Sony cuts costs, but not brand problems

Sony announced Tuesday it's cutting 5 percent of its full-time workforce, in addition to a sizable chunk of contractors, and delaying investment in some factories. It's all part of the Japanese electronics giant's plan to save money amid the troubled global economic environment.

The total annual savings will eventually amount to $1.1 billion by early 2010, the company says. But will it be enough? Sony's current struggles are well known, and it's not clear that cutting just 16,000 positions and a few factories is going to get the unwieldy behemoth back on track.

The company is huge, and it has had trouble finding cohesion among its brands and products. And with increased competition among all product categories, the Sony name just isn't the same as it was even five years ago.

"Years ago they were able to charge a price premium over other brands, but now, with strength of Samsung and others, it's harder for them to charge that premium," said Rick Giusto, vice president of IDC's consumer, new media, and computing analysis. "There's heightened competition within all consumer electronics segments."

Sony's size and reach into almost every category of electronics isn't its advantage anymore. It's simultaneously being forced to figure out how to compete with strong competitors in every category: mobile phones, TVs, cameras, Blu-ray players, video consoles, portable music players, laptops, and more.

Sony had always been able to charge more for its brand name because its quality surpassed that of competitors like Samsung. That's just not the case anymore, as others have proved their mettle as makers of quality products. It's Samsung, the market leader in televisions, that determines TV pricing now. So if Samsung lowers its prices, Sony is forced to respond.

And it's not going to get easier. The current economic crisis will only intensify the battle for customers among all the big names in electronics.

"There's going to be hyper competition within different (consumer electronics) segments through the Christmas holidays and into next year," said Giusto. "We're going to see price cuts because people are going to try to stimulate demand...That's just going to continue."

But the announced restructuring doesn't directly address this. Here's what Sony plans to do:

It will outsource the manufacturing of a planned increase in CMOS image sensors for mobile phones, and delay increasing its investment in a liquid crystal display TV plant in Slovakia. Overall, the plan includes eventually closing 5 or 6 more of its 57 worldwide manufacturing sites.

Delaying investment--as opposed to cutting back--likely won't hurt Sony's LCD business, according to Paul Gagnon, who monitors the TV industry for market research firm DisplaySearch.

Sony's brand image is changing as competitors like Samsung are able to dictate TV market pricing.

(Credit: CNET)

"Sony (already) has a lot of capacity (to build TVs)," he said. "In a down market, delaying investment is not a bad idea. Particularly because there are concerns about how much incremental growth you can get in developed regions (like North America and Europe) and how quickly new markets might grow in India and China."

Additionally, 8,000 full-time and 8,000 contract employees will be eliminated by March of 2010. The company will be shutting down an LCD TV manufacturing plant employing 560 in Westmoreland, Penn., and a video tape plant in Dax, France, which currently employees 300. Beyond that, the company is being close-lipped about which business units and regions will be most affected by the restructuring plan.

While that seems like a lot of large numbers, some say it's probably not enough. The final cost cuts aren't due until early 2010, according to Sony's statement, and that "appears too slow," according to J.P. Morgan analyst Yoshiharu Izumi. He said Sony's priorities as far as which businesses will see the cuts and when isn't clear enough. Izumi said in a research note he personally hoped to see the most attention paid to the TV business.

Though Sony has made big strides in getting its TV business back on track toward profitability, it is still falling short. The company has invested heavily in LCD panel technology, but has still had to contend with rapidly declining prices, competition with budget brands, and reduced demand as the market becomes saturated with flat-panel sets.

It found success creating a lower-end line of TVs specifically for discount chains Wal-Mart Stores and Target. It meant going away from Sony's traditional premium brand image, but it helped drive up the company's market share in TVs again, where it remains No. 2 behind Samsung. It looks like a good move now, with the U.S. in a recession, and consumers who will be more conservative with their spending on TVs, Blu-ray players, and cameras.

While Sony struggles to find the answers to its brand woes, it's far from the only electronics maker struggling right now. Fellow Japanese giant Panasonic said last month its yearly profits will take a hit, and Samsung on Monday said its profits, sales, and capital expenditures would fall. LCD panel makers in Taiwan and Korea have also announced that they plan to scale back or delay investment.

"2009 is a year when a lot of CE makers are going to scale back investments," said Giusto.

So it could be a more level playing field the company is competing on in that regard. But Giusto said it's important that Sony not scale back too much.

"As long as they don't do something like exit the low end, because that's where a lot of the volume is going to be," he said.

[MadLyb]

When you are a company built on being a diferentiator, you cannot fix failings in that area by trying to be a cost leader. For a couple decades, I almost never bought Sony products based on price, but on the quality and the capabilities that were usually way ahead of their competitors.

Then, they became arrogant and an entertainment company (Not sure which is worse), and we got proprietary solutions that were usually dripping with various forms of DRM and as they outsourced manufacturing, the quality started slipping.

