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WIKI ANALYSIS
Sony Corporation (TYO: 6758; NYSE: SNE) is an international corporation with major businesses in electronics, video games, movies, and finance. The Japan-based company is one of the world's largest media conglomerates with revenue of ¥7.2 trillion in FY2010[1]. The Sony conglomerate is responsible for many well-known consumer electronics products, ranging from CyberShot digital cameras to VAIO computers.
Company Overview
Sony began as a small Japanese electronics company, catapulted to success after it produced the first successful pocket-sized transistor radio in the 1950's. Today, Sony Corporation is one of the world's largest media conglomerate companies. Based in Minato, Tokyo, it operates in the U.S. under the umbrella company, Sony Corporation of America. Sony is a leading manufacturer in electronics, video equipment, televisions, video games, information and communications technology, and semiconductors. Its business operations also span motion pictures, computers, music, and finance.
Business Segments
Electronics (66% of FY2009 Sales)
Electronics is still Sony's most important business segment, bringing in 66.8%[2] of its revenue. Sony is a well-recognized and respected brand with consumers, and its products cover a wide spectrum of the entertainment and industrial markets. However, the electronics division has averaged a break-even operating profit over the last five years.
- Audio - Sony's Walkman brand had commanded the portable audio market in the 1980's and 90's, but the company had failed to develop a successor to its cassette and CD players. MP3 players and iPods now dominate portable audio, and Sony was unable to gain significant market share with its MiniDisc technology. Sony's audio segment has slowed in growth since 2004-revenue increased by only 9.4% in 2008 compared to 13.9% in 2004.<ref=Song>[stock:Sony_(SNE)/Products%20Services#181 | SNE 2008 20-F, Item 4, pg. 21]</ref>[3]
- Video - Sony makes digital cameras and DVD players in its video business. Video sales accounted for 21.6% of the company's electronics sales in 2008, second behind television sales.[4] While the company's CyberShot line of digital cameras have enjoyed strong performance, DVD player sales have declined as the market has matured. Sony has been pushing its next generation Blu-ray technology, which it hopes will replace the DVD. However, Blu-ray is in close competition with Toshiba's HD-DVD technology. See Blu-Ray vs. HD-DVD.
- Televisions - Television manufacturing constitutes 23% of Sony's electronics division, and is the largest segment.[5] Although Sony has long produced traditional tube and projection television sets, it has since focused on the rapidly expanding market of high-definition and flat-panel sets with its Bravia line of LCD TVs. Bravia is currently the top-selling LCD TV brand in the U.S., with 30% market share. Sony has an advantage over competitors in this business because it uses LCD panels produced by its own S-LCD Corporation joint venture, while other manufacturers must pay for markups on the panels. In April of 2007, Sony announced plans to sell televisions incorporating new organic electroluminescent (OEL) technology. OEL screens are thinner and consume less power than traditional LCD screens because they do not require a backlight. Sony will be the first company to offer OEL televisions and plans to begin selling an 11-inch OEL model by the end of 2007.
- Information & communication - Sony's information and communications business includes a broad range of products, including computers, printers, and professional broadcast equipment. Sales of the company's VAIO brand of laptops and PCs have outpaced market growth. Sony has leveraged its presence in the home-entertainment market to produce the VAIO TP Series Living Room PC, which will allow consumers to access online video content from their home-entertainment systems.
- Semiconductors - Semiconductor manufacturing is the smallest segment in the company's electronics division, and includes CCD image sensors for digital cameras and small LCDs (Sony's joint venture with Samsung, S-LCD, produces television-sized LCD panels). In an alliance with Toshiba and IBM, Sony has developed the new CELL processor which allows more efficient performance in multimedia and vector calculation applications. The development and price of the CELL processor has also impacted the rollout of PlayStation 3, which utilizes the technology.
- Components - Sony manufactures batteries, data recording media, data recording systems, optical pickups, and other electronics components for outside customers. Over the last year, Sony recalled a significant portion of its lithium-ion laptop batteries after reported instances of batteries catching fire due to an internal short-circuit. It is estimated that the recall, which involved more than a dozen laptop manufacturers including Dell and Lenovo , cost ¥51 billion, in addition to significant negative publicity.
- Other - Other Sony products include CD and DVD discs, integrated circuit cards, and other smaller products and services.
