As a gamer, I want Sony to succeed because competition helps create and maintain quality products. Having three consoles on the market puts pressure on all three companies to give gamers an amazing experience and I don’t believe gamers are better off if any of the three companies dropped out of making consoles.
With that said, there is fear for Sony’s future. It’s not hyperbole when people say Sony is in trouble. Nobody is exaggerating Sony’s problems. It’s not false gloom and doom. The truth is, there’s enough financial data provided to the public to piece together the big picture of Sony’s long term problems. I don’t pretend to be a financial expert, but I believe the available data shows worrying trends of Sony being in a deep decline for the last 10 years.
There is a large group of people who act like Sony is too big of a company to fail. Some gamers think Sony is the same corporate giant they’ve always been and that Sony continues to be this giant threat to Microsoft and Nintendo, regardless of their current financial problems.
Sony’s total liabilities have increased dramatically for the last ten years. Sony’s market cap value is more than 9 times less than it was in the year 2000, and their ROA and ROE have also fallen in the same period. The company is drowning in debt and historical net losses. While Sony currently has high quality products, there’s no product at the moment that is really getting Sony out of the red. Currently, the company is compounding more losses while organizational restructuring is going on.
For the financial data in this article, I have provided dates to put the data in better context. Please understand that financial data changes constantly, so the numbers will change on the available sources. With that said, don’t expect drastic changes because the data I am providing is in a span for 10 years. So if Sony is in a decline for 10 years, their problems will not dramatically change in the near future.
Now let’s begin.
Sony’s Shrinking Market Cap Value
Market Cap definition by investopedia.com: “The total dollar market value of all of a company’s outstanding shares.”
Market Cap definition by Wikipedia.com: “Market capitalization is defined as the share price multiplied by the number of shares in issue, providing a total value for the company’s shares outstanding.”
Below is a chart of Sony’s market cap value between September 2002 through September 7th, 2012.
Sony’s Market Cap Value on September 2000: $100 billion (Source: Bloomberg)
Sony’s Market Cap Value on December 2007: $54 billion (Source: ycharts.com)
Sony’s Market Cap Value on December 12, 2011: $18 billion (Source: Bloomberg)
Now lets skip to the most recent day that the stock market opened on.
Sony’s Market Cap Value on September 7th, 2012: $11.69 billion (Marketwatch/Wall Street Journal)
Nintendo’s Market Cap Value on September 7th, 2012: $15.9 billion (Marketwatch/Wall Street Journal)
(Please Note: Market Cap Values typically change every day/week so any numbers posted for September 6th, 2012 will slightly change the next day or week.)
How bad are Sony’s Total Liabilities and Debt?
“We’ll have to fasten our seat belts and get ready for the turbulence,” Yuuki Sakurai said. “Hirai is in a tough position, I don’t envy him.” (Source)
Total Liabilities as of June 2012: (Source)
Total liabilities are the total amount of all financial obligations (short term and long term) of a company. This includes all creditor claims on company assets.
Electronic Arts Total Liabilities: $2.27 Billion
Google’s Total Liabilities: $21.33 Billion
Apple’s Total Liabilities: $51.15 Billion
Microsoft’s Total Liabilities: $54.91 Billion
Sony’s Total Liabilities: $135.61 Billion
Sony has more total liabilities than Microsoft, Apple, Google, and Electronic Arts combined.
Total Assets as of June 2012: (Source)
Total assets include cash in the bank, property, accounts receivable (money owed to the company), equipment, and inventory.
Google’s Total Assets: $86.05 Billion
Apple’s Total Assets: $162.90 Billion
Microsoft’s Total Assets: $121.27 Billion
Sony’s Total Assets: $166.22 Billion
Compare Apple’s total assets ($162.90 billion) to Apple’s total liabilities ($51.15 billion).
Compare Microsoft’s total assets ($121.27 billion) to Microsoft’s total liabilities ($54.91 billion).
Now compare Sony’s total assets ($166.22 billion) to Sony’s total liabilities ($135.61 billion).
Since total assets include everything that Sony owns (cash, buildings, divisions, intellectual property, etc.)…Sony would have to sell over 80 percent of their total assets (Total Assets = Every single thing Sony owns including cash) just to pay off their total liabilities.
If you combined the June 2012 total liabilities of Microsoft ($54.91 billion), Apple ($51.15B), Google ($21.33 billion), and Electronic Arts ($2.27 Billion), that would equal to $129.66 billion in liabilities. Sony would STILL have $5.95 billion more in total liabilities than Microsoft, Apple, Google, and Electronic Arts combined. It really paints a picture of just how out of control Sony’s total liabilities have become.
