Thursday, November 15, 2012


This has been a long time in coming:
Hong Kong, November 09, 2012 -- Moody's Investors Service has downgraded the issuer and long-term senior unsecured bond ratings of Sony Corporation to Baa3 from Baa2.

At the same time, Moody's has downgraded the short-term ratings of Sony and its supported subsidiary, Sony Global Treasury Services Plc., to Prime-3 from Prime-2.

The ratings outlook is negative...

Operating losses in its TV business -- which accounted for 11% of non-financial services revenue in 1H2012 -- are likely to continue pressuring overall earnings. The company expects an operating loss of JPY80 billion in FYE03/2013 and then break-even in FYE03/2014. The level of operating losses dropped in 1H2012 on a year-over-year basis, due largely to cost reductions. Sony has mentioned that such reductions have exceeded its target.

However, expected weak sales in 2H2012 and 2013, as well as continued fierce competition, are likely to make it challenging for Sony to reduce -- according to targets -- the operating loss in TVs. In particular, we expect large losses in TVs to continue in FYE03/2014, although the level of these losses will decline to some extent from that in FYE03/2013 due to cost cutting measures.

At the same time, operating profit from Sony's digital imaging products and games businesses declined about 60% in 1H2012 on a year-over-year basis. The earnings from these products are now expected to decline more rapidly than expected as the growing use of smartphones increasingly cannibalizes the market for compact digital cameras and portable game consoles.

These segments accounted for 16% of non-financial services revenue in 1H2012 and have helped to a large extent offset the large operating losses in TVs.

Baa3 is the lowest investment grade level for a bond rating. Below that, it's considered a junk bond. Junk bonds can't be purchased by banks, generally, because they're considered far more speculative than investment grade. As a bond issuer, the lower your bond rating, the higher the interest rate you must offer to attract investors.

That gets expensive.

Sony's in big trouble. They're not alone--so is Sharp and Panasonic--but Sony is the most suprising, given their place in the history of consumer electronics, and their position as apex predator only a decade ago.

Jake Adelstein, who you may remember as the author of Tokyo Vice, a fascinating look at the Yakuza in Japan, recently published an article about Sony's decline titled The Ghosts of Sony, co-authored by Nathalie-Kyoko Stucky. This aticle appears to have originally been written in Japanese, then translated to English, so you may notice an occasional bit of awkwardness, but it's an excellent read.

Three main themes emerge from the article. One is this comment from the owners of a "mom and pop" electronics store in Tokyo:
There are Sony emblazoned product stands, in capital letters saying Sony, and placards in the store—but they are now for hanging up cords or other products that don’t include the Sony brand. “We do not have Sony products in our shop anymore,” say the owner apologetically.

“Many electronics shops in town do not sell Sony nowadays because Sony itself has pretty much stopped placing products in tiny retail shops like ours.”

The second theme is identification of the villain: Nobuyuki Idei, who was CEO from 1999-2005. Why is he considered the villain? Details (from a Sony mid-level manager):
“Idei decided to streamline the company and do massive restructuring. When we say, ‘restructure’ in Japanese—we really mean get rid of people. He put together an early retirement plan and strongly encouraged people to use it. Well, that didn’t generate a lot of good feelings. When a company starts promoting early retirement, most people take that as a sign to get out while they still can. And many did. Maybe the idea was that by getting rid of the middle aged and older employees they’d encourage innovation and bring in some young blood. The effect was more like shooting yourself in the foot.”

Instead of fostering innovation, this wound up (ironically) crippling it, because the younger workers had never been innovators to begin with--it was the layer Sony excised that had developed new products and driven the company forward.

The third theme, and this is, to me, the most interesting by far: the employees Sony "restructured" out of the company, the creative forces behind the company's heyday, kept working.

They were just working for other companies now--particularly in Korea:
“What was even worse is that during this period, Korea and Taiwan immediately welcome the exiting Sony techies with open arms. It was better than industrial espionage—Samsung could openly ‘buy’ the technology that Sony had developed simply by rehiring their best and brightest.”

If you're wondering about Samsung's meteoric ascent in the last decade, that seems like a reasonable place to start. And now Samsung is eating Sony alive, particularly in the television market.

Korean companies (fairly or unfairly) have a reputation for being high-level, ruthless practitioners of industrial espionage. In this case, though, all they did was hire people Sony no longer wanted. The degree of irony is positively Shakespearean.

I've said this more than once in the last five years, but I don't see a way out of this collapsing orbit for Sony. They've restructured (again), but nothing can hide the fact that Sony is a highly profitable Financial Services division with seven other divisions that are rarely profitable.

PS4? Why? The PS3 (and now Vita) are massive money losers. Sony found a way to lose money on the PS3 when the console market still seemed to have limitless potential. Now we know better, and mobile devices like smartphones and tablets are killing the dedicated gaming market.

In sum: it's grim.

Site Meter