Game (13% of FY2009 Sales)
Sony's previous generation console, the PlayStation 2 (PS2), is the video game system with the largest installed base of over 120 million units. The company's next-generation system, the PlayStation 3 (PS3), is more computationally powerful than competitors, offering cutting-edge graphics. Since its release in November 2006, the PS3 has lagged behind both Microsoft's Xbox 360 and Nintendo's Wii in terms of overall unit sales. The PS3 had sold approximately 4.5 million units as of the end of May 2008 compared to about 10.2 million for the Wii and 10.3 million for the Xbox 360, which was released 12 months before the other two consoles. However, in 2008 the PS3 has outsold the Xbox360 with 1.2 million units compared to 1.1 million units.[6]
The video game business not only represents a significant portion of its business, but the company is using the PS3 as a platform to propagate its high-definition DVD format, Blu-Ray. If the PS3 succeeds, then the company will likely profit from the adoption of this format, as Sony would be making significant licensing fees from movies, games and other media which utilize it. The PS3 is also the first major application to utilize Sony's CELL processor. It has been widely reported that Sony was subsidizing the cost of its hardware in order to gain market penetration, losing up to $300 per console, which retails for $599.[7] This loss is expected to decrease with the increased production of CELL processors and Blu-Ray drives, the two major bottlenecks for the PS3.
In 2005, Sony released its entry into the portable gaming market, the PlayStation Portable (PSP). The PSP features a large LCD screen, wireless network connectivity, music playback, and uses Sony's proprietary Universal Media Disc format. In an effort to expand the system's market, Sony has added peripherals, such as a GPS receiver (Garmin (GRMN)) and a hard drive storage adapter. In addition, a new version of the PSP, the PSP 3000 is set to debut in the US and Europe in mid-october, will feature a built in microphone and upgraded screen. The new PSP will be able to used as a phone. PSP's main competitor is Nintendo's DS.
Transitioning to the PS3
For the 2007 fiscal year, PS2 out sold PS3 consoles by about 4.5 million units (13.73 M vs. 9.24 M).[7] Sony was forced to release the PS3 prematurely in comparison to the PS2's production cycle and this caused competition not only from other next gen consoles, but also from the PS2. The PS3 faces the following challenges in its transition:
- A very high console price of $599 (60G) or $499 (20G)
- The unexpected popularity of the Wii and its broad consumer appeal
- The PS2 was the 800 pound gorilla of the previous generation of consoles and costs only $130
- A decrease in exclusive games adds to the competition between next gen consoles
- Intense competition from the XBox360 which has taken a nearly identical competitve strategy as Sony in terms of console design and consumer focus
The sales of the PS2 is both a good and bad indicator for Sony. Sales from the PS2 are masking just how big the losses from the PS3 actually are, however, it also shows that future sales of the PS3, and next gen consoles in general, still have a lot of room to grow. It is plausible that PS3 sales are lagging because the quality to price ratio of the PS2 is delaying many future PS3 customers from buying the console..
Pictures (10% of 2010 Sales)
Sony Pictures Entertainment makes, markets, and distributes feature films in both U.S. and international markets. Sony's Motion Picture Group, which includes the production houses Columbia Pictures and Sony Pictures Classics, makes around 30 feature films annually and brings in 9.7%[4] of the company's total revenue. Major recent releases include Spiderman, The Da Vinci Code, Crouching Tiger Hidden Dragon, and Capote.
However, due to the nature of movie production, even successful blockbusters generally break even in theaters, with the majority of profits coming from subsequent home-entertainment sales. Significant resources are spent on advertising feature releases before and after their entry into theatres. The company, however, continues to benefit from the film's popularity and DVD sales, long after it has left theatres. Sony Pictures Home Entertainment generates a high operating margin of 20%, compared to a loss for the motion pictures segment.
Sony also controls a strong portfolio of television programming, including Seinfeld, Jeopardy, and Days of Our Lives. International television operations have experienced fast growth as foreign language markets are opened. ??
Financial Services (12% of FY2010 Sales)
Sony's financial services, which are offered only in Japan, include Sony Life offering life insurance, Sony Assurance offering home, automotive, and medical insurance, and Sony Bank, an internet-based bank. This division is usually very profitable.