Based on the chart below, you’ll notice that Sony’s liabilities (light blue) have been skyrocketing for ten years now.
Click chart below to enlarge size.
The biggest problem here is that Sony’s total liabilities show no sign of declining. They keep increasing and eventually, this bubble is going to pop. It’s important to understand that not all liabilities are inherently toxic. Companies are expected to have significant liabilities at all times. It’s when we compare Sony’s liabilities to assets ratio with that of other major corporations that it suddenly becomes clear that something has gone wrong.
Below: Chart of Sony’s growing liabilities over the years according to stock-analysis-on.net
On June 27th, 2012, Sony held an annual meeting with over 9,303 shareholders in Tokyo, Japan. After years of multiple disappointing quarters, some of Sony’s shareholders began to release their anger on Howard Stringer.
At the meeting, a heckler shouted:
“What a job, Mr. Stringer! Can someone tell me why we need to appoint this man―who built Sony’s debt to nearly a trillion yen―to chairman of the board? Is Sony that starved for personnel?”
Another heckler proclaimed:
“I am against reappointing Ryoji Chubachi and Howard Stringer as directors. Mr. Stringer tried to blame the company’s poor results on the 2011 Japan earthquake and flooding in Thailand, or anything else he could find in the business environment. He’s been giving excuses from the outset. The slow actions of those two have slaughtered the value of Sony.”
The room of shareholders exploded into applause around the auditorium.
Sony’s Capital Structure
I see a higher chance of revival for Panasonic than Sony.
~ Yuuki Sakurai,
CEO at Fukoku Capital Management Inc.
On August 6th, 2012, Moodys Investors Services placed Sony Corp. under review for a possible second downgrade for this year. At the current moment, Sony’s credit rating is three levels away from being declared “junk”. Moody’s is unsure whether Sony’s restructuring will even help. Moody’s commented on Sony’s restructuring process by saying, “Sony has not been able to deal with these issues effectively.” Moody’s added, “concern that weak consumer sentiment, especially in Europe and China, and a strong yen versus the euro may hinder the timely recovery of Sony’s earnings and leverage.”
Below are charts displaying Sony Corporation’s entire capital structure from quicktake.morningstar.com.
On June 2009, Sony only had 40.6% debt and 59.4% equity. By June 2012 (3 years later) Sony’s debt is now 50.1% of their capital structure, and their equity shrank to 49.9%. In three years, Sony went from a company that use to be mostly equity to a company that is now 50/50 on debt and equity.
Anyone will tell you that when you look at Return on Assets (ROA) and Return on Equity (ROE) together, they are probably one of the biggest indicator of a public corporation’s health.
According to investopedia.com
Definition of Return on Equity:
“It’s a basic test of how effectively a company’s management uses investors’ money – ROE shows whether management is growing the company’s value at an acceptable rate.
Definition of Return on Assets:
“Return on Assets reveals how much profit a company earns for every dollar of its assets. Assets include things like cash in the bank, accounts receivable, property, equipment, inventory and furniture.
The chart below uses data from the year 2002 all the way through June 30th, 2012.
You’ll notice that the red line (ROE) is rapidly sinking, the orange line (ROA) is slowly declining since 2009, and the blue line (total liabilities) is skyrocketing out of control. When you look at all three of these things on the chart, it makes Sony’s financial situation look worrisome.
Asset managers, analysts, entrepreneurs, and credit agencies doubt Sony’s recovery plan
On August 2nd, 2012, iTechPost.com reported: “Since he [Kaz Hirai] moved into the CEO office, Sony’s shares have tanked by more than two-fifths.”
When Kaz Hirai laid out his plans for saving Sony, he listed it in four steps:
- Focusing on core businesses (Gaming division, digital imaging)
- Streamlining Sony’s TV business
- Cut costs by transforming Sony’s business portfolio
- Speeding up innovation
I can’t see a scenario in which they boost their top line. The environment is still severe, demand for TVs won’t recover, and they’ve got no hit products. ~ Ichiro Takamatsu,
Bayview Asset Management Co
After hearing Hirai’s plans to save Sony, many of Sony’s asset managers have felt unimpressed with both his plan, execution, and recent results.
Yuuki Sakurai, CEO at Fukoku Capital Management Inc., oversees $7.3 billion of Sony Corporation’s assets. In June 2012, Sakurai said he doesn’t think Sony can turn things around: “I see a higher chance of revival for Panasonic than Sony,” said Sakurai, “Sony still hasn’t been able to show us the path for revival.”
