Sony – Silo city?

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Sony’s strategy raises more concerns that it solves.

• Sony has announced its medium term strategy with the aim of delivering JPY500bn in operating profit for the full year ending March 2017E.
• This would represent a return on equity (RoE) of 10% which will be the yardstick against which performance will be based.
• The three main tenets of its new strategy are as follows:
  1. Pursue profitability without necessarily pursuing volume.
  2. Each business unit to have greater autonomy but also greater responsibility for helping to deliver group 10% RoE. Sony recognises that this will vary across the different parts of the business and has classified its businesses accordingly. (Growth drivers, Stable profit and those that will be volatile).
  3. Each business unit being positioned as being part of an overall portfolio of assets rather than stand-alone units.
• Sony also aims to continue its conversion into a holding company structure with the business units operating as wholly owned subsidiaries.
• The aim here is to speed up decision making and to ensure that each unit is self-sustaining.
• Speeding up decision making and ensuring that each unit is part of an overall portfolio is good news for Sony’s ecosystem ambitions but the rest of it is troubling.
• Making the business units more autonomous will not encourage them to co-operate and raises the risk that the old-silo mentality returns in force.
• Furthermore, it makes the realisation of profitability from the ecosystem much more difficult.
• If Sony is successful in creating an ecosystem based on a great user experience derived from PlayStation and rolled out across the rest of the company (see here), I can see a huge internal battling emerging for how that profit is allocated.
• If Mobile becomes very profitable due to users being willing to pay up for the Sony ecosystem, how will this profit be allocated?
• The gaming and the media segments will rightly demand some of the profitability due to their contribution to the ecosystem but the mobile business will need that profit to meet its targets.
• Carving out the units also makes it easier to hive them off or shut them down which makes me think that Sony has missed the fact that the real profit is generated when these businesses all pull together.
• The potential for these conflicts will also dis-incentivise the units to collaborate with each other in the first place meaning that Sony returns to the silos that have plagued it for the last 10 years.
• If this happens then the ecosystem strategy will fail and the targets will be missed.
• There are three ways to make money from the ecosystem: 1) premium hardware pricing, 2) Advertising or 3) subscription.
• Sony can realistically only address 1 and 3 and both of these require a collaborative structure where the assets all pull together and incentives are based on overall performance rather than the individual pieces.
• This is exactly what Microsoft is doing and is why I am increasingly confident that it has a real chance to be a major ecosystem.
• This new strategy raises more concerns than it addresses and makes me worry that, after all, Sony has missed the point of what it should be trying to achieve.
• I continue to prefer Microsoft and Google as plays on the ecosystem and my concerns regarding Sony have just gone up a notch.