SAVE   |   EMAIL   |   PRINT   |   RSS  
Sony: World on a Stringer
Can a new CEO lead a comeback at the Japanese consumer electronics giant?
September 8, 2005: 2:18 PM EDT
By Paul R. La Monica, CNN/Money senior writer

Sign up for the Tech Biz e-mail newsletter
Hopes are high for Sony's newest game console, the PlayStation 3. It is due out in 2006.
Hopes are high for Sony's newest game console, the PlayStation 3. It is due out in 2006.
Howard Stringer is the first non-Japanese chairman and CEO in Sony's history.
Howard Stringer is the first non-Japanese chairman and CEO in Sony's history.
Shares of Sony rallied after the company named Stringer as chairman and CEO in March but the stock has pulled back since.
Shares of Sony rallied after the company named Stringer as chairman and CEO in March but the stock has pulled back since.

NEW YORK (CNN/Money) - It's been about six months since Sony did the unthinkable and tapped a non-Japanese executive to lead it.

But so far, new chairman and CEO Howard Stringer, a British-born U.S. citizen, has not had a fun couple of months.

The company's movie studio has endured, like the rest of Hollywood, a major box office slump. But it was worse for Sony since it didn't have any notable hits this summer as "Bewitched" and "Stealth" both flopped.

The company's other major media unit -- a music partnership with BMG -- lost money in the second quarter on declining sales.

Some also argue that Sony's bread and butter electronics business is in decline. Rivals like Panasonic, Sharp and Matsushita have caught up to Sony in the television business. Sony's once ubiquitous Walkman has been supplanted by Apple's iPod. Plus, Sony will have to contend with Microsoft's Xbox 360, which is hitting the market before its new PlayStation 3, due out in 2006.

With all this in mind, it's no wonder that Sony's New York Stock Exchange listed American Depositary Receipts (ADRs) have fallen nearly 15 percent since Sony (Research) announced in March that Stringer was taking over. So is there any hope for this giant to make a comeback?

Is Sony Japanese for HP?

Despite what the stock has done lately, there is hope on Wall Street.

Mark Stahlman, an analyst with Caris & Co, likes Sony's chances for a recovery under Stringer. In some respects, he said that Stringer will have opportunities to restructure Sony that are similar to what Mark Hurd is doing at Hewlett-Packard (Research). And that could boost profits as well as return the company to its roots as an innovator.

"Sony is fundamentally an engineering company that has overgrown over the course of many years with lots of non-engineering management," Stahlman said. "It should be easy to eliminate extra layers of bureaucracy. The closest parallel would be HP under Carly Fiorina."

Stahlman is also optimistic that Sony will return to glory in the consumer-electronics business as the transition to high-definition forms of media, most notably HD television sets, kicks into gear.

High-def TVs are starting to become more affordable and that should help Sony during this holiday season and in 2006, Stahlman said, since it will have several HD TV offerings on the market. In addition, the company's PlayStation3 console will be HD-compatible.

He added that Sony's new willingness to build products that incorporate other standards is a good sign as well. Sony had traditionally been a company that stubbornly stuck with proprietary technology.

But the company's newest digital Walkman players, an attempt to compete with the iPod, will be compatible with more than just Sony's own music-file formats, Stahlman noted.

Sony could lead the age of HD

David Liebowitz, an analyst with Burnham Securities, said Sony's biggest problem is not that it is playing catch-up but that there is just a lot of uncertainty about who will wind up leading the consumer-electronics market in the HD era.

"The situation at Sony is evolving and at this juncture it's premature to issue any sort of scorecard," Liebowitz said. "The digital revolution is in its relative infancy."

But because of the many changes taking place in digital entertainment, such as the upcoming release of Blu-ray DVDs, a format backed by Sony that can store more movies and data than other types of DVDs, Sony will have a fresh chance to re-establish itself as a leader.

"The Sony brand remains very powerful. Competitors have managed to hammer away but the brand is still well-known and stands for high quality. They've got to become the company that they used to be, which was highly innovative," said Wendell Perkins, manager of the JohnsonFamily Large Cap Value and JohnsonFamily International Value funds, which both own Sony.

Perkins said he added to his position in Sony after Stringer was named CEO, adding that even though he thinks the company still has a lot to prove, he believes that Sony's prospects for an earnings turnaround makes the stock a compelling buy. He said that Sony is trading at about 9 times his 2005 cash flow estimates, a bargain compared to other tech and media stocks.

Worst should be behind Sony

And speaking of media, what about the problems in the entertainment business? Stahlman said he's not concerned since movies are still a small part of Sony's overall sales (about 13 percent in the second quarter) and it's a highly unpredictable business. Stahlman thinks investors need to focus on the electronics area.

"The importance of studios is exaggerated. Stringer has been clear that Sony is fundamentally a hardware company," said Stahlman.

Still, even though Sony does generate the majority of its sales from gadgets as opposed to content, Liebowitz argued that a box office smash in the next year wouldn't exactly be a bad thing since it is the type of event that can intrigue Wall Street.

"A megahit on the entertainment side might go a long way towards improving investors' perceptions of Sony," said Liebowitz.

To that end, Sony appears to have a sure-fire blockbuster on its hands in 2006 when the adaptation of the best-selling novel "The Da Vinci Code" comes out.

So even though the first few months on the job haven't exactly been a blast for Stringer, the best may be yet to come for him and Sony investors.

For more personal technology news, click here.

For more about Apple's new iTunes phone, click here.

Analysts quoted in this story do not own shares of Sony and their firms do not have banking relationships with the company.

Sign up to receive the Tech Investor column by e-mail.

Plus, see more tech commentary and get the latest tech news.  Top of page

Tech Biz
Written by: Paul R. La Monica
Manage alerts | What is this?