After navigating some rough seas, Sony's Electronics division has been starting to right the ship.
Over the past year, the company has been forced to rethink its product lineup and catch up to competitors in some cases, but now the Japanese electronics giant's U.S. division is looking ahead and betting big on the future of flat-panel televisions and high-definition media.
CNET News.com sat down with the head of Sony Electronics' U.S. operation, Stan Glasgow, to talk OLED (organic light-emitting diodes) TVs, Blu-ray Disc, the importance of the PlayStation 3, consumer electronics, and the dwindling margins for manufacturers and retailers on notebook PCs.
During our chat, Glasgow made it clear that Sony is only focused on TVs when it comes to the impossibly thin OLED technology and that soon the company's 3mm-thin TV will be even thinner. And, though the company just won a long and drawn out format war with HD DVD, Glasgow spoke openly about the limits of Blu-ray and what the medium still lacks. Plus, he sounds pretty high on the mini-notebook concept, even if he won't admit the company is developing a product yet.
Stan Glasgow, president of Sony Electronics USA
(Credit: Erica Ogg/CNET News.com)The following is an edited and condensed version of the interview.
Q: You have an 11-inch OLED and said you'd be putting $200-plus million into the next stage of investment. How big are we talking here in terms of screen sizes?
Glasgow: In the short term, which is a couple of years--I'm not going to be more definitive than that--we have targeted a 27-inch. We've showed it as CES, we've targeted the initial investment, and that's what we're looking at in the short term. Certainly in the longer term we'd like them to be the same size as LCD. We'd like them to be 52 inch, 46 inch, 36 inch...it's just a matter of time.
What about affordability? How long until these are affordable for the mainstream consumer?
Glasgow: It's going to be years and years until price points come down to where they're anywhere close to LCD. In the not-too-distant future, you'll have a choice in LCD at this size, or you can buy an OLED at the same size at a premium. I almost see it as a potential--and I don't know this, nobody knows the answer--I almost see this as the upper end of flat-panel television.
We can continue to make it thinner. It's 3 millimeters now, but it can get thinner. Eventually it's printable on a plastic substrate that can bend. But I don't think it's going to take many years to get to that level.
What about applications in other devices? I know Samsung's talking about monitors next year.
Glasgow: We are focused on TVs. Our interest is strictly television at this moment. I'm not saying that will never change, but at this moment that is the most complex area to go after. The bigger you make these, the more complicated they are. They're much simpler to make smaller. So it'd be easier to jump into cell phones, and other types of products, but that's not what we're interested in doing. We're interested in television as our major focus. Our engineering is focused there, and our investment is focused there.
Speaking of televisions, the experiment mentioned last week, with Hancock coming out on the Bravia Wireless Internet Link, is that a one-off kind of thing? Or is there more in the works there?
Glasgow: I'd say maybe it's a step above an experiment. It's brand new what we're doing, how we're doing it. We're trying to excite people by giving them content. It's streaming so we don't have the content protection problems...(But) people's bandwidth across the country is very different.
Prototype OLED TVs
(Credit: Michael Kanellos/CNET News.com)The big problem in the United States is we don't have enough bandwidth to really drive content through the Internet and our pipes. Japan has much better pipes, so does Korea, so does Europe. So it's still experimental. we hope to do more in the future, and it's the first one. We're going to try and see what happens.
What about non-Sony content?
Glasgow: It's possible in the future. I'm not going to rule that out; I don't think anyone at Sony would rule that out. (But) we think it's a good first step.
Besides interactive menus feature on Blu-ray, is anyone doing anything that's a really creative use of the medium that we don't know about yet?
Glasgow: There's so much I have no idea about, because we're going to have to open this up as a social network--not just contributions of Sony and other Blu-ray partners. There are going to be contributions from actual customers.
If we had a dream (for) Blu-ray, it would be much more interactive than it is today: No. 1, where you could interface and change things as you want to see them on the screen. No. 2, you could socially interact with other people, it's connected through the Internet...but theoretically you and your friend could watch the same movie, and you could change themes, change endings, all sorts of strange things in the future. Some type of social interaction in the future....And yes, we'll have a lot more (Blu-ray) product out in the next couple of months.
Looking ahead, you're only just getting into Blu-ray. How do you see the future penetration of the format compared with DVD?
