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'Synergy' plan in play at Sony

Posted: 18 Apr 2005 ?? ?Print Version ?Bookmark and Share

Keywords:sony? synergy? electronics industry?

Sony's recent executive shuffle has raised questions about the company's synergy and vertical integration.

Two years ago, as chairman and CEO of Sony Corp. of America, Sir Howard Stringer described "synergy" at a press briefing here as the electronics industry's "most used and abused word." Nevertheless, Stringer insisted that Sony would capitalize on the combination of its content and electronics hardware businesses, adding confidently, "We are reaping benefits" from synergy.

As Sony Corp.'s new chief executive, Stringer is going to have to decide whether synergy really is the way to go or a lost cause.

Last week's executive shakeup at Sony poses two critical questions for Stringer. Can Sony afford to pursue a dubious strategy, "synergy," that has thus far generated few benefits? And, can Sony prove that its vertical integration!the goal of which is to produce clearly differentiated consumer electronics hardware!is worth several billion dollars' investment in internal semiconductor operations?

Previous Sony executives!particularly departing CEO Nobuyuki Idei and demoted board member Ken Kutaragi!believed in both synergy and vertical integration. It's unclear whether Stringer and the rest of Sony's new leadership will take up these causes or treat them as costly illusions.

Some experts question whether the rigorous demands of consumer electronics and supporting silicon can ever mesh with the often nebulous culture of movies and music creation. Nicholas Carr, author of Does IT Matter? Information Technology and the Corrosion of Competitive Advantage, bluntly said that synergy "hasn't worked" for Sony. "Companies tend to delude themselves about the power of synergies between different businesses," said Carr, former executive editor of the Harvard Business Review. "The synergies are theoretical, but the conflicts are real."

There's a fundamental conflict between the consumer electronics and content-creation businesses, Carr said. "Successful devices need to play all the content customers want, regardless of which company supplies it. Content providers want their content to get preferential treatment. These are two very different goals, and it's awfully hard to pursue them both simultaneously."

Ben Keen, chief analyst at Screen Digest, a London-based market research firm, said he had "not seen any evidence" that hardware-software synergy had benefited Sony. Blu-ray, an optical recording technology that Sony helped develop and on which it will offer motion pictures, could be an acid test for the company, he said.

However, "the fact that Sony will now effectively control two major studios has not been a positive factor in encouraging other studios to support the [Blu-ray] format," Keen said. "Moreover, the commitment to including Blu-ray in Playstation 3 could push the cost of delivering that hardware to dangerously high levels."

Stuart Lipoff, partner at IP Action Partners, said the concept of corporate synergy in general is still viable and may be achievable at Sony. Managers must be willing to disrupt existing content distribution channels in order to move into new electronic ones, he said.

Lipoff cited Apple Computer Inc.'s success with the iPod player and iTunes music download service as a case in point. "Apple, which was not a major CE player and owned no content, made it in electronic music distribution," he said. Meanwhile, Sony's management sat on the sidelines, guilty of "criminal neglect of Sony's assets," he asserted.

Noting Sony's core strengths in consumer electronics, Carr suggested the company might be better off in the long run by selling its media holdings. If that were to happen, Stringer, a celebrated veteran of Sony's content business, might be the perfect guy to pull the plug. Such action by the company's first gaijin CEO would spare Japanese executives!all raised in the hardware business!from losing face over the surrender of Sony's movie and music operations.

But given Stringer's successful management of the music and movie operations, there is persistent hope that he can yet work the miracle of synergy. "We've been 'siloed' too long," Yair Landau, vice chairman of Sony Pictures Entertainment and president of Sony Pictures Digital, said last week at the Digital Hollywood conference. "The hardware divisions haven't been working with the content divisions. You don't do a reorg like this unless you are up against it."

Sony's executive shuffle has also raised questions about the future of its semiconductor business. The division will be headed by Ryoji Chubachi, who will become Sony's new president on April 1. The chip division will lose Kutaragi, who championed development of the Cell processor in collaboration with IBM Corp. and Toshiba Corp. Kutaragi also pushed the idea that internal development and production of "key devices" were essential for differentiating Sony's end products. His outspoken faith in in-house chip production, however, reportedly caused internal friction.

Kutaragi was seen as the technology brains behind Sony. A meager increase in Sony's stock price on the Tokyo exchange following the announcement of the executive shakeup amounted to a vote of little confidence in the new management team, said Masahiro Ono, an analyst at Morgan Stanley Japan Ltd.

During a press conference in Tokyo last week, Chubachi was noncommittal on the fate of Sony's semiconductor business. "Semiconductors are important; the investment should be continued," he said. "But I like to consider it a matter of balancing the total corporate strategy."

Referring to the Cell processor, Chubachi said, "Cell is also important for Sony's products!not just for PS3. We should continue to invest. But how to implement the processor in products is a challenge." That vagueness leaves the door open to a reversal of Kutaragi's efforts to vertically integrate Sony while most competitors were going horizontal.

Traditionally, consumer electronics companies use "custom ASICs and software for each device, and [have] long product development cycles. All this is going out the window," said Van Baker, research director for consumer electronics at Gartner Group. "They have to move to using more off-the-shelf silicon and software and live with lower margins. Essentially they are moving to a PC industry model, though hopefully one that is not quite so bad." The CE companies, Baker said, "are at varying degrees of understanding this."

But Sony wasn't willing to live with lower margins, especially for Playstation. In unveiling the Playstation Portable in Tokyo last fall, Kutaragi said the game division relied on Sony's semiconductor operations for 50 percent of the box's component value. Aggressive pricing was only possible, he said, because key ICs were designed and fabricated internally, using a 90nm process. "You can't pull off this kind of pricing by depending on off-the-shelf components," Kutaragi said. The first-generation Playstation, by contrast, used ASICs from LSI Logic, a graphics chip from Toshiba, and memory from NEC, Mitsubishi, Toshiba and Hitachi. The only key internally developed component was a Sony disk drive, Kutaragi said.

Semiconductor companies have vastly different capital needs, planning horizons, strategies, internal disciplines, market and channel management, and target markets than CE companies. If the two are under one roof, there has to be an almost church-and-state separation, with consolidation happening only at a financial level. This is why huge companies like Hitachi, Mitsubishi, Motorola and others have effectively divested their IC operations.

Executive bias?

In a 1998 article in Harvard Business Review, Michael Goold and Andrew Campbell, directors of the Ashridge Strategic Management Centre (London), wrote, "Because executives view the achievement of synergy as central to their jobs, they are prone to biases that distort their thinking." They fall victim, the authors said, "to the 'upside bias,' which causes them to concentrate so hard on the potential benefits of synergy that they overlook the downsides." In the case of Sony, Lipoff at IP Action Partners believes top management neglected to take control of its music and film acquisitions in such a way that synergies could be achieved.

"Given the big operational and cultural divide between the CE manufacturer business and the content business, this is not a big surprise," he said last week. The content business is "driven by a seat-of-the-pants artistic feel with the ability to make decisions rapidly but not to rock the boat"!especially when existing profitable business models are still working. In contrast, he said, "The CE manufacturing business is one of long lead times, planning and coordination with standards efforts."

Additional reporting by Yoshiko Hara, Rick Merritt and Ron Wilson.

- Junko Yoshida

EE Times

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