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

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.

More stories

PS4 Pro and most other models discontinued in Japan

Sony will only continue to manufacture the 500GB 'Slim' model in the region going forward

By James Batchelor

Nintendo and Sony share prices rise to record highs

Switch and PlayStation 5 drive stock high enough to surpass Wii and PlayStation 2 levels

By James Batchelor

Latest comments (6)

Andreia Quinta Photographer, Studio52 London7 years ago
I friend of mine made a short article that pretty much sums up Sony in the last few years. I can't find a way to disagree. They do need radical changes, for yesterday.
0Sign inorRegisterto rate and reply
Klaus Preisinger Freelance Writing 7 years ago
Look at the rating of the Sony stock with rating agencies. Then mumble "there are still institutional investors". Then say "there are still institutional investors?" Then realize what weird entity you are dealing with in terms of being an investor.
0Sign inorRegisterto rate and reply
Sandy Lobban Founder, Noise Me Up7 years ago
The company simply lacks a proper operating system like Android and iOS to connect the content and hardware. They would be as well buying a company like Smartisan and building their own eco system. Late to the game yes, but late is better than never. Samsung seem to have plans to do exactly this in the next couple of years instead of giving Google all the glory. You've got to ask yourself, why Sony doesn't have these same ambitions....although they might, but their just not telling anyone. :)

Edited 1 times. Last edit by Sandy Lobban on 17th May 2013 12:59pm

1Sign inorRegisterto rate and reply
Show all comments (6)
Axel Cushing Freelance Writer 7 years ago
@Sandy Lobban
Sony actually tried something like that some years ago. They were promising a wonderful transcendent media experience if you bought all Sony equipment. Your TV, your PS3, your audio receiver, it would all work together to provide multimedia Nirvana as long as everything came from Sony. The response from the public was "Meh." To an extent, they have their own version of the App Store (PlayStation Store), but having an "ecosystem" doesn't make sense for what Sony puts out.

Several friends of mine who certainly fit a section of Sony's target demographic, who have comparable products (LG or Samsung TVs, as an example) and who are by no means technologically illiterate find absolutely no value in a lot of the features that lard up a TV today. No Internet browsing through the TV's built-in browser, no going to YouTube or Hulu. If they want to do that, they'll use a computer. And if they absolutely have to watch Filipino convicts dancing "Gangnam Style" in the exercise yard on a big screen, they'll run an HDMI cable out from their computer to the TV and change the input.

Trying to clone Apple or Google's success is a weak strategy for Sony. It might buoy them in the short term, but it sends up big red flags about the long term future of the company. Kaz Hirai might as well unfurl a banner down the side of Sony HQ saying, "We can't hack it anymore!" Sony's biggest problems are around the customer level. Particularly in the gaming community, Sony's engendered some ill will, though not nearly as much as EA or Activision-Blizzard. Moreover, retailers aren't seeing the value in carrying Sony, outside of the PS3. Particularly in Japan, the electronics shops look at Sony with disdain. Not only are the profit margins better on Samsungs and LGs, but Sony's attitude towards the retailers and customers is a sore point. It's not cool to "Buy Japanese" in Japan anymore, as far as Sony's products. And if retailers in Akihabara are ashamed to sell your products, you've got a serious problem.

Sony needs to get aggressive again. They have to regain their lustre with consumers and retailers. It's not enough to have umpteen million bells and whistles if nobody can afford your products or likes how they're put together. Admit there are problems within the company, then fix them. Otherwise, Sony's going the way of Sharp, Magnavox, Curtis Mathis, Zenith, Packard Bell, and others who didn't get their act together in time.
0Sign inorRegisterto rate and reply
Is everyone avoiding the issue that all investors are now trying to get their charges to divest interests in game and console development?
0Sign inorRegisterto rate and reply
Sandy Lobban Founder, Noise Me Up7 years ago

I worked at Sony for 8-9 years before starting my own business, so I have a decent knowledge of how things work with the company, and I was there when the PS3 cross media bar was being pushed as the interface of choice across products. There was nothing wrong with that, it was just a bad design, in that it lacked features, and still contained too much technical information for the end users, I feel. The focus back then when the company had cash should have been an Eco system like iOS. It was short sighted to only be focussing on delivering what you already do (games, music and films) and assume that this is all that people wanted. I do wish my former colleagues well in the future though. I would like to see them do something like this.
0Sign inorRegisterto rate and reply

Sign in to contribute

Need an account? Register now.