Mathew Ingram: Sony's misses mean it's time to face music

Not that long ago, Sony was the one to beat when it came to personal electronics. After all, the legendary Japanese company not only invented the Walkman portable tape player - which launched the portable music industry - but pioneered the compact disc and the DVD as well and helped to shape the digital video revolution.

Sony's name became synonymous with the term "market leader", whether you were talking about televisions, video cameras, CD players or almost any other form of personal electronics.

Unfortunately for Sony, however - and its shareholders - those days are a thing of the past. The company failed to catch the digital music wave that was spawned by the development of MP3 players and effectively handed the market over to Apple and competitors such as Rio.

Likewise, the arrival of low-cost flat-panel televisions seemed to take Sony by surprise. The company, whose Trinitron TVs were the market leader, failed to take advantage of that opportunity as well, and let Sharp, Samsung and Matsushita (which makes Panasonic) take the lead.

Sony bought a Hollywood movie studio to try to diversify its revenue base but had mixed results.

A move into the video game market with the PlayStation was considerably more successful, as Sony commandeered a large proportion of the market created by Nintendo and became the leader. But video games alone can't carry a company of Sony's size.

In a dramatic move designed to show its commitment to change, the Sony board of directors recently appointed Howard Stringer, a Welsh-born former TV reporter and CBS executive, to be its chairman and chief executive - the first non-Japanese CEO the company has had in its 50-year history.

Stringer just announced his plan to turn the electronics giant around, a scheme that involves 10,000 layoffs out of a total workforce of about 150,000, the closure of 11 plants and the shuttering of several business units.

If the new Sony CEO was hoping for a resounding vote of confidence from the stock market, however, he didn't get one. Sony's shares dropped by more than 5.5 per cent on fairly heavy volume the day the news was announced. At its current level of about US$34 ($49), the stock is about 20 per cent lower than it was earlier this year. In 2000, Sony's stock was selling for more than US$100.

Several analysts who follow the company said that they found the plan underwhelming and that simply cutting costs isn't going to return Sony to strength.

Standard & Poor's analyst John Yang told Reuters that he's "still not convinced that Sony can stir growth. They have to come up with something nobody can imitate but consumers will buy. But they haven't given any details how they plan to do that."

The company is developing a kind of flat-panel TV it says will be better than plasma or LCD, is coming out with a new version of the PlayStation next year that uses a much faster multimedia chip with advanced features, and recently launched a Walkman portable MP3 player. However, the benefits of the new TV format remain to be seen, and Microsoft is also coming out with a new video game machine. The market for MP3 players, meanwhile, has become commoditised - and therefore involves fairly low margins.

Stringer says one of his goals is to break down the walls between the company's various business units, walls that many Sony critics believe have prevented the company from capitalising on some of the blockbuster electronics markets of the past decade. Unfortunately for the Sony CEO, those walls have been in place longer than many of the company's employees have been alive. They are likely to be a lot harder to dissolve than he thinks.

Even if he is successful, there's no guarantee that Sony can come up with products that will grab the market's interest in the same way that Apple has with its iPod MP3 players.

Many critics say Sony will also have to get used to the idea of not being able to control all the various parts of a market. That desire has led the company to develop sophisticated but ultimately unsuccessful products such as the MiniDisc player, which used a proprietary audio format, and to stake much of its portable music and photo businesses on the MemoryStick format, another proprietary standard. Can the company learn to live without its traditional dominance of a market, or the premium prices it has grown used to charging for its products?

Those are just some of the multibillion-dollar questions that many investors will need to find answers to before they can start getting excited about Sony again.