All Other (6% of FY2009 Sales)
Joint ventures (3.5% of Revenue)
Joint venture relationships allow companies to combine their knowledge and resources to increase exposure in new and existing markets. Sony's major joint ventures include:
- Sony Ericsson - Sony has combined its presence in consumer electronics with Ericsson's technology expertise to penetrate the wireless handset market. Its mobile phones ranks third in terms of sales, and include Walkman music phones and Cybershot Camera Phones. The Sony Ericsson venture is facing increased competition from smart phones, reducing its share of industry profits.[8] On July 16, 2009, the venture announced its fourth quarterly loss. As the graph below shows, those companies with the leading smart phones have been able to earn an outsized share of industry profits in relation to their market share. This demonstrates that the future of this market is in smart phones, as they present a tremendous opportunity for profits.
- S-LCD Corporation - A joint venture between Sony and Samsung, S-LCD produces LCD panels for use in LCD televisions for both companies. This partnership is beneficial for Sony's television business by decreasing the costs of LCD panels.
- Metro-Goldwyn-Mayer (MGM) - Sony has a 45% stake in the movie production company MGM. Recent key releases include Casino Royale, Rocky Balboa, and Clerks II. MGM faces the same challenges as Sony's own Motion Pictures Group in movie production.
Business Growth
FY 2009 (ended December 31, 2009)[1]
- Net revenue decreased by 6.6% to ¥7.2 billion.
- Net income increased 58.8% to a ¥40.8 million loss.
Trends and Forces
Research and development
The company must spend significant resources on research and development to keep up with rapidly advancing technology and shifting consumer demand. In 2007, Sony spent a total of ¥543.9 billion, or 7.1%[9] of its total revenue on R&D. One of Sony's new products with is the organic light-emitting diode (OLED) display, which is thinner and more efficient than traditional LCD displays.
Litigation
Like other major manufacturers of consumer products, Sony may face liabilities for defective products. Over the last year, Sony recalled a substantial number of laptop batteries, which may catch fire due to an internal short circuit. Sony BMG faced intense controversy for including DRM software on its music CDs that used questionable means to modify customers' computers. The company settled to pay affected customers $150 in compensation. Such lawsuits can be extremely costly, both in terms of financial resources and negative publicity. Most recently, on July 9, 2009, SNE along with Panasonic was sued over some of its thermal and power management for its notebook computers by IpVenture.[10] The plaintiff alleges that Sony infringed on four patents it held. This is a risk that a technology company who develops new products will run into from time to time. This could prove very costly to the company as a loss in court could result in a large cash settlement in addition to the loss of a technology integral to their business.
Maturation of DVD Sales
Sony's motion picture businesses share many of the same challenges as the rest of the Hollywood industry. Large studios depend on a handful of blockbusters for the majority of its revenue, and hits are difficult to predict. Movie production costs are very high, and most successful movies generate only break-even profit in the box office. Sony's Motion Picture Group and MGM joint venture routinely operate at losses and profit is usually generated through DVD sales. As the US DVD market continues to mature, profit growth for these businesses may be limited.
Internet Advertising on Video Games
Sony made a deal with IGA Worldwide Inc. to allow advertisements in PS3 videogames. The deal would allow IGA and, potentially other advertisers, to send advertisements over the internet that would show up in the videogames themselves. This could potentially be an interesting new revenue souce for the PS3.[11]
Blu-Ray vs. HD-DVD
Blu-Ray and HD-DVD represent the next evolutionary step for DVDs. One of the major distinctions between Blu-Ray/HD and traditional DVDs is that the former have much greater storage (18-25Gig vs. 4.7). This greater storage capacity is advantageous to movie studios because it allows them to issue HD (High Definition) movies and include more features on their videos.
Ultimately Sony beat out Toshiba's HD DVD platform once the studios all fell inline behind Blu-Ray. Sony had placed a substantial bet on Blu-Ray, and has even included the technology in in the Play Station 3. The next evolution in this technology will be the general release of 3D films, currently championed by Avatar.
Competitors
No other media conglomerate has a presence in all of Sony Corporation's four business segments. However, each one of Sony's businesses faces intense competition in its respective market.
Thanks for the wretiup. I definitely agree with what you are saying. I have been talking about this subject a lot lately with my father so hopefully this will get him to see my point of view. Fingers crossed!
