Last week, Sony (SNE) announced a net loss for the fourth year in a row. While I don't own shares of this company, it still saddened me as Sony's products played a big role in most of our lives particularly through 80s and 90s. The company's cameras, camcorders, TVs, entertainment sets, video game consoles, computers and many other products were regarded as the best quality out there. Now the company is struggling to survive. How did Sony get into all this mess and how can it get out of it?
How Sony Got Into This Mess
External and internal factors led Sony to the mess it is in today. During the last decade of 20th century and the first decade of the 21st century, competition became particularly rough. Many companies started to produce similar products to Sony and sold them at much cheaper prices. While competition was busy opening production plants and customer service facilities in countries like China, Taiwan, India, Cambodia and Vietnam, Sony kept most of its operations in Japan. The high cost of living in Japan, coupled with strong yen did not help pricing of Sony and it started to fall behind competition even though many of its products possess superior quality.
These days, consumers don't value quality as much as price, unless the producer has a brand name as strong as Apple (AAPL). Apple is able to push high prices, because the company's products are trendy and many people all over the world see owning Apple products as a sign of status. Sony used to enjoy such status in 1980s and early 1990s, however a lot of things have changed since then. In the past, consumers were expecting to hold their TVs, cameras, entertainment systems and other electronics products for a very long time, and as a result, quality of the product was important. These days, consumers expect to buy a new TV, laptop, camera every few years as these products get upgraded every few years, therefore lifespan of products isn't a concern for the consumers anymore. Why would anyone care about whether their laptop will last a decade if they are planning to get a newer version in 3 years?
The biggest problem in front of Sony is its plan to pass its high production costs to customers, as this plan hasn't been working well in the last several years. New players in the market such as Samsung (OTC:SSNLF) made things particularly difficult for Sony.
How Sony Can Get Out of This Mess
If the problem is high costs, which leads to high prices, the solution would be to cut costs. The company should work on rebuilding its brand image and produce its products cheaper. I don't think rebuilding the brand would be an issue for Sony. I believe that most consumers would still prefer Sony over competition if they didn't have to pay large premiums for them. For example, on Amazon.com (NASDAQ:AMZN), when we search for a 40 inch TV, the cheapest product is of Coby (i.e., $330). The second cheapest TV is RCA with its price-tag of $400. Toshiba comes next with $427, Visio follows with $470. Samsung has a 40 inch TV at $480. How about Sony? On Amazon.com, Sony's cheapest 40 inch TV sells for $500 and Amazon says that there is only one left in stock (note: product prices and availabilities in Amazon.com are always subject to change so you might not find the exact same results upon conducting the same search as me, however you should find a similar trend). When Sony's products are slightly more expensive than the market average, they still get preference by the costumers, which shows us that Sony still has a strong brand image.
Sony has a huge variety of products. While some of these products might generate a lot of revenue for the company, many others will not. The company should probably go over its products, determine the most profitable ones and focus on those. Apple showed the world that a consumer electronics company can be pretty successful by focusing on just a few products rather than having a giant portfolio of hundreds of products. Sony should stop being possessive about its products and maybe even consider selling some of its products.
The company should also shift its portfolio from selling only hardware to a mixture of selling hardware and software. Again, Apple is a good example here. Once the company sells a product, it can keep selling licenses and other related services in order to keep the revenues coming with that product. Sony has been doing this with its Play Station brand, and it should probably consider expanding this model to more of its brands and products. Software licenses and services almost always have much better profit margins than selling hardware.
It would be really sad to see Sony go out of business. The company still has a strong brand name and it can still remain as a major player in technology after a few changes in its structure. Sony should definitely switch from low margin products to high margin products if it wants to stay in the game. As for investment, I suggest investors to wait a year and see how the new CEO, Kazuo Hirai performs before buying or shorting this company. At the moment it is really difficult to see where Sony will be headed in the medium to long term.
Disclosure: I am long AAPL.