Struggling with Sony

Posted on October 9, 2005 , filed under Stocks | Print This Post

There’s been a lot of controversy over Sony’s notoriously tight knit corporate culture. In recent months Sony’s stock has been depressed over sluggish sales from its TV and portable electronic units. Concerns are also mounting over the uncertain future of Sony’s new high definition DVD standard named Blu-ray. The tight knit culture that Sony has fostered has been a double edged sword for the company. For example, Sony had the opportunity dominate the digital audio player market by leveraging its strong industrial design arm and the Walkman brand name. Instead the company came under pressure from its music and publishing unit over piracy. As a result, Sony opted to create its own proprietary format named Atrac3. Buyers of Sony’s digital audio players would have to re-encode digital audio files, a tiresome process, into the Atrac3 format to listen to them. Technologically Sony’s players had the capability to play file formats like MP3, AAC and WMV but the company opted not to include support for the files. It wasn’t until the third generation of Sony’s digital audio players that the company finally supported MP3 and other file formats. By then it was too late, companies such Apple established market leading products and a variety of Korean, Japanese and Chinese manufacturers began releasing digital audio players almost on a weekly basis. The digital audio player market rapidly saturated itself, margins eroded and Sony lost its window of opportunity.

While there are apparent disadvantages to Sony’s corporate culture, there are also distinct benefits. Sony is currently underway in the largest format battle since the company struggled with its Betamax technology vs. Matsushita’s VHS. Today Sony has pitted its Blu-ray technology against Toshiba’s HD-DVD technology. As with Betamax, Sony’s Blu-ray format is technologically superior to its competitor. Critics and analysts alike cite Sony’s falter with Betamax and digital audio players but have overlooked the importance of how Sony’s tightly knit culture can propel Blu-ray’s success. Unlike Betamax which was introduced as standalone technology, Sony can boost adoption of Blu-ray by using its computer entertainment and games unit. In the last decade Sony crafted one of the company’s biggest global successes to date, the Sony Playstation. Sony’s consumer electronics unit tapped its games unit and it was announced that Sony would be including a Blu-ray drive as part of every Playstation 3 sold. I looked up the adoption of DVD players in the first year they were released in 1997. According to this site DVD player sales totaled 320,000 units. In comparison, the Sony Playstation 2 sold 3 million units in North America just 2 months following its launch. That’s more than 10 times the number of DVD players sold in just the first 2 months of the Playstation 2′s release. To date the Playstation 2 has sold over 70 million unit’s world wide.

While I wrote in an earlier post about console game stocks that the impact of Microsoft’s XBOX 360 on the Playstation 3 is uncertain, it would be foolhardy to bet against the overall success of either new system. The large difference between the two is that Microsoft’s XBOX 360 will not include support for either HD-DVD or Blu-ray, opting to support the older DVD standard, while Sony’s Playstation 3 will support Blu-ray. Sony has taken a lesson out of Microsoft’s playbook. Microsoft enjoyed rapid adoption of it’s Internet Explorer software by bundling the browser with its Operating System platform. By bundling Sony’s Blu-ray with its game system platform Blu-ray’s adoption is almost assured.

Content providers will follow which ever format enjoys a larger installed user base. Analysts are ignoring the fact that the Playstation 3 will give Blu-ray a several million installed global user base in under the first year of sales of the system.

Sony future growth is highly dependant on Blu-ray’s success. Blu-ray gives Sony an avenue to charge for royalties from media manufacturers, content providers and hardware manufacturers. It will also herald adoption of new display technologies from its TV unit and allow its movie unit to leverage its library of titles in high definition.

Sony’s current stock price is $33.05. The stock is trading near its one year low. I expect that once the XBOX 360 launches in November and initial sales figures are released, Sony’s stock price will drop as analyst and investor attention turns to Microsoft’s game division. I am looking to purchase SNE at under $30 within 3-6 months.

I predict that if sales are strong for the Playstation 3 and Blu-ray discs are released in advance of HD-DVD, SNE will top $50 by middle of 2007.

SNE is part of a larger long term investment strategy that I will discuss in future posts.

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Pingback by RawGreed.com - Stock Updates, RawGreed Awards, Business Gossip » Blog Archive » Continuing to watch Sony Corp.

2005-10-28 11:14:32

[...] I wrote an earlier article on SNE, Sony Corp. discussing the company’s technological gamble on its Blu-ray high definition DVD standard. I mentioned in the article that I like SNE at under $30 within the next 3-6 months. The stock is currently trading near its one year low of $31.80 and we may very well see the stock hit under $30 as Microsoft launches the XBOX 360 this month and Sony faces uncertain adoption of its next generation DVD format. If SNE does trade under $30, I will probably rebalance my portfolio to include shares of the company. [...]

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