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Sony's TV Star in the Spotlight

Posted on: Friday, 28 April 2006, 06:00 CDT

For a company that seemed on the verge of becoming an also-ran in TVs, Sony is staging one heck of a comeback. In just seven months, Sony's Bravia flat-panel TVs have snagged a spot among the globe's hottest-sellers. Demand was so strong last year that for a three month spell the company managed to outsell every other manufacturer in the $25 billion industry.

That performance has many analysts predicting Sony's Apr. 27 full-year earnings report won't turn out as badly as the company has let on. By Sony's own reckoning, the TV unit lost a whopping $1 billion for the year up to March. With the expected loss, Sony (SNE) has said operating earnings for the entire company will come in at $870 million, down 13.8% from the previous year. But with the recovery in the TV business, Goldman Sachs (GS) reckons the loss will be smaller -- enough to bump operating earnings up to $1.2 billion. Other analysts say earnings could go even higher.

Judging from the 20% rise in Sony's stock so far this year, investors appear to agree with the optimists. Turning the tide in TV sales is crucial, because they now account for nearly a fifth of Sony's overall revenues. "We expect TVs to be profitable" as early as this fall, says Katsumi Ihara, executive vice-president in charge of TVs.

TOP PRIORITY. It's all part of Chief Executive Howard Stringer's plan to refashion Sony's core consumer-electronics unit for the digital era. The division brings in more than 70% of the company's sales, but it hasn't been profitable for the past two years because of a dearth of must-have products and an inability to create links to its vast library of movies, music, and other content. JP Morgan (JPM) analyst Hiroshi Takada estimates the electronics unit lost around $350 million in the year to March, despite the improving TV sales.

For Sony as a whole, profit margins were below 2% -- miniscule when compared to the 14% enjoyed by Korea's Samsung Electronics in 2005 [though Samsung's earnings got a mega-boost from its chip business].

Whipping Sony's TV division into shape has been a top priority for Stringer. Though Sony's Trinitron models dominated the industry for decades, the company was slower than rivals in developing flat-panel technologies, a sector The NPD Group says doubled last year, to $4.2 billion. That forced Sony, which prides itself on in-house innovation, to buy expensive panels from others, and contributed to mounting TV losses.

GROWING COMPETITION. Now, Stringer has shut old picture-tube TV plants in the U.S. and Britain, targeted flat-panel TVs at key consumer markets, and expanded a panel-making joint venture with Samsung. Spinning off non-core retail businesses and halting projects with little financial return has helped fund the reforms.

Still, Stringer will have to show that Sony can add technologies to differentiate its TVs from rival brands while cutting production costs. That's a challenge for any TV maker, since competition is pushing prices down by some 30% annually as Taiwanese manufacturers roll out cut-rate models. And with other TV makers such as Sharp, Hitachi (HIT), Matsushita Electric Industrial (MC), and LG.Philips sprinting to build plants around the globe, the market is bound to get more crowded.

Stringer's strategy depends largely on selling top-end, super-clear, high-definition TVs to the masses. He has narrowed Sony's offering to two types: rear-projection TVs for screens 50 in. and larger, and LCD TVs for the 32 in. to 46 in. range.

STRINGER STRATEGY. Rear-projection TVs aren't as svelte as competing sets using plasma or LCD panels. But the technology allows Sony to make bigger sets at a more competitive cost. Its 60 in. high-definition rear projection model, for instance, goes for around $3,000 in the U.S., roughly the price of a comparable 50 in. plasma display set from Panasonic. "Rear-projection technologies will undoubtedly dominate from 50 in. onward," says Paul O'Donovan, principal research analyst at Gartner in London. "The incremental cost of making them bigger is much less and profit margins remain higher."

The Sony comeback story, though, revolves around LCDs. S-LCD, the 50-50 venture with Samsung started in 2004, has given Sony a reliable supply of panels and helped it shave as much as 20% off TV production costs, according to Standard & Poor's analyst John Yang. Sony won't say what effect the tie-up has on LCD TV margins.

Stringer deserves a lot of credit for the improving fortunes of the TV business. For the U.S. launch of the first TVs with panels from S-LCD last August, Stringer opted for a new brand name -- Bravia. He also set prices to undercut rivals and spent loads of cash on an ad blitz promoting the set's high picture quality. The new models were an overnight hit. In the final quarter of 2005, Sony's LCD TVs vaulted to the world's No. 1 spot, with 14% of the market, according to market researcher NPD. Says Sony's Ihara: "The robust sales we saw during the yearend holiday season are continuing."

STRAINED RELATIONS?. Collaborating with Samsung has helped both companies. "We couldn't have [improved our LCD screens] so quickly without Sony," says Cho Yeong Duk, a Samsung vice-president who oversees planning for the company's LCD panel business. More evidence that the venture is booming: The companies in April announced that they plan to spend $2.2 billion expanding one LCD factory and building a new plant.

One worry for Sony is that Samsung has become a major competitor. So far, the two have maintained their friendly ties even as they go head to head in the U.S. and Europe. But as the importance of TVs grows for both partners, relations could get strained. "Clearly, Sony and Samsung are developing a pretty strong rivalry across many consumer-electronics categories, and TVs are among the fiercest," says Ross Rubin, director of industry analysis at The NPD Group.

Stringer knows fixing the TV business would let Sony spend on new technologies. One possibility is equipping TVs with the superfast multimedia Cell chip, which Sony developed jointly with IBM (IBM) and Toshiba (TOSBS). That might let TVs handle wireless video streaming, Web browsing, and data exchanges with electronics around the home. Another involves commercializing organic electro-luminescent TVs, which would be thinner, lighter, and less costly to make than current technologies.

UNLOCK INNOVATION. Those initiatives, though, may have to wait until the TV unit's operating profits rebound. In the meantime, Sony execs say they can cut costs by simplifying production and making S-LCD more efficient.

The turnaround is still a work in progress. But Stringer wins kudos for tackling TV reforms first, and sorting out the unit's biggest problems so quickly. Now he must find a way to unlock the innovation that Sony needs for lasting growth.

Source: Business Week

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