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SNE AT A GLANCE

P/E ► 19.8 AVG EV/EBITDA ► 3.67 LOW ROA ► 2.4% AVG ROE ► 4% AVG Debt to Equity ► 2.93 HIGH Current Ratio ► 1.10 LOW Interest Coverage Ratio ► 2.18 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

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 $89.6 billion in its fiscal 2008.^[1] Sony is a well-recognized brand name of consumer electronics, its most important business. Key Sony products such as CyberShot digital cameras, Bravia LCD TVs, the PlayStation game system line, and VAIO computers have all experienced strong, growing sales.

One of Sony's largest investment uncertainties is its PlayStation 3 (PS3) console. The 2006 operating profits decreased by 68% mostly due to development and launch costs of the PS3.^[2] Operating income has since rebounded significantly, increasing over 65% to ¥374.5 billion in 2008.^[2] The console, which uses the CELL processor jointly developed by Sony, is more technologically advanced than the competitors, Microsoft's Xbox 360 and Nintendo's Wii. However, it has lagged behind competitors in sales, which may be due to its greater cost. In January 2009, PS3 sold 203,000 consles, which was fourth behind the Wii,679,000 consoles, Nintendo DS, 511,000 consoles, and XBox 360, 309,000 consoles.^[3] The PS3 uses Sony's next generation Blu-ray technology, and can function as a stand-alone Blu-ray player. Blu-ray drives use a blue laser, which allow a higher disc density than DVDs. Its key competitor is Toshiba's HD-DVD. Since the outcome of this format war is important to Sony's future revenue, Sony sells the PS3 console at a loss in order to promote Blu-ray.

Sony's motion picture business holds dominant market share of 20%, producing around 30 feature films annually. It has a strong portfolio of recent successful films such as the Spiderman franchise. However, as management claim, year to date for Sony films, there have been no real blockbusters to drive earnings growth for the segment.^[4]

[edit] Corporate 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, with FY 2007 annual revenue of ¥9.06 trillion, or $86.8 billion.^[5] 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.

[edit] Business segments

[edit] Electronics (67% of Revenue)

Electronics is still Sony's most important business segment, bringing in 66.8%^[6] 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>SNE 2008 20-F, Item 4, pg. 21</ref>^[7]

• 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.^[8] 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.^[9] 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.

[edit] Games (13.7% of Revenue)

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.^[10]

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.^[11] 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.

[edit] 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).^[11] 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.

[edit] Motion pictures (9.6% of Revenue)

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 9.6%^[8] 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.

[edit] Financial services (6.2% of Revenue)

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, generating a 13% operating margin in 2007.^[12] However, the segment's operating income decreased 85.9% during 2008, operating at a 3.9% operating margin because of weakening global economic conditions.^[12]

[edit] 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 create penetrate the wireless handset market. Its mobile phones ranks third in terms of sales, and include Walkman music phones and Cybershot Camera Phones. Sony Ericsson venture has experienced strong growth, and is a strong contributor to Sony's net income.

• 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.

[edit] Trends and Forces

[edit] 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%^[13] 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.

[edit] 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.

[edit] 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.

[edit] Video game console market

See comparison to competitors below.

[edit] 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.^[14]

[edit] 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. 4.5). This greater storage capacity is advantageous to movie studios because it allows them to include more features on their videos.

Right now it is unclear which technology will gain dominance, as sales neck and neck. Sony has placed a substantial bet on Blu-Ray, and has even included the technology in its playstations. If this technology is widely adopted the company stands to benefit. That said sales of Blu-Ray DVDs will not have a substantial impact on Sony's earnings in the short-term.

[edit] Comparison to 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.

[edit] Electronics

Even within the electronics division, there is an enormous variety of products and specialized markets.

• Audio - Sony has lost its dominance in the lucrative market of portable audio. Its Walkman line of cassette and CD players has been superseded by a new wave of MP3 players and Apple's iPods. Sony's MiniDisc format, while initially promising, had failed to gain significant market share. Sony BMG, a division of Sony Music Entertainment, is one of the "Big Four" record groups, which include Universal Music Group, EMI Group, and Warner Music Group (WMG).