Glasgow: That's a good question. DVD took 10 years to really penetrate. We're now in the second year of Blu-ray. My guess is it will probably happen a little quicker in terms of penetration. The pricing is already coming down more quickly than DVD came down. I don't think it will take as long as 10 years, but I don't think it will penetrate to the same percentage because there's a couple of conflicting forces. Certainly, people that want the best picture are going to want it, without a doubt. People that are OK with upconverting DVD players, which is somewhere close to 600, 650, maybe 700 (lines of resolution)--that's not a bad picture either. So a lot of people may be happy with an upconverting DVD player. And (Blu-ray) may not turn over, it may not penetrate to the same extent, because (DVD) was such a big medium change from tape.
But I see it being the major format. It's won the war, that's done. Now it's a matter of: Can we provide an exceptional experience? Can we provide a social part? And can we involve the overall community in, let's say, designing applets and coming up with new things that we can't even think of today?
How critical is the PS3 to your overall electronics strategy here in the U.S.?
Glasgow: I think that there's strength in Sony...it's about having a gaming division and an electronics division, a pictures division, a music division--we've never worked together like we have now. Hancock is a great example. We're so well-connected together. Here we are doing an experiment with a film. We're going to promote the heck out of it through our electronic retailers. The gaming division is working on it at the same time. (The) music (division) is involved. We're operating as a very balanced group. So what I can say is, without the gaming, we wouldn't be as strong and as balanced as we are today. It adds a great deal.
What do you think the effect of these ultra-low-cost computers' popularity will continue to have on the notebook business?
Glasgow: The question is, how important is that in the United States and developing countries? We're doing a lot of research on what consumers want and don't want. And I think we'll get it figured out over time. But is it worthwhile to have a second notebook that starts up quickly, can only do e-mail and connect to the Internet, can't do spreadsheets, and other things you'd normally do? Those are the things we're testing right now.
But what do you think? Do we need fewer devices? Or more?
Glasgow: I'm not the normal consumer obviously. I do an awful lot of e-mail, I connect a lot. I'm not happy with the (BlackBerry-type devices), like this Sony Ericsson I carry around. I find it hard reading, I'm getting older, and it's getting too small. But I don't want to carry my notebook around because it takes awhile to start up. So something in between would be very cool, and it wouldn't bother me to have an extra PC around.
That's sort of what we're thinking in this country. I think the emerging countries are different...But in terms of the U.S., we have a lot of homework to do.
Now, last month there was a report that Quanta was making a mini-notebook for you guys. Is there any truth to that?
Glasgow: I can't say yes or no. I love all the rumors, though.
What do you think about this Blockbuster/Circuit City proposed tie-up as far as retail electronics goes? (Note: later that same day Blockbuster announced its plans to abandon its bid for Circuit City.)
Glasgow: It's fascinating what's happened in the last 10 years in electronics retail. The big have gotten much bigger and extremely successful, like a Best Buy. The smaller guys, regional retailers, have done extremely well. The middle-sized guys have gotten into a lot of trouble. It seems that the companies expanded too much, but haven't prepared the infrastructure properly to service customers.
It's also interesting to watch how well Wal-Mart and Target have been doing, in terms of building more consumer electronics...
Circuit City--we want a very strong No. 2 (electronics retailer). Best Buy is certainly the leading company. We would like Circuit City to be strong. How that gets done--it can be done in many different ways.
My hope is that either by themselves, or by merger, or by working with another company that they'll be stronger than they are today. We think the possibility is there, and we support them. A good, strong No. 2 player in consumer electronics is a positive thing for manufacturers. They've got 800 stores. There are not many companies that have 800 electronics stores.
Movie-rental chain Blockbuster announced Tuesday that it has withdrawn its $1 billion bid for consumer electronics chain Circuit City.
Chief Executive James Keyes blamed "market conditions" for the demise of the proposed deal, valued at one time at more than $1.3 billion.
"Based on market conditions and the completion of our initial due diligence process, we have determined that it is not in the best interest of Blockbuster's shareholders to proceed with an acquisition of Circuit City," Keyes said in a statement. "We continue to believe in the strategic merits of a consumer retail proposition that would bring media content and electronic devices together under one brand. We will pursue this strategy through our Blockbuster stores as a way to diversify the business and better serve the entertainment retail segment."
Blockbuster shares jumped nearly 12 percent, while Circuit City fell 14 percent in after-hours trading following the announcement.
Blockbuster made its offer for Circuit City in February but it was only made public in April.
