over 3,010% and Amazon’s over 1,410% since the tech bubble burst in March 2000.

Key growth driver
Sony has identified semiconductors, and in particular image sensors, as a key growth driver. As one of the largest CMOS (complementary metal-oxide-semi conductor) sensor makers in the world, Sony is benefiting from burgeoning sales in smartphones, virtual and augmented reality gear, autonomous cars, robots and other equipment powered by AI. CMOS technology is actually built into microprocessors and other digital logic circuits used in robotics and cameras. Though it is one of the half a dozen manufacturers of image sensors, Sony’s CMOS sensors are top-of-the-range components that sophisticated robots and autonomous cars, as well as high-end smartphones, need. Sony accounts for 25% of global CMOS sensor sales, but just under half of all global sensor revenues.

While it has stemmed losses from its TV, smartphone and other electronics businesses, Sony now needs to restore its ailing film studio after a dismal run at the box office that has left it trailing its Hollywood rivals. “Loeb had identified entertainment as the unit that would drive Sony four years ago and said everything else was rubbish,” Damian Thong, consumer electronics analyst at Macquarie Securities in Tokyo, told me in an interview recently. “The irony is that Sony is now finally firing on all cylinders and the troubled part is the entertainment division.” Sony recently tapped top 21st Century Fox executive Tony Vinciquerra to head its Sony Pictures unit.

Despite growing calls from some Sony investors that Hirai should actually sell the entertainment unit now that Sony is on the cusp of becoming a new robo tech company, the CEO remains adamant that motion pictures and music are a core part of Sony. The movie business’ operating margins are just over 3%, or way below the 8% margin that Hirai and his team had earlier targeted. But with the new pipeline of movies under production, including Spider-Man: Homecoming, which will be released in early July as a co-production with Disney, Thong is confident that Sony will turn the entertainment business around. Another growth driver is Sony’s game business, which is benefiting from PlayStation’s big lead in virtual reality headsets over rival Xbox, which will only release a similar VR product sometime next year. Sony has used VR to leverage sales of its new blockbuster PS4 Pro against Xbox One.

Sound investments
Sony is also sitting on some nice investments. At the height of its troubles a few years ago, investors seemed concerned that it continued to buy or hold stakes in listed companies. Sony bought 10% of scandal-plagued camera firm Olympus four years ago. Despite having sold down half of that stake, it has more than doubled its money as Olympus has turned around. Sony also swapped some of its assets in 2003 to take a 40% stake in little-known healthcare firm M3, which runs a global medical web portal used by doctors in Japan and North America. M3’s stock has surged more than 19-fold since its listing in 2004. Sony’s stake in the firm is now worth US$3.6 billion. That is after it sold 5% of M3 to Goldman Sachs earlier this year to cut its stake to 34%.

The lesson from Sony’s troubles and its recent rebound is that even for large, successful, iconic global firms, it pays to be nimble and innovative and keep on investing in the next new things. Sony faltered because it took its eyes off the ball when Apple was developing iPods and iPhones, Samsung was innovating with cutting-edge LCD technology and Netflix was rolling out its over-the-top video streaming. Now, it is rebounding, in part because it invested in things such as sensors that will drive the new driverless cars and power tomorrow’s robots.