Hirai announced a plan to cut 10,000 jobs at Sony, reduce the number of TV models, and exit out of PC-use optical drives. This month, Sony announced cutting 15 percent of the mobile phone workforce. Some of Sony’s asset managers think Sony’s strategy of cutting costs isn’t enough to make the company profitable.
“What they’re doing now is trying to squeeze out profits with cost cuts,” said Ichiro Takamatsu, who helps oversee $2 billion of Sony’s assets at Bayview Asset Management Co. in Tokyo, “I can’t see a scenario in which they boost their top line. The environment is still severe, demand for TVs won’t recover, and they’ve got no hit products.”
One of Sony’s own former executives thinks Sony’s days might be over.
On April 15th, 2012, Yoshiaki Sakito, a former Sony executive, was quoted saying “It’s almost game over at Sony.” He then continued, “I don’t see how Sony’s going to bounce back now.” Yoshiaki Sakito has also worked for Walt Disney, Bain & Company, Apple and a start-up focused on innovation training.
On August 10th, 2012, Standard & Poor announced they were evaluating the possibility of downgrading Sony’s credit rating again, citing a weak recovery. In a statement released on August 31st, 2012, S&P said, “Standard & Poor’s sees weakening prospects for Sony to restore profitability at its core electronics businesses in fiscal 2012 (ending March 31, 2013).” The statement later says, “In light of the weak prospects for earnings and planned increases in strategic investments, we expect Sony to make negative free cash flow in fiscal 2012, reducing the likelihood of improvement in debt and cash flow ratios for the company in the near term.”
Moody’s had similar thoughts as S&P. On August 6th, they released a statement saying, “Sony has not been able to deal with these issues effectively.” Moodys had cut Sony’s rating to its current level three notches above speculative investment, or “junk” status.
To cut costs, Hirai mentioned that Sony would analyze which products aren’t adding much value; he would then decide either to drop those products or figure out ways to reduce costs through “collaboration”. For numerous years, Hirai was very emotionally invested into Sony’s gaming division. Discontinuing the PS Vita would basically be an admission that he had launched a failed product during his time at Sony Computer Entertainment, and it seems Hirai would rather cut jobs or streamline other divisions at Sony before that happens. To discontinue the PS Vita would be a stain on his past legacy at SCE.
Now that we’ve discussed Sony’s financial problems in detail, we should try to pinpoint why this happened. A big reason would be Sony’s culture, which we will be discussing in the second half of this article. The culture within a company can impact how a company managed, financed, organized, and supervised. Let’s move onto the second half.
The War Inside Sony: Engineers vs Executives
“Engineers have always been stars at Sony—more so, perhaps, than their creations.” – Gizmodo
Sony remains dominated by proud, territorial engineers who often shun cooperation. For many of them, cost-cutting is the enemy of creativity. ~ Hiroko Tabuci
Sony always gave full creative freedom to its engineers as a strategy to push quality and innovation. This is the vision that Sony’s founders always had when they created the company. Engineers are treated like rockstars for creating many of the different products and proprietary formats coming out of Sony. Is it possible that Sony’s loyalty to the creative visions of their engineers might be partially responsible for Sony’s financial problems? It’s easy to say that Sony should cut their costs and stop putting out super expensive products. But the truth is, Sony’s culture was built on giving engineers (not accountants) the ability to make the final decisions on Sony’s products. By giving engineers so much control, Sony forgot that making a profit is most important to the overall health of the company.
To promote thinking outside the box and innovation above all else, Sony became a culture of where failure is acceptable and has little consequence or threat to most engineers’ jobs. This is partly because the founders, Masaru Ibuka and Akio Morita, failed multiple times before having their first major success. The founders adapted this logic to Sony’s culture. This explains why engineers who have worked at Sony in Japan for a very long time have amazing job security even after numerous products have failed.
Gizmodo says, “There are countless examples of Ibuka and Morita’s successors following in their footsteps, taking up the mantle of the brash engineer, forging ahead despite warnings of over-ambition or even unprofitable results, all in pursuit of a now-mythical Better Way.”
The rivalries between engineers is part of why Sony has lost its identity over the years.
Sony’s strategy never comes together as a cohesive whole because their engineers are constantly in competition with each other to become famous for creating the next big proprietary format or gadget. There are so many proprietary formats or unnecessary electronics coming out of Sony that it makes Sony’s overall strategy and identity very confusing. The engineers all want to be the guy who creates something as big as the Walkman or PlayStation, they are all competing for that recognition inside of the company. However their ideas are created based on the love for technology, not long-term profitability.
