AWSJ(9/2) Sony Thinks Outside The Box In Bid To Change Luck (Dow Jones News Service)
Updated: Wednesday, September 01, 2004 05:30PM
(From THE ASIAN WALL STREET JOURNAL)
By Phred Dvorak
TOKYO -- It has been a decade since Sony Corp. came up with its last big hit product, the PlayStation videogame machine.
Since then, amid many technology revolutions -- mobile phones, flat-screen televisions, digital music players such as Apple Computer Inc.'s iPod -- the company that invented the Walkman has played the unfamiliar role of laggard. Sony's net income in the past four years combined is less than Microsoft Corp. makes in a quarter. Sony's stock price is the same as it was at the end of 1996.
With another decade like that, the world's most famous consumer-electronics maker could be just another name on the discount shelf. Desperate for hits, Sony's bosses last year tapped Ken Kutaragi, the creator of the PlayStation business, to remake the company's electronics strategy.
Mr. Kutaragi's response reflects a huge shift in the consumer-electronics business that is wreaking havoc with Sony's traditional strengths. There is little room left for the stand-alone box: From cameras to television sets, just about everything today works on a digital standard and has to talk to other devices. More and more gadgets live or die on their semiconductors and software -- a trend that plays to the strength of companies in the computer industry. Companies with a lock on key technologies, such as Intel Corp., thrive but those assembling commodity components are threatened with extinction.
So Mr. Kutaragi is determined to build the next generation of Sony gadgets around homemade chips and software that others can't easily copy. To promote teamwork, he is throwing together divisions of the Sony empire that once barely talked to each other.
It is a jarring transformation for a company known for prima donna engineers who cared only about their own gadgets, jealously guarding innovations and thinking of other divisions as rivals. The inventors at Sony were peerless in old-time hardware -- squeezing the parts of a tape recorder into a tiny box or shaping a TV picture tube to get the sharpest image. But they weren't nearly as strong in programming and chip design -- the areas that count most now.
To break down old barriers, Mr. Kutaragi has consolidated semiconductor and programming groups that were scattered across the company.
"These last 10 years, we've lost virtually all our basic strength -- our technology," says the 54-year-old Mr. Kutaragi. "We had lots of fine analog engineers. . . . But when things became digital, the basic [engineering] literacy changed. And suddenly there weren't any executives and senior engineers who could decide what direction to take."
Mr. Kutaragi's vision was shaped by his success with the PlayStation, now a $7.5 billion-a-year business. It relies on data-processing and image-manipulating chips that only Sony makes. "Most of the intellectual creation in hardware will be concentrated in semiconductors," says Mr. Kutaragi. "The product is just a cabinet, a costume."
The success of Apple's iPod is also a lesson. The iPod's basic hardware, a hard disk for storing songs, is a commodity that any company can buy. But the look and feel created by Apple's software, which makes it easy to build a music collection and play it in fun ways, is harder to match.
Sony's struggle to remake itself mirrors that of other consumer-electronics makers. They all dread commoditization -- the spread of standardized parts that makes it impossible for all but a handful of ruthlessly low-cost producers to survive. That is what happened in personal computers, with Dell Corp. the chief winner.
But Mr. Kutaragi's strategy is a gamble. The first set of products produced under his reign -- still available only in Japan -- all take the radical step of marrying videogames with consumer electronics. That may confuse consumers. An early pet project of Mr. Kutaragi, a device that combines a videogame machine with a DVD recorder, has struggled in Japan. Also, Microsoft and Intel are angling to control the software and semiconductors used in the living room.
Inside Sony, Mr. Kutaragi's grip has yet to extend to some devices, including Vaio personal computers and the Walkman division. In a sign that Sony has yet to fully rid itself of internal fiefdoms, the Vaio and Walkman divisions both recently released products designed to compete with the iPod.
