Sony – Still in play

Sony is still in a better position than many.

• Sony has reduced its FY2015E net profit forecast by JPY180bn ($1.66bn) due to the write down of all of the goodwill associated with the acquisition of Ericsson’s half of Sony Ericsson.
• Net loss for the year ending March 2015E will now be JPY230bn rather than the JPY50bn forecasted in July.
• When goodwill is tested, the company looks at the long term outlook, makes a forecast and runs a discounted cash flow valuation to estimate what the business is worth.
• If the business is worth less than the net assets plus any associated goodwill, then goodwill is written down to the appropriate level.
• The fact that Sony is writing down all of the goodwill suggests that long term ambitions of 10% margins in mobile are now deemed unrealistic.
• The fact that no other forecasts have been changed suggests that the unit shipment and margin forecasts for the business in the short term remain pretty much unchanged.
• This move also heralds a change in the strategy where the mid-range products will be cut back and the fewer resources concentrated on the premium products.
• This makes sense because at low volumes a handset maker needs high gross margins in order to make a positive return.
• However, even just concentrating on the premium segment, I think Sony will not be able to make better than 3-4% margins without developing its ecosystem.
• Sony has managed to capture a real lead in the console based gaming segment over its key rival Microsoft and now is the time to capitalise on that.
• The first issue is that the user experience on PS4 outside of playing the games themselves is very poor. The XBox One knocks the socks off it in that category (see here).
• This must be addressed because Sony needs to build its ecosystem on its core strengths of gaming and media consumption.
• Using these assets it needs to expand into other areas of Digital Life and make its devices work seamlessly together.
• This is all about software which historically has not been Sony’s strength.
• Sony’s devices are sleek and differentiated when it comes to hardware but unfortunately users don’t care that much anymore.
• What is needed is a rich, fun and easy to use user experience that is unique to Sony, seamless on every device it makes and where users want to hang out and explore.
• Into this it needs to add cool and fun Digital Life services that will create user loyalty and stickiness.
• If it can achieve this then users will once again clamour for Sony devices meaning that Sony can start putting its prices up and make some proper money.
• This is the only way I believe that the handset business will ever earn more than 3-4% EBIT margins.
• This is not impossible and Sony is actually in a much better position than many other contenders that are trying to do the same thing.
• Its lead in gaming (the most important Digital Life segment), its solid media assets and its full suite of consumer devices give it the assets to succeed.
• Whether it will or not is very uncertain but it seems that management are no longer taking success for granted.