On April 2012, Hiroko Tabuchi wrote an article to the New York Times saying, “Sony remains dominated by proud, territorial engineers who often shun cooperation. For many of them, cost-cutting is the enemy of creativity — a legacy of Sony’s co-founders, Mr. Morita and Masaru Ibuka, who tried to foster a culture of independence. But the founders had more success than recent executives in exerting control over division managers.”
Businessweek had an article which explained how Howard Stringer couldn’t convince Sony’s engineers because Sony engineers only trust other engineers, and have very little trust for anyone else. Sony’s engineers refused to listen to Stringer that content was key because their egos were too consumed with creating hardware. This is part of why the creators of the Walkman, even though they had huge assets and an entire music record label, weren’t able to release an MP3 device before Apple’s iPod.
“Stringer also encountered a hardware-worshipping culture that mistrusted him because he wasn’t an engineer. He was a ‘content guy’ who supposedly cared less about making devices than pushing movies and music. ‘Whenever I mentioned content,’ [Stringer] says, ‘people would roll their eyes because, ‘This is an electronics company, and content is secondary.” That resulted partly from longtime rivalries between engineers in Japan and generally better-paid movie and music people in California. Sony’s consumer electronics unit sometimes declined to send products for use in Sony movies even as Samsung was generating buzz with placements of its phones in blockbusters like The Matrix.” Earlier in 2007, Stringer told a reporter: “I HAVE said before that without content, most gadgets are just junk.”
William Saito also thinks in-house rivalries kept Sony from reaching their goals. Saito is a venture capitalist and council member on national strategy and policy at the Japanese government’s National Policy Unit. Saito argues: “The Japanese are very intelligent as individuals, but as a collective they become incompetent.”
Sony’s desire to control everything kept it from controlling anything. ~ James Surowiecki,
in an article to the New Yorker
James Surowiecki tells the New Yorker: “The Betamax video tape recorder failed in part because the company refused to co-operate with other companies. But in recent years the problem got worse. Sony was late in making flat-screen TVs and DVD recorders, because its engineers believed that, even though customers loved these devices, the available technologies were not up to Sony’s standards. Sony’s cameras and computers weren’t compatible with the most popular form of memory, because Sony wanted people to use its overpriced Memory Sticks. Sony’s online music service sold files in a Sony-only format. And Sony’s digital music players didn’t play MP3s, which is a big reason that the iPod became the Walkman’s true successor. Again and again, Sony’s desire to control everything kept it from controlling anything.”
On February 3rd, 2012, incoming CEO Kaz Hirai told 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,” he said. “It’s one issue after another. I feel like ‘Holy s***, now what?’” He continued saying, “We really need to buckle down and be realistic. I don’t think everybody is on board, but I think people are coming around to the idea that if we don’t turn this around, we could be sitting in some serious trouble.”
I don’t think everybody is on board, but I think people are coming around to the idea that if we don’t turn this around, we could be sitting in some serious trouble ~ Kaz Hirai
When Hirai says not everyone is on board, he’s not joking. The idea of “buckling down” and “being realistic” typically means cutting costs and downgrading certain divisions, which would be a Sony engineer’s worst nightmare. Howard Stringer basically lost control of the company. It’s foreseeable that even more in-fighting may occur at Sony with Kaz Hirai running the show as a result of engineers protesting any cost cutting decisions that Hirai makes. Sony is so dysfunctional right now because engineers, not the executives, run the show. It will be difficult for Kaz to cut costs when Sony’s entire culture since the beginning of the company’s birth was founded on giving engineers freedom to create their ideas. If Kaz wants to be tough with cost cutting, he will have to completely reverse Sony’s entire culture.
However, that’s easier said than done. The most influential people at Sony have been there for more than 20 to 30 years, and they have been shown to flat out refuse drastic change. This is part of why Sony still acts like they are still the huge corporation that they were in the 90′s. The culture at Sony refused drastic change when Howard Stringer ran the show and the same will likely happen with Kaz Hirai.
Howard Stringer mentioned to Bloomberg that change has never come easily at Sony. This is mostly due to Japan’s lingering culture of lifetime employment that makes it difficult for Sony to shrink payrolls or close Japanese plants. Stringer also mentions Sony’s Japanese tradition of consensus building which makes it difficult for Sony to respond quickly to the orders of a strong leader. Howard Stringer says: “People mostly say to me, ‘You don’t need to do this. Why are you doing this?’”