The result? I rarely look at Sony for any solution today. The only exception will probably be Blu-ray, but then they bought that win.

[WillSinn]

The problem for Sony is not that they don't have unique products that perform well, and its not just that they charge a price premium for the products that they make. It's that time and time again the don't stand behind the products that they do sell when they fail AND their commitment to proprietary formats that usually end up failing (minidisc, betamax, memory stick) and cost more than their competitors.
I was a diehard Sony fan until my 2nd PS2 went out at 3 months and 2 weeks, Sonys response to me, someone who had purchased 800-900 dollars worth of PS2 equipment in the first month and a half it was released, was "Sorry Charlie".
My response back to them is unprintable, and to this day 7 years later, I haven't purchased a single Sony item, and will never do so again.

[biznatch11]

Totally agree with the proprietary format stuff. For example, I won't even consider a Sony digital camera because they use Memory Sticks. I want a format (like SD) that can be used in any digital device I have, and that I have many options with (brands and prices) when I want to buy new ones.

[loose_screw]

AMEN brother!

[softwarepro]

yes memory stick will stop me from buying or looking into that brand (I have 4 years old camcorder though..first and last purchase)

I mean look at their LCD TV price double compare to other brands (like Philips, Samsung or Panasonic not bad names) with comparable features (in most cased same features)

I like Samsung for everything

[JFDMit]

Sony are ruled by paranoia. On the one hand, they're a consumer electronics company with an interest in producing products that enable people to consume digital media in as many different ways as possible. On the other hand, they're an "entertainment" company, determined to squeeze the last drop of income out of every bit they own. In Sony's hands, these two goals have been incompatible.

For me, the clearest example of this incompatibility came a few years back, when I tried to rip a Sony Music CD to my Sony VAIO laptop, using Sony MagicGate music management/DRM software, and then copy it to a Sony Memory Stick, via the VAIO's built-in Memory Stick slot, to use in my Sony Memory Stick Walkman. Even though every product in the chain was made by Sony, they simply wouldn't work together. The specific reason in that case was because the Memory Stick drive in the Walkman required MagicGate DRM, and while the VAIO could happily rip CDs with the same MagicGate DRM embedded, the VAIO's Memory Stick slot was unfortunately not MagicGate compatible, so that was that.

The larger reason is because Sony acts like its own biggest competitor, to the extent that its own products sometimes find it impossible to work together.

[drbyte]

It used to be they had products that mattered. Now they don't, and it's not reflected in their pricing. I'm another who skips their cameras, tvs and mp3 players. Too expensive, and not compatible with anything without jumping thru hoops.

I've had great luck with the ps1 and ps2 game systems though. No problems at all. They always work. The memory cards and controllers are 'priced to screw', but the games play great and I don't have to worry about firmware updates (it's like running a microsoft OS) and game updates like I see my friends do with their ps3's.

Plus even when money times were better, I couldn't warrant spending $299 or $399 for a ps3 game system, $60 per game and purchasing a $2500 Sony TV to play it on. Thats not 'fun' to me anymore. That's serious cash just for playing games. Plus Sony makes you go out and buy the hdmi cable you needed to see your 'ooohhh ahhhh' ps3 in all its hi def glory. That burned a couple of my freinds up with their ps3 purchases.

Sony better rethink how they approach the consumer. We have way to many choices now when it comes to electronic goods.

[loose_screw]

I think everyone stated excellent points. Also, consumers are smarter now, and price is increasingly becoming more important as electronics become commodities, so Sony can no longer hang on the thinking that their brand name means anything (it doesn't). Whenever I see a movie with Sony products plastered all over it, I chuckle a little because I think those characters in the movie are fools for buying Sony, and that kind of brand loyalty doesn't exist in real life for Sony. Apple yes, Sony no.

I don't know if Sony will ever learn either. They could be in Apple's shoes right now with mp3 players, but they went with minidisc and DRM, and the rest is history. Until Sony ditches the media company, there is no hope IMO.

Likewise, if Samsung or other electronics manufacturer buys a movie/music company, they will probably suffer the same fate.

[bajadesperado]

I had no idea Sony was in such bad stead with the buying public.I've had many Sony products and they all performed well so noidea on their customer service and policy either. Sony really needs to belly up to the table and put their company back in customer service mode before they put some new products out there in the marketplace. I agree that the consumer is more knowledgeable and most can afford any brand at any price but the customer service and product quality better match the $$ they put on it.
Sony has plenty of movers and shakers in their competition circle(CE ) and now we do shop for a bargain with lots of features and expect excellent customer service when we buy a product and it better perform and not break and we better not hear another foreign cutomer service rep that we can't understand. Just fix the problem! we paid for the product and customer service is part of that. prepaid!Hmmmmmm!