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Can Sony rebound?
It's not too late for Sony to profit in the digital music player market, but it needs realignment.
October 18, 2004: 2:26 PM EDT
By Eric Hellweg, CNN/Money contributing columnist

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BOSTON (CNN/Money) - For Sony, it was a rare moment of candor.

Stan Glasgow, president of consumer sales at Sony Electronics, told analysts and the press last week, "Our performance to date has been less than good. I think we fell asleep for a while. Now we're awake."

The statement delivered the shock that comes only when an executive finally confirms what has been completely obvious to everyone else.

For Sony investors -- particularly those who bought into the company years ago based on its great track record of pushing device innovation and design -- the sleeping spell that Glasgow references feels positively Rip Van Winkle-like.

Playing catch-up

The company has been without a big hit in the music device category for several years, and most of its product releases going back almost eight years have been failures. Sony pretty much created the music device category with its culture-shifting Walkman, which, of course, makes its recent track record an embarrassment.

Digital music? Sony's been playing catch-up with me-too products when it has been able to ship any at all. According to IDC, the digital music player market will hit $4.1 billion in sales this year and grow to $11.1 billion by 2008.

Sony's place in the market is abysmal: According to NPD Group, it is eighth in overall market share for digital music players, with less than 1 percent. That's a big reason Sony finds its stock currently trading near its 52-week low.

The digital music player market is still in its early stages, so Apple's dominance is not guaranteed. But the distance between Apple and its competitors is growing. Which also means that Sony's opportunity to steal share is shrinking.

Apple's success -- and attendant profits -- with the iPod shows that strong performance in digital music players can add a nice chunk of top- and bottom-line growth to a company's earnings.

In its fiscal fourth-quarter earnings report last week, Apple said iPod sales contributed 23 percent of revenue and it added that the device was a key factor in the company's more than doubling its quarterly profit.

Embrace the MP3

Sony's admission of failure with its digital music player is a good start toward righting itself, but obviously it won't be enough. In order to become a contender in the digital music player market, Sony must embrace the MP3 format.

I know, I know, you're saying Apple doesn't embrace it. But Apple created the legitimate digital music market and had the luxury of dictating its terms. Sony needs to remember that far more people still use MP3 than use Apple's format -- 72 percent of people's digital music collection is in MP3 format.

Currently, Sony's player is based on ATRAC 3, the company's proprietary digital rights management software. Sony's insistence on supporting only this format has single-handedly made its player and its online digital music store a nonstarter.

"Sony has always wanted to go its own way," says Stephen Baker, an analyst with NPD Group. "Sony needs interoperability. It might not be the best way to put it, but Sony needs to think differently." By not embracing MP3, Sony immediately put its player at a disadvantage.

Sunnier days ahead?

So why would Sony make this mistake? At the same meeting, Glasgow hit the nail on the head: "Maybe part of [the problem] was being affiliated with a music company."

The company listened to the music department's concerns about piracy and ignored the market's demand for interoperability. The company and its investors are now paying the price.

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"The lack of MP3 support is the primary reason Sony has stumbled," says Susan Kevorkian, an analyst with IDC. "It stymied them in the market."

But there's good news ahead. Glasgow promised that Sony's new digital music products appearing next summer will support the MP3 format, and that will go a long way toward helping the company gain some market share and perhaps return to its storied position as a leader in portable electronics.

The question investors need to ask is this: Will next summer be too late?


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Market indexes are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer Morningstar: © 2014 Morningstar, Inc. All Rights Reserved. Disclaimer The Dow Jones IndexesSM are proprietary to and distributed by Dow Jones & Company, Inc. and have been licensed for use. All content of the Dow Jones IndexesSM © 2014 is proprietary to Dow Jones & Company, Inc. Chicago Mercantile Association. The market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved. FactSet Research Systems Inc. 2014. All rights reserved. Most stock quote data provided by BATS.