September 23, 2002 4:00 AM PDT

Sony becoming a sleeper PC giant

Read more about Sony
Quick--who's the fastest-growing major PC maker in the world? If you guessed Dell, you're wrong.

Despite flopping in the PC market a few years ago, Japanese consumer-electronics giant Sony has finally stepped up to become one of the computer industry's big players.

The company's worldwide computer shipments grew faster than those of any other major brand in 2001, according to statistics from research firm Gartner Dataquest. And this year, shipments increased 23.7 percent in the second quarter, even as the market shrank by nearly a percentage point. With these gains, Sony has marched from its No. 12 spot in worldwide market share at the end of last year to No. 8 at the end of the second quarter.

"They're borrowing from several of the success strategies in the PC business," said Roger Kay, an analyst with research firm IDC. "They have a bit of the operational excellence of Dell, some of the gaga design of Apple and some of the total solutions idea from IBM--only targeted at the home retail market."

Long known for its TV sets and its Walkman portable music players--the latter so successful, the trademarked name entered the lexicon as a generic signifier like "Kleenex"--Sony promised to be a strong contender in the computer market. But even after a couple of years in the arena, the company limped behind more single-minded PC companies like Hewlett-Packard, IBM and Compaq Computer. Industry experts wondered if Sony's strategy to tie its PCs to its traditional products would sink the ship before producing results. But the numbers are coming around.

Shipments of Sony Vaio PCs into the U.S. retail market are up nearly threefold in the first six months of 2002 compared with the same period in 2000, the pinnacle year for PC shipments. Compared with the same period in 2001, Sony is up almost 42 percent--second only to Toshiba's 60 percent growth rate in U.S. retail--according to market tracker NPD Techworld.

And in handhelds, Sony has jumped up from 1.2 percent of the retail market in Oct. of 2000 to second in market share, to Palm, with about 22 percent of the market as of June 2002.

Competitors would quickly point out that Sony's growth has been over a limited base of customers, but analysts say the company's expansion is in the right areas when it comes to generating revenue.

"They have a bit of the operational excellence of Dell, some of the gaga design of Apple and some of the total solutions idea from IBM."
Roger Kay, IDC analyst
In the PC business, most of Sony's growth is in notebooks, which have higher margins than desktops. But even in desktops, the company has expanded from the high end into the midrange of the market. Some Sony models, in fact, are currently sold out, a rarity in a market where excess inventory has become normal.

In handhelds, meanwhile, the consumer-electronics giant is also beginning to expand down into the lower end of the business, offering more models of devices. It's likely, too, that the company will maintain its strength in the high end by releasing new models with fancy new features running atop the upcoming Palm OS 5.0.

Kay added that although PCs are the "glue" that connects many of Sony's technology devices, the company isn't dependent on one product line to be successful. It's also a major force in the digital camera and portable audio markets.

It also helps that Sony isn't being exposed to the slowdown in corporate spending as much as some of its competitors are, IDC analyst Alan Promisel said.

"Commercial IT spending is off, and while that drives most of the volume in the PC business, Sony is not in that space," Promisel said. "Dell and HP are hurt by the lack of IT spending...The consumer segment is still comparatively lively."

Sony has dipped its toe into the small- and medium-sized business market, but compared to large businesses, PC sales there are relatively steady.

Looking back
Sony's current standings in the PC and handheld markets are a far cry from where they started out. Initial efforts fell flat on their face because of lackluster design and high prices, not the sort of start expected from a company whose moniker is among the top 25 most-recognizable brand-names in the world, according to research firm Interbrand.

Sony entered the PC market in 1996 and two years later was still lagging rivals. Executives said it was all part of a slow-burn plan to merge its PC business with it consumer-electronics and entertainment efforts.

"They had to innovate after the first Clie, which was a dud."
Kevin Burden, IDC analyst
"Our product concentration is not necessarily on speeds and feeds," Mark Hanson, a Sony vice president of marketing for the Vaio line, said recently. "Our original intent was to figure out how the PC could help consumer-electronics usage, and (then) bridge them. And the technology is there where we can do what many can't. We're now better able to show why we got into the PC business."

At the time, however, analysts and others attributed the lack of growth to offbeat designs and high prices.

Sony finally made some headway in the PC market with the introduction of its ultraslim Vaio 505 notebook, which was one of the first ultrathin notebooks under $2,000. After picking up significant share in the notebook market, Sony adopted some of the design ideas and applied them to its desktop line.

"In recognition of margins and competition, it took Sony a while to make their case viable," NPDTechworld analyst Stephen Baker said. "The notebook space was identified as the first place where they could make a mark...they aren't as significant in desktops, where margins are lower and it's harder to differentiate themselves."

The company has tried to stand out as a technology leader in PCs, being one of the first to offer a combination DVD-ROM and CD-RW drive for movie playback and CD ripping on its notebooks as well as digital video recording capabilities on its desktops.

"They're the ones looking to expand their tentacles into more consumer markets," Baker said. "And they're likely to butt heads somewhere" with HP, who is trying a similar strategy.

HP spokesman Roger Frizzell acknowledged that the two are battling it out in the retail market but said HP has the advantage of being able to attract a broader range of customers.

"We can address the needs of more customers, because we have a broader line of PCs," Frizzell said. HP has PC models for consumers to large businesses, so it can market its printers, cameras and other peripherals to a bigger base.

Looking forward
Hanson said that the next step for Sony in the PC market is to get consumers to use the PC as a media access server that can share files with televisions and receivers. Sony is expected to announce news PCs at the end of the month.

The company is also expected to bring more of its Internet-enabled products to the United States as broadband Internet subscriptions increase. Such products are now primarily available only in Japan, where broadband acceptance is higher.

Last week, Sony revealed a Net-connected digital video recorder in its "Cocoon" line. An alternative to the PC for accessing the Internet, the device stores shows on a hard drive. Also last week, the company hosted its own trade show, called Dream World 2002, where it demonstrated upcoming products.

Of course, the company has had its share of failed PC products. Sony was late to crash the Internet-appliance market, with its eVilla, and then continued to hype it even as competitors abandoned rival products. Sony eventually brought the ax down on the gadget.

Sony also put its Vaio Slimtop Pen tablet to rest earlier this year. The Slimtop came with a touch screen that allowed people to draw images directly onto the monitor and run Windows applications with a stylus. Although it consistently drew oohs and aahs for its sleek design and the software that let people paint color pictures directly on a flat-panel monitor, the high cost associated with its touch screen hampered sales.

In handhelds, though Sony has maintained its reputation as a technology leader, its efforts haven't always translated to sales. The company distinguished itself with its Clie line by becoming the first manufacturer to build digital audio players, high-resolution color screens and digital cameras into PDAs (personal digital assistants).

But the first Clie was released to a loud thud. Starting with its second-generation device, though, and continuing with successive devices, Sony stuck to its entertainment focus and has quickly and steadily gained market share, pushing the competitive bar higher in the process.

"They had to innovate after the first Clie, which was a dud," IDC analyst Kevin Burden said. "Now, no one else is pushing further than Sony. You have to almost credit Sony for pulling Palm upstream, functionally speaking."

News.com's Michael Kanellos contributed to this report.

 

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