Hirai's First Test

For his first public outing as Sony president and CEO, Kaz Hirai had a rather inauspicious backdrop. Just a few days before he made his presentation on the company's future, it had announced that a write-off of tax credits in the USA was adding ¥300 billion to its losses for FY2012 - bringing total annual losses to around $6.4 billion (£4 billion), the deepest ever experienced by the company.

That's not a great start for a new CEO whose task has been seen as challenging from the outset. On the other hand, though, it might be exactly the backdrop Hirai needed. Even though Sony's extra ¥300 billion loss is a balance sheet problem rather than a cashflow one (and that's a very important distinction), the depth of the FY2011 annual loss is a shock to the system - for Sony's management, for its investors and for everyone else involved. To Hirai, it certainly makes the struggle he faces to turn the company around a little tougher, but it also gives him an opportunity to make the sweeping changes Sony needs.

"The consensus regarding Sony's TV business is simple: it's a multi-billion dollar albatross, a millstone which will drag Sony to the bottom of the Pacific if it can't disentangle itself"

As such, it's hard to avoid feeling a little bit disappointed by what he announced on Thursday in Japan. 10,000 layoffs (which had already been reported widely) is a fairly sweeping move, but we still don't know where exactly the axe will fall, and it seems to be a cost-saving exercise rather than a consequence of a major retrenchment for the corporation. That's a big problem. Sony needs to be leaner, but not because it needs to nip and tuck its various divisions to save costs overall; it needs to shed entire divisions that simply don't and can't make money.

After the brutal hammer-blow of the firm's new financial forecasts, Hirai might have had an opportunity to do that. Plenty of those anticipating his statements had one thing they wanted to hear him say: "we're getting out of televisions". The consensus among market watchers regarding Sony's TV business is simple: it's a multi-billion dollar albatross, a millstone which will drag Sony to the bottom of the Pacific if it can't disentangle itself. Nobody denies that Sony makes good TVs, but the market has become completely commoditised. Sony simply can't compete with Samsung on manufacturing costs, for a variety of economic and political reasons, and Samsung itself is looking nervously over its shoulder at potential rivals in developing Asian and South American nations.

The simple problem is this: making TVs used to be hard, and now it's not. Building flat-panel TVs, even very good flat-panel TVs, is a task that used to be restricted to a small group of superbly technically proficient companies, of whom Sony was the unquestioned leader. Samsung took the lead, matching Sony's specifications but undercutting their costs. Now, the technical skills needed to build a good HDTV are increasingly widespread. There's no serious money to be made here, barring a few high-margin corners of the business, like the "Bang & Olufsen" more-money-than-sense high-end. 3DTV might have sustained the business for companies like Sony for a while, but it's been a flop so far (and more worryingly for them, it's also turned out to be technically simple for low-end rivals to implement). There's talk of 4k technology, the "next level" of HDTV, but if Sony's going to pin its hopes on that gaining major consumer traction then its shareholders ought to run for the hills.

In the end, though, Hirai didn't say that Sony is getting out of TVs. Commentators in the media were understandably disappointed, but everyone understands why Sony remains wedded to this expensive vanity business. It's been the heart of Sony's strategy for decades, just as it's been the heart of living room entertainment for decades. Sony is famous for many things - transistor radios, the Walkman, the PlayStation - but it's in televisions that it truly broke through to become the world's leading electronics firm. Like most large Japanese companies it has an immense amount of inertia, not least because Japanese companies are remarkably bad at getting elderly managers to retire and give up their influence - which can be good when you need the benefit of their experience, and bloody terrible when you need to retrench a struggling company that's bleeding hundreds of billions of Yen into nostalgic but utterly misguided business ventures.

I don't think it's right, though, to be too disappointed by Hirai's failure to stand up to that inertia and rapidly divest the TV business. There's no question that he's going to have to take some incredibly tough stands against Sony's elder statesmen if he's going to turn around the company - and he's going to have to seriously challenge much of the company's corporate culture if he's to rescue it from itself. Picking such a major fight within weeks of his accession, however, wouldn't be a good move. Hirai needs to move his pieces into place carefully, and in that regard one could argue that he did a pretty good job on Thursday.

Hirai is going to have to take some incredibly tough stands against Sony's elder statesmen if he's going to turn around the company

Note, for example, that there was little talk of TV manufacturing as being the core of Sony's business going forward. Hirai didn't hammer the TV business in his presentation, but he certainly didn't laud it either. Instead, he picked three winning sectors - digital imaging, videogames and mobile phones - and said that he wants to see 70 per cenr of Sony's sales, and 85 per cent of operating income, coming from those sectors within two years. Given that the firm is also targeting growth in other sectors such as medical equipment, it's easy to see that traditional sectors like TV manufacturing aren't expected to be a major part of Sony within a fairly short space of time.

As to the choices for replacing TVs, Hirai has performed exactly as those of us who followed his career at SCE thought he would - putting PlayStation at the heart of Sony's business strategy. The pillars he has chosen on which to build Sony's future are strongly interlinked. Any successful strategy in mobile, gaming or digital imaging will necessarily lean strongly on the other two sectors. In each area, Sony has strong rivalry to overcome. In mobile, its Android handsets are not presently best of breed, and Android itself lags Apple's iPhone in the high-end market. In digital imaging, Canon and Nikon continue to rule the professional and high-end sectors, while compact cameras are being replaced by phones (although Sony notably supplies the extremely well-regarded camera for the iPhone 4S). In gaming, Microsoft and Nintendo present strong challenges, while the rise of online and mobile gaming threatens the entire console business.

There are no easy, quick wins here, in other words. But by combining the company's undeniable strengths in each of those areas with a genuine willingness to create a corporate culture that is nimble, innovative and honest (one which, in other words, doesn't fear treading on executives' toes and smothers abortive products like the PSP Go and the recent clamshell Android tablet device before they embarrass the firm on the market), Sony could come to dominate one or even all of those sectors. The ingredients for this to be one of the world's greatest electronics firms are still in place. Unfortunately, so too are the seeds of complete disaster. Which outcome we end up with is heavily dependent on how brave, how insightful and, bluntly, how willing to be hated Kaz Hirai turns out to be.