There is some irony in the sight of Mr. Kutaragi, long the bad-boy iconoclast of Sony, urging warring divisions to work together. The man whose PlayStation unit was so defiant toward headquarters that one executive called it a "rebel organization" is now himself in Sony's inner circle with the title of executive deputy president.
Mr. Kutaragi's elevation to the center of Sony's electronics business, which accounts for almost 70% of the company's revenue, is part of a broader restructuring. Earlier this year, 5,000 Japanese employees took a buyout package and left the company. Sony is standardizing parts to cut costs.
Mr. Kutaragi is pouring $4.5 billion into semiconductors over three years. Sony is working on an ultrafast microprocessor, which it calls the cell chip. It hopes the chip, which is the centerpiece of a new PlayStation under development, will be a living-room version of the Pentium chips Intel makes for PCs.
And Sony is creating its own software look, just as Microsoft's Windows and Apple's Macintosh operating system have theirs. Sony's look features a menu shaped like a plus sign or a crossbar and will be seen on new flat-panel TVs going on the market this month in Japan and next year in the U.S.
Sony's makeover sprang from a crisis. In April 2003, it announced an unexpectedly weak profit outlook, with the electronics division as the main culprit. Investors called it the "Sony shock" and sent its shares plunging.
Sony's chief executive, Nobuyuki Idei, responded by promising to slash staff, factories and product lines. He put Mr. Kutaragi in charge of next-generation devices.
Mr. Kutaragi had already been at work on some far-out gadgets at the videogame unit. A few months before his promotion, he was mulling two products that straddled the line between videogames and consumer electronics. One was a handheld game machine, somewhat like Nintendo Co.'s GameBoy but with a twist: It also played movies stored on a new kind of optical disk. The other product was a DVD recorder that could sit under a TV set and record programs on digital discs. This one too had a twist: It doubled as a game machine like the PlayStation.
With the April 2003 promotion, Mr. Kutaragi sprang into action, phoning engineers throughout Sony to ask for help building the portable game machine. "Sony engineers -- they're very, very selfish. It's very hard to combine even one [of their] projects. But I combined 20 projects" to create the machine, Mr. Kutaragi boasts.
The next month -- May 2003 -- Mr. Kutaragi unveiled a demonstration of his other idea, the DVD recorder-plus-videogame machine. He called it the PSX and said it would run on PlayStation 2 chips. What is more, he said it would be ready by the end of the year -- a mere seven months away.
The machine's main attraction was to be the zippy game-like response and graphics made possible by the PlayStation 2 chips. Mr. Kutaragi had his team fashion a menu shaped like a plus sign that could be scrolled by thumbing a little joystick. The goal was to make it fun and easy to use the recorder's functions, which included storing music and pictures as well as video.
But the programming was tough, since it had to be done in code designed for the PlayStation 2 chips. The videogame team had to do most of the work, even though the PSX was a joint project with consumer electronics.
The videogame engineers got a taste of the obsessive attention to quality and detail that Sony put into its traditional electronics products. Every feature had to be tested and retested according to Sony's written protocol -- for example, recording a program while various combinations of other functions were running at the same time.
The engineers soon saw they wouldn't be able to test everything in time. Mr. Kutaragi decided that features like faster DVD recording could be added in software updates that customers could download from a disk or the Internet. It was an approach familiar enough in the personal-computer world but almost unheard of in consumer electronics -- "a disgrace," as one Sony engineer not involved in the project put it.
Trouble was brewing in other areas. Retailers feared the PSX's aggressive pricing -- about 30% lower than similar recorders -- would cut into their margins. Japanese hobbyist magazines found fault with the product before it was even on sale because it didn't have many of the features of rival DVD recorders, although it did have the videogame function that no one else had. The PSX was even being challenged by a machine called the Sugoroku from another Sony division. Like the PSX, the Sugoroku could store programs on DVDs or an internal hard-disk drive.
