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February 10, 2012

Content before hardware: Sony’s new business strategy

Sony's new CEO Kazuo Hirai is throwing out the company's traditional 'hardware first' business methodology and moving the company to a more unified online and content company.

By Cbr Rolling Blog

Sony’s new CEO Kazuo Hirai is throwing out the company’s traditional ‘hardware first’ business methodology and moving the company to a more unified online and content company.

Hirai was formerly the head of Sony Computer Entertainment (SCE), home of its Playstation video game console – and one of its last consistently profitable divisions.

Former CEO Howard Stringer announced his retirement on February 1, and Hirai will take over on April 1. The company warned last week that its losses would be much larger than the $2.9bn annual loss – the company’s fourth in a row.

Upon his promotion, Hirai stated in an interview to The Wall Street Journal:

"I thought turning around the PlayStation business was going to be the toughest challenge of my career, but I guess not. It’s one issue after another. I feel like ‘Holy shit, now what?’"

Hirai took over SCE from predecessor Ken Kutaragi after the troubled Playstation 3 launch in 2006, which squandered much of the brands dominance in the sector and allowed Microsoft’s XBOX360 and Nintendo’s Wii console to become dominant.

The major challenge for Sony as a whole has been its underperforming TV division, which, while dominant over the last 30 years, has stumbled in the face of low cost Asian TV producers, such as South Koreans LG and Samsung (which it had a joint LCD TV partnership with; now disbanded) and US companies like Vizio – which has balanced the quality-price ratio much better in the key US TV market.

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Hirai has already said he is looking at cutting costs extensively in the division, and will be squeezing expenses across the company. He has promised to return the TV division to profitability in two years, and refutes any suggestion the division will be cut.

The strong Yen has been hurting all Japanese electronics manufacturers, from Canon to Panasonic, which are struggling to stay competitive against the Chinese and South Korean companies.

The company’s business model – long based around the classic Japanese model of silos in competition, has been exposed by companies such as Google, Samsung and especially Apple and Amazon, who have managed to vertically and horizontally integrate content, hardware and online offerings far more successfully.

Hirai will no doubt be looking to reproduce this success and leverage the company’s film and music offerings (such as Sony Pictures and the Sony-BMG record company) to compete better in this space. He has been instrumental in ensuring that Netflix, LoveFilm and ‘video on demand’ services such as Hulu (in the US), BBC’s iPlayer and ITV’s player are all available through the Playstation 3 console.

The company recently purchased Ericsson outright, creating the new Sony Mobile division, which will now feature an Android operating system and integrate with Sony’s TVs and Playstation devices.

Hirai is a popular choice, and has long been groomed for the position. As well as being American educated and bi-lingual (a problem former CEO Howard Stringer struggled with) coming through the video game division means he is uniquely positioned in the modern new media market. It also means he wont be afraid to slay sacred cows, a long standing problem for Japanese companies strong on tradition and divisional loyalty.

Even Sony’s modern ‘sacred cow’ the Computer Entertainment division is feeling the pressure, as the new Sony Playstation Vita console struggles, as its main competitor the Nintendo 3DS has. Both have, again, been strangled by the rise of smartphones, which offer increasingly sophisticated video game options.

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