Sony break-up would spell trouble for games
Daniel Loeb's plans for Sony would undermine the games division - but the investor's proposals still need to be taken seriously
Sony Computer Entertainment is a Japanese videogame company specialising in a variety of areas in the...
After a remarkable and perilous few years for Sony - once the world's most revered and successful consumer electronics brand - a fresh twist in the saga arrived this week in the form of a letter to company boss Kaz Hirai, hand-delivered by US billionaire Daniel Loeb. Loeb is a little-known figure outside financial circles, but his hedge fund, Third Point, has amassed a 6.5% stake in Sony - making it into one of the largest shareholders in the giant firm, and giving Loeb a certain degree of clout.
"Despite the best efforts of the past decade, Sony continues to cling to the decades-old fantasy that it is capable of competing in markets like televisions and mobile phones"
The contents of his letter constituted a respectfully-worded bombshell. Loeb acknowledged the value and heritage of the Sony brand and indicated support for the turnaround Hirai has been attempting to implement at the company - but he wants Sony to go further. Specifically, he wants Sony to spin off a large chunk of the Entertainment side of the business, including the music and movie divisions, as a separate, publicly listed company.
The idea is that by splitting the "software" side of the business (which has largely been successful) from the "hardware" side (which is in pretty serious trouble), not only will Sony unlock the value of the Entertainment business by freeing it from the ball-and-chain of TV manufacturing and the like; it will also stop using the success of the Entertainment business to disguise the extent of the rot in the hardware business, and have a much stronger motivation and drive to aggressively reform that side of the firm. By dividing the firm into two, Loeb argues, you'll save both sides (the division might actually be into three, since Sony still holds a number of insurance and financial services divisions which are profitable but completely irrelevant to the core business).
Loeb recognises, perhaps better than any of the other foreign investors who have tried and failed to impose their will on Japanese corporate behemoths and their shareholders, the magnitude of the task he faces. His letter to Hirai was a PR stunt, but one carefully orchestrated - hand-delivered as a demonstration of respect, and worded as a strong suggestion rather than a demand, bedded in faint praise rather than harsh criticism. It was meant to set the cat among the pigeons, but to smooth the pigeons' ruffled feathers at the same time.
Loeb knows, no doubt, that while his 6.5% stake may look significant, it pales in comparison to the deeply interconnected web of smaller stakes held by Japanese institutional shareholders, each of whom will - when pressed - act in a unanimous manner that might not be in the individual interest of a given shareholder, but is seen as the "right thing" for the company overall. Far more famous US shareholders than Loeb have sailed right into those treacherous waters, utterly underestimating how different the psychology and organisation of the Japanese shareholder is to the US shareholder; the most famous of them all was the aggressive Texan, T. Boone Pickens, who tried a hostile takeover of one of Toyota's suppliers in the early 1990s, only to be utterly defeated by a broad coalition of shareholders led by Toyota itself. His strategy would have worked in the USA, but in Japan it was seen as aggressive, profiteering, and damaging to the business; even small shareholders who stood to gain from Pickens' raid voted against it as a consequence. Hence, Loeb is trying something different - floating an idea as a suggestion and trying to give it momentum both among shareholders and within the company itself.
The reason this is of particular interest to the games business is that perhaps the biggest fly in the ointment - the factor Loeb has, perhaps, failed to understand - is Sony Computer Entertainment. If you divide Sony into the "Entertainment" and "Hardware" divisions, where does that leave SCE? Uniquely among Sony's business units, it is responsible both for mass-producing hardware and for creating hit software. Culturally, it would probably be more at home with the Entertainment arm of the company - yet it relies heavily on the engineering and manufacturing clout of Sony's home electronics background. More importantly, it's likely that any revival of Sony's ailing TV and consumer electronics businesses will come from a technology and content platform developed within SCE. The Sony Entertainment Network - the still-rather-unwieldy umbrella title for what the rest of us know as PSN, PlayStation Network - is Sony's rapidly-evolving great white hope. Nothing could be more damaging than a division of the company which created a tug-of-war over ownership or control of the network platform which is the firm's best hope of actually leveraging its successful content business to resuscitate its struggling hardware business.
"Real reform is needed - perhaps not Loeb's reform, but almost certainly something equally dramatic"
At the same time, there is a basic, harsh logic behind Loeb's suggestion which is hard to ignore. After years of gradual restructuring which have paid remarkably small dividends, Sony probably does need some kind of drastic move. Within Sony, there are business units which are doing pretty well - the movie business is great, the music business is reasonably healthy, the games business has rocky periods but generally thrives and has strong buzz around the PS4 already. In less visible areas, like camera components and optical imaging, Sony has world-class products that are probably built into a device you own right now - albeit without the Sony badge on the front. However, despite the best efforts of the past decade, Sony also continues to cling to the decades-old fantasy that it is capable of competing in markets like televisions and mobile phones - markets where the sprawling mid-range is utterly commoditised and creating hardly an ounce of profit for anyone involved, and where the high-end is completely monopolised by other Asian manufacturers with significantly lower cost-bases (and very supportive national governments, in some cases).
In other words, while Loeb's suggestion raises all manner of questions and problems for the games business - because the games business is one of Sony's best performers, and it uniquely straddles both of the areas which Loeb is so keen to rend apart - it may also, in some modified form, be absolutely essential to the games business. Much has been made of Sony's recent profit, but this is a paperwork mirage; the company went into the black on the weakening Yen (which is fine - the Yen has been uncharacteristically high for a few years, so this is probably a correction, not an anomaly) and, more notably, on the sale of some large office buildings. Japanese, a language which often seems to have a convenient word for just about everything, offers the word "urigui", meaning "to live by selling off one's possessions"; it's not a state of affairs that can last for long. Even Sony only owns so many office buildings. The company won't face bankruptcy any time soon - the same distributed web of support which would rally the firm's shareholders against a hostile takeover or raid would also ensure that Sony's credit lines remain open for far longer than any western company would expect - but if it wants to stay in the black, "urigui" won't last long. Real reform is needed - perhaps not Loeb's reform, but almost certainly something equally dramatic. Otherwise, it may not matter how good the PS4 is; even a great product from a crippled company would breed little confidence for the future.
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