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International Column
 
SONY: ERICSSON DEAL
Four looks like a crowd
Sony is looking to get a better grip on its mobile phone division by acquiring Ericsson’s stake in the JV. But a real turnaround may require radical rethinking on the company’s strategy
Issue Date - 24/11/2011
 
For Chairman, President & CEO Howard Stringer, who is expected to step down next year, mixed feelings would normally be a given. But he may mostly end up contemplating on what could have been. Sony hired the Welsh-born former President, CBS and founder, TELE-TV, in 2005 to turnaround its businesses and revive the brand’s iconic status. Neither of the aims seem to have been met.

This year, the TV business is expected to lose money for the eighth year in a row with competitors like Samsung gnawing away market share fast. Other businesses like computing and gaming also face tough competition from the likes of Microsoft and HP. Sony Corp. has sold a lot of its TV manufacturing plants since 2009. It now plans to further restructure the division, which may include teaming up with other companies or spinning off the business in its entirety. At one point of time, Sony was worth $100 billion. Today it is valued at $18.05 billion (November 7). Its m-cap is down by more than 50% since Stringer became Sony’s first non-Japanese CEO. Despite being the first mover and market leader in portable music players, Sony lost it all and Apple is the one, which really struck gold on multiple occasions with iPod, iPhone and iPad. There were some victories – like gaming, Blu-Ray and 3D film making, and Stringer has successfully unleashed a series of cost cuts in the company. But mere cuts, unless they are accompanied by strong & inspiring ideas and painstakingly immaculate execution, cannot take a company too far.

On October 27, 2011, Sony announced that it would be acquiring Ericsson’s stake in the Sony Ericsson JV for $1.45 billion. If one looks at Sony’s performance over the past decade, it gets apparent that apart from financial misfortunes, its strategy has been a complete misfit across business segments (except for gaming). And smartphones is one of them, a wrong that Sony hopes to correct with this deal.

In 2000, Sony was struggling to make a mark in the global cell phone market with a marginal 1% market share. It then forged a JV with Stockholm-based Ericsson in August 2001. However, the JV bombed, as it managed to appreciate market share by a mere 1%. The company is now looking at upping its stakes in smartphones. When contacted by B&E, Sony’s spokesperson for A-Pac commented, “It has been Sony Ericsson’s target to become a leader in the global Android phone market in terms of value share. (rf. Sony Ericsson’s CY11Q3 market shares are 11% in value). Through integration of Sony Ericsson, Sony will be able to integrate functions such as product R&D and design, and accelerate adoption of new platforms & technologies for better user experiences.”

 
Year 2008 actually announced the fall of Sony Ericsson as a cell phone manufacturer. That year, despite favourable conditions (the handset market was expected to grow by 10% in 2008) Sony Ericsson’s profits fell significantly by 43% to €133 million, sales declined by 8% and market share came down to 7.9% from 9.4%. In Q2, 2008, net profit crashed by 97% and the handset maker announced that it will cut 2000 jobs.

This is what happens when two different companies share a long term property. While they started as two handset majors looking to synergise their mobile handset divisions, Ericsson later found its calling in the mobile equipment business. The fact that the two divisions were often found to be working in divergence with each other is not too surprising, given that the same problem has been talked about in relation to Sony’s own units. By making this acquisition and gaining complete control over the division’s destiny, Sony actually has a chance to undo the damage. The future of technology is convergence. And the first step towards this future is to have a portfolio of devices, which facilitate convergence. Speaking to B&E from Atlanta, Jeff Kagan, Tech Analyst, agrees “I think the cloud and other areas of new technology will continue to grow and change. There is plenty of opportunity for Sony if they can catch the ‘wave’.” Once this acquisition goes through, Sony will aggressively start pursuing the ‘four screen strategy’ wherein it will work towards integrating smartphones, laptops, tablets and television. This will also include a close knit integration with Sony’s gaming devices. In summary, Sony is attempting to deliver an Apple like experience – which it could have easily achieved a decade ago.

As of now, Sony should contemplate divesting one of the underperforming divisions to better focus on a futuristic segment like smartphones & tablets. Considering how the integration job has worked so far apart from gems like the Sony Xperia Play, success on a simultaneous four screen strategy is not really something analysts are necessarily rooting for. Moreover, the words “It’s a Sony” aren’t about to command the same aura of yore anytime soon. To be able to revive any division, Sony’s top brass and workforce must immediately realise this and give up on the smugness that has afflicted them since many years. And definitely, Stringer’s successor must be the one who has the ability to shake up the status quo and get the company’s innovation engine up and running again, Akio Morita style.

Deepanshu Taumar           

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