Sony – Old chestnut

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Old chestnut software problem is back.

• Sony is intending to change its stars by moving away from hardware towards content and services but the old software chestnut is likely to trip the company up again.
• Under Kazuo Hirai, Sony has had an excellent turnaround, but one that has been almost exclusively driven by hardware.
• The combination of wiping the floor the Microsoft in the current generation of games consoles and its best in class image sensor for mobile devices has led the recovery.
• This combined with a focus on fiscal efficiency is what has driven the top and bottom line turnaround.
• However, with smartphone growth now grinding to a halt, Sony’s new CEO, Kenchiro Yoshida is looking to launch a 3-year plan to focus on content, software and entertainment rather than devices.
• The theory behind this is solid as RFM research has repeatedly shown that both advertising and subscription revenue offer a more stable and reliable revenue stream with higher margins in most instances.
• However, while these revenue streams are more stable with higher profit margins, they tend to be lower in absolute terms of both revenue and profit generated.
• RFM research has consistently found that monetisation via hardware is 3 to 5 times more effective than other methods although it is far more difficult to get right and much riskier as Sony has found on numerous occasions.
• The issue with this new direction is that in the content business, it is only the original content creators that are doing well and everyone in the middle distributing the content is getting badly squeezed.
• This is why Netflix is spending everything it can on original content making it more like HBO than a content distribution company.
• Therefore, Sony will have to either become entirely an original content creator or create an aggregation experience so good that users want to consume content using Sony services.
• Sony has this in its picture studio, but its performance has been hit and miss over the last few years meaning that a reliable profit stream is going to hard to come by.
• Furthermore, to stick all of this together and create a compelling cross-platform offering will require Sony to write software which is something that it has really struggled for over 20 years.
• In the same way that Google really struggles with hardware, Sony really struggles with software and I think it extremely unlikely that it will crack this nut.
• Hence, a move out of hardware is likely to make revenues and profits go into decline even if margins markedly improve which, I think will not be received well.
• Sony has been a fantastic performer during its turn-around but this new strategy looks like a leap to far.
• It could be time to be looking elsewhere.