Games
Sony's previous generation console, the PlayStation 2 (PS2), is the video game system with the largest installed base of over 120 million units. The company's next-generation system, the PlayStation 3 (PS3), is more computationally powerful than competitors, offering cutting-edge graphics. However, since its release in November 2006, the PS3 has lagged behind both Microsoft's Xbox 360 (during the 2006 holiday season) and Nintendo's Wii in terms of overall unit sales. The PS3 had sold approximately 4.5 million units as of the end of May 2008 compared to about 10.2 million for the Wii and 10.3 million for the Xbox 360, which was released 12 months before the other two consoles. In May, total software sales and hardware sales for industry were 37% and 34%, respectively.[12]
In 2005, Sony released its entry into the portable gaming market, the PlayStation Portable (PSP). The PSP features a large LCD screen, wireless network connectivity, music playback, and uses Sony's proprietary Universal Media Disc format. In an effort to expand the system's market, Sony has recently announced new peripherals, such as a GPS receiver and a hard drive storage adaptor. PSP's main competitor is Nintendo's DS, which offers a unique touch-screen input interface and two-screen display.
Sony has been criticized for relying too much on improving traditional specifications for its game systems. Although more powerful than competitors, the PS3 costs $599, even after a $300 subsidy by Sony, compared to the $399 Xbox 360 and $249 Wii. Nintendo, on the other hand, has focused on changing gaming interfaces, with a motion-sensor based controller for the Wii and a touch-screen input for the DS. In comparison, both Nintendo systems have experienced faster sales than Sony's PS3 and PSP, respectively.
Xbox Live, Meet PlayStation Network
Along with the purchase of the Xbox 360 comes the option to connect to what is known as Xbox Live through either Ethernet or WiFi connectivity. Xbox live provides 360 users with network game interfaces, but also allows for the purchase of all sorts of media content such as movies and music. The push my Microsoft to have the Xbox 360 as the end all media station signifies the beginning of the end for traditional brick and mortar stores such as Blockbuster. In an effort to compete with this service, Sony will be offering a similar service through its newest PS 3 devices in addition to its televisions, hoping to have 90% of its products PlayStation Network compataible by 2011.[13] Playstation Network is expected to afford PS 3 and Sony televsion users connectivity to nearly all of its licenced media starting in the summer of 2008.
Pictures
Major movie studios Buena Vista, 20th Century Fox, Warner Bros., Paramount, and Universal are the main competitors of Sony's movie business. This market relies on a few blockbusters for most of its revenue, and such hits may be difficult to predict. Sony's portfolio of successful films includes Spiderman, The Da Vinci Code, Crouching Tiger Hidden Dragon, and Capote.
Financial Services
Sony established its financial services in Japan in 2004. At the time, the Japanese insurance and banking market was underserved. Sony Financial Holdings have been one of the most profitable segments for the company, with an operating margin of 13% in 2007.[14] However, due to increasing privatization in the Japanese market and decreasing total value of insurance policies, Sony's financial business will be negatively affected, as indicated by the segment's 9.1% decrease in operating margin in 2008.[14]
References
- ↑ 1.0 1.1 SNE 2010 10-K "Financial Section" pg. 46-56
- ↑ Sony Corporation Annual Report (FY2007) "Business Overview," page 29
- ↑ SNE 2006 20-F, Item 4, pg. 18
- ↑ 4.0 4.1
- ↑ SNE 2008 20-F, Item 4, pg. 21
- ↑ Video Game Industry Sales
- ↑ 7.0 7.1 SNE 2008 20-F, Item 5, pg. 38
- ↑ 8.0 8.1 Sara Silver (July 20, 2009). Apple, RIM Outsmart Phone Market. Wall Street Journal.
- ↑ Sony Corporation Annual Report (FY2007) "Research and Development," page 48
- ↑ Sophia Pearson (July 9, 2009). Sony, Panasonic Sued Over Notebook-Computer Patents. Bloomberg.
- ↑ Sony's PS3 to Get In-Game Ads
- ↑ Video Game Industry Sales
- ↑ Boorstin, Julia “Sony’s Latest Play for your Livingroom,” Seeking Alpha, June 28th, 2008.
- ↑ 14.0 14.1
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