Despite the deadline crunch, Mr. Kutaragi obsessed over details. "You'd show him something and he'd tell you to tweak the color," recalls Akira Shimazu, the engineer heading the PSX team. "At the end he was there all the time."
The scaled-down PSX shipped on Dec. 13 in Japan with a list of features to be added later. Japanese consumers puzzled over whether the PSX was a game console or video deck, and sales lagged. (A U.S. launch is still scheduled for 2005.) Some insiders began to wonder if Mr. Kutaragi's strategy of marrying games with home electronics was too radical.
Mr. Kutaragi wasn't waiting around for an answer. In October 2003, Mr. Idei unveiled a more detailed turnaround plan, and put Mr. Kutaragi in charge of all home-electronics products, including the $9 billion TV business.
Soon after, Mr. Kutaragi dropped a bombshell on an assembly of TV executives: Sony would put videogame chips in its flat-panel TVs, and use them to run the same plus-sign menu -- extending the link-up of games and electronics. "That was quite a shock for us," recalls Taku Sawaya, head of software design and a 10-year TV veteran. "Would we really put a game device in a TV?"
Sony's TV division had already gone through a lot that year. Long known as one of the most powerful and obdurate parts of the company, the division saw its reputation pummeled when sales of its staple Trinitron picture-tube sets tumbled. Sony had to scramble to catch up to rivals in flat-panel TVs, and eventually signed a deal with Samsung Electronics Co. of South Korea to build a joint liquid-crystal display production line. That was highly unusual for Sony, which traditionally built TVs on its own.
Sony also replaced the longtime head of TV and merged the separate companies that had produced each kind of TV -- projection, picture-tube and flat-panel. Previously, says Makoto Kogure, who is now head of the combined TV operations, each company developed parts and specifications for its products by itself. "They were competitors," says Mr. Kogure.
After he took over home electronics, Mr. Kutaragi continued the shake-up. In January, the PSX and Sugoroku teams merged, putting all video recorders together. In April, product planners in home electronics were grouped together. "Recorders, TVs, audio -- we all have to work together to figure out how to liven up the living room," says Hitoshi Hitokoto, video product-planning chief.
The changes, combined with a company-wide cost-cutting push, took their toll. Employees lashed out at Mr. Idei, Sony's CEO, who in January began holding town hall meetings every few weeks. "I hate it when I'm working so hard, and newspapers are making fun of Sony," Mr. Idei says he was told. "Isn't management to blame?" Mr. Idei says he told the employees they had to take responsibility for Sony's performance, too.
In the TV division, however, the integration of the new sets with PlayStation chips was going smoothly. In contrast to the PlayStation-dominated PSX team, TV engineers kept control of software design, and fought to make sure the new sets still acted like TVs. That meant telling PlayStation engineers, for instance, that when a TV is switched on it should show the last channel viewed, not a menu bar.
When Sony unveiled the eight new sets at a waterfront music hall in Tokyo in mid-August, Mr. Kutaragi was watching proudly from the sidelines in a tan suit and white sneakers, talking about using the plus-sign menu in other products too. The test of his vision comes in September, when Sony starts selling the TVs in Japan. Sony plans to sell some models in the U.S., but without the plus-sign menu.
Other tests are coming, too. The other idea that Mr. Kutaragi had been mulling since before his promotion -- the handheld game machine that also plays movies -- is scheduled to ship in Japan at year-end and in the U.S. in early 2005. Sony's powerful "cell chip," which it is developing with International Business Machines Corp. and Toshiba Corp., is to make its debut at the end of the year in a prototype graphics workstation. The chip will go in both the next PlayStation and a new generation of TVs, probably around 2006.
Meanwhile, the PSX, Mr. Kutaragi's flagship consumer-electronics product, is still flagging. Mr. Kutaragi is unfazed. The PSX's marketing strategy "was a bit confused," he admits. "But it is only a first step."
(END) Dow Jones Newswires
09-01-04 1731ET
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