• Video - Sony's video business consists of digital camera and DVD player sales.
  • Key competitors in the digital camera market are Canon and Nikon. In the past, the company has made only cameras for the consumer market, but it has acquired Konica Minolta's digital SLR assets in early 2006 in a move to enter the professional market.
  • Sony's next generation Blu-ray technology is a major gamble for the company. Blu-ray and HD-DVD, its competitor, both have the potential to win the format war. Both technologies use blue lasers, rather than the red lasers found in traditional DVD players, to achieve greater data density. The data layer in Blu-ray discs is located closer to the surface than in HD-DVD discs. This allows Blu-ray discs to store more data than its competitor (25 GB vs. 15 GB), but also makes the discs and player equipment more expensive. First generation Blu-ray players are approximately $1000, while HD-DVD players are half that price at $500. Movie studios prefer the Blu-ray format because the larger storage capacity allows for more features and bonus materials per disc, so currently the Blu-ray format has backing from studios. Sony has further pushed for adoption of the technology by incorporating Blu-ray players in its PlayStation 3 console ($599), effectively subsidizing the costs of players.

• Televisions - The traditional CRT television market is relatively mature, and no longer very profitable. The fastest growing segments of the television market are flat screen, high-definition LCD TV's. Sony leads this market with its Bravia line of LCD products. The company holds a key advantage over competitors because the S-LCD Corporation, its joint venture with Samsung, provides Sony with LCD panels at manufacturing cost, while other television makers must pay higher market prices.

• Information & communications - Among the key products in this category are Sony's VAIO line of laptops and PCs. Growth of VAIO sales have outpaced that of the market, and continued growth is expected due to increased consumer adoption of Microsoft's Vista operating system. Currently, VAIO laptops represent 5% of the market.

• Semiconductors - Sony's semiconductor business represents a small component of total revenue. Sony produces several products such as CCD sensors for digital cameras and small form factor LCDs. The most important development within this segment is the CELL processor, a joint development by Sony, Toshiba, and IBM. The multi-core architecture of the CELL processor allows for more efficient performance in multimedia and vector calculation applications. It is designed to bridge the gap between conventional CPUs, which are made by Intel and AMD and specialized processors such as the GPUs found in graphics cards, which are made by nVidia and AMD subsidiary ATI.

• Components - Sony makes a variety of components for third-party customers. A large component of this revenue comes from the manufacture of laptop batteries, which are used by major laptop companies such as Dell and Lenovo. 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.

[edit] 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.^[15]

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.

[edit] 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.^[16] 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.

For more details on the video game market, see Game Consoles Wars: Xbox 360 vs. PS3 vs. Wii.

[edit] Motion 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.

[edit] 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.^[12] 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.^[12]

[edit] References

1. ↑ SNE Yahoo Finance Profile
2. ↑ ^{2.0 2.1} SNE 2008 20-F, Item 3, pg. 5
3. ↑ Xbox 360, PS3, Nintendo Wii Sales 2009. Technology Talks (February 22, 2009).
4. ↑ Sony Corporation Q2 FY 2008 Earnings Release
5. ↑ Sony Corporation Annual Report (FY2007) "Business Overview," page 29
6. ↑ Sony Corporation Annual Report (FY2007) "Business Overview," page 29
7. ↑ SNE 2006 20-F, Item 4, pg. 18
8. ↑ ^{8.0 8.1}
9. ↑ SNE 2008 20-F, Item 4, pg. 21
10. ↑ Video Game Industry Sales
11. ↑ ^{11.0 11.1} SNE 2008 20-F, Item 5, pg. 38
12. ↑ ^{12.0 12.1 12.2 12.3} SNE 2008 20-F, Item 5, pg. 39
13. ↑ Sony Corporation Annual Report (FY2007) "Research and Development," page 48
14. ↑ Sony's PS3 to Get In-Game Ads
15. ↑ Video Game Industry Sales
16. ↑ Boorstin, Julia “Sony’s Latest Play for your Livingroom,” Seeking Alpha, June 28th, 2008.
17. ↑ The Free Library