PlayStation 3 is a great example of Sony giving too much creative freedom to its engineers by allowing them to create the Rolls-Royce of game consoles without any watchful supervision over the project to pay attention to the costs of materials. The engineers had very little respect for both Sony’s executives and former President and CEO Howard Stringer. The engineers tried hiding the costs from any non-engineer who would be a threat to their creative vision.
A Wall Street Journal article (via Kotaku.com) gave some more insight: “In developing the PlayStation 3 console, the device’s latest iteration, Mr. Kutaragi went over budget on development costs without informing Mr. Stringer, according to a person familiar with the situation.” The article continues by saying, “Mr. Kutaragi was notorious within the company for his reluctance to communicate with his bosses or other units. In 2005, Mr. Kutaragi hosted an event at a big electronics conference in Las Vegas to celebrate the U.S. launch of the PlayStation Portable handheld game machine — one of the company’s biggest products that year. He didn’t invite executives from Sony’s electronics division, which provided the parts.”
In 2006, Ken Kataragi said that PlayStation 3 was being sold too cheap and Sony was doing gamers a favor for giving it to them for $600. This is just another example of the arrogance displayed by Sony’s engineers and Sony’s top brass at the start of this console generation. In a 2006 article, PCWorld.com explained: “iSuppli called the PlayStation 3 an ‘engineering masterpiece‘,” with a motherboard that looks more like that of an enterprise server or network switch than a games console.”
According to iSuppli (in November 2006), the combined materials and manufacturing costs for PlayStation 3 came to about $806 for the model with a 20GB hard drive. This excluded the cost of the controller, cables, and packaging. For the $499 20 GB PS3, Sony took a loss of about $307 on each console they sold. For the $599 60GB model, they lost an estimated $241. By June 2009, GameSpot reported that manufacturing costs for the PlayStation 3 were down 70 percent. In a 2010 article from CNet/Wall Street Journal, Sony was losing 6 cents for every dollar of PS3 sales. At the time, the PS3 was selling at a retail price of $300 which means they were losing about $18 for every console sold.
Sony never learned from any of this.
That’s why Sony will sell PS Vita at a loss for three years. I don’t get the feeling that Sony looked at PS3 and said, “Maybe we should try to make a profit with Vita on year one”. There’s no sense of learning from past mistakes about taking major losses. There’s so many branches at Sony that the top executives seem clueless of what’s going on inside their own company, and nobody knows why Sony is selling so many television models when they are constantly losing money in that division.
Is Hiroko Tabuci correct in [her] Wall Street Journal article about Sony’s engineers having too much power and control over Sony’s product lines? [She] is correct, but Sony’s executives should always take more accountability/responsibility for the company’s actions more than anyone else. When Howard Stringer was in office, all he did was blame earthquakes and the fall of the yen/dollar/euro, instead of admitting that Sony released products that weren’t major hits. The fact remains that Sony’s executives make a lot of excuses, they poorly communicate with their engineers, and this causes disorganization and confusion within the company. A great example would be when Sony’s PlayStation network was hacked by Lulzsec. Sony was more concerned about hiring lawyers and getting their insurance company to pay for the damage, than getting their engineers to fix the problem in a swift and efficient manner.
Because there is a lack of communication between the branches of Sony, Sony’s product line has no real identity right now. Every division and branch is made up of people who are doing their own thing, and not caring about what the rest of Sony is doing. That’s why the only thing that comes to a consumer’s mind about Sony products right now is, “Oh yeah. That’s the company that makes stuff I can’t afford unless I get multiple jobs. They put out $600 game consoles at launch, and $40,000 4K resolution televisions“. Sony is stuck. Everyone expects amazing quality and technological leaps from Sony products, but most people don’t have the money to buy them due to economical reasons. If Sony changed their strategy and started manufacturing cheap products, it would go against everything that the Sony brand stands for.
Sony is an example of a company that has become so large that they’ve lost focus of their main priorities. This is also a company that thinks they can afford tons of failures as long as they have a few successes along the way. But at what cost? At what cost can you keep launching products that don’t make a profit until the third or fourth year that it is released? At what cost can you keep launching failed proprietary formats like the UMD, or failed peripherals like PlayStation Move?
Sony releases brilliant products time from time. I am especially a big fan of their PlayStation brand. But Sony is not the Sony of the 90′s. Sony is not today’s Apple. Sony is not today’s Samsung. Sony is not today’s Microsoft.
It won’t be easy for Sony to return to their glory days after ten years of negative trends.