A combination of the two companies would have added up to an $18 billion business, according to Blockbuster's calculations. Both companies have struggled in the past year--Circuit City posted a $200 million loss near the end of 2007, and Blockbuster has been fending off Netflix's success in online video rentals, as well as the growing threat of digital movie downloads.
If Circuit City gets sold anytime soon, it probably won't be to its chief suitor, Blockbuster, according to one of the electronics chain's most vocal investors.
In an interview with TWICE magazine Friday, Jim Wattles, owner of Wattles Capital Management, which owns 6.5 percent of Circuit City shares, said a sale could happen in the next two months. Wattles also said that Blockbuster, which bid roughly $1 billion for Circuit, isn't the only interested party, and in fact, the likely future buyer will be a private equity firm.
So, essentially, the company has options. It was revealed Friday morning that it has retained Goldman Sachs to look at other opportunities for acquisition besides Blockbuster. And another famously vocal shareholder, Carl Icahn, let it be known that if Blockbuster can't make good on its bid, he's interested.
Wattles comments to the magazine come a few weeks after Blockbuster's bid became public and he sent a letter to the retailer's chairman encouraging him to allow Blockbuster to at least kick the tires. Circuit City was, at the time, resisting allowing Blockbuster a look at its books, necessary to make a complete acquisition offer.
Not that he's soured on Blockbuster. On the contrary, he praised Blockbuster's hiring practices and employee training.
He's probably the only one. Sure, investors are unhappy, but the combination of two different retail companies with different cultures, products, and business models, is a disaster waiting to happen. In concept, it's great: selling hardware and content together. In execution? It's unclear how this could ever work.
Apple's iPod and iTunes combination is a tantalizing example of the possibilities a tie-up like this could represent. So is Amazon.com, with its Kindle e-book reader and e-books. But the difference, according to consumer electronics and retail analyst Stephen Baker, of the NPD Group, is that both of those occurred organically.
"Amazon and Apple did everything natively. It was an extension of what they were already doing," he said. "This is bolting pieces on."
Blockbuster sure sounds like it wants to buy Circuit City, but is it able to?
The financial advisers to Circuit City told company officials Wednesday that they think Blockbuster, which has offered $1 billion for the consumer electronics retailer, doesn't have the proper financing to make good on its bid, according to a Reuters report.
In a statement, the company said, "Circuit City awaits a viable financing structure that is predictably executable by Blockbuster given its current constraints of size and capital structure before it would be appropriate to allow further due diligence."
Blockbuster's CEO said earlier this week that his company would proceed with its takeover effort only if conditions are right and that it is loath to go through with a hostile bid. Circuit City has essentially stonewalled Blockbuster since the initial bid was made in February, not allowing easy access to its books.
Also Wednesday, a Circuit City investor who owns 6.5 percent of the company's stock sent a letter to Circuit City urging the company to open its books to its suitor and begin negotiations. The retailer responded quickly to Wattles Capital Management, issuing a statement reiterating its position that Blockbuster hasn't answered its questions regarding how it plans to finance a deal.
Blockbuster seemed to have no qualms about offering roughly $1 billion to buy up Circuit City stores, but it may not have the stomach for a protracted acquisition fight.
(Credit:
Blockbuster)
James Keyes, the CEO of video-rental giant Blockbuster, told The Wall Street Journal that his company would proceed with its takeover effort only if conditions are right and that it is loath to go through with a hostile bid. The threat of hostilities is looming, apparently, because Circuit City is not allowing easy access to its books.
"The heart of the matter is that we still need further facts," Keyes told the Journal (subscription required). "With those facts, we can choose whether to proceed or get back to our continued success."
Part of what's at issue is how Blockbuster will pay for the billion-dollar deal, and that has Circuit City saying "Not so fast, 'buster.'" One possible maneuver would have Blockbuster making use of Circuit City's own balance sheet to finance the offer, or using its own existing debt facility, possible asset sales, or belt-tightening, the Journal reports in a separate story, citing people familiar with the situation. There's also the Carl Icahn angle to factor in; the billionaire investor has indicated his support for the idea.
Circuit City has been stonewalling on opening up to Blockbuster for a while now. Blockbuster went public with its acquisition effort a week ago, a month after making its initial proposal to the electronics retailer--and that after having had talks about a prospective union dating back to December.
But however much sense the deal might have made early on in the Blockbuster boardroom, by and large it has most people scratching their heads. As CNET News.com's Jim Kerstetter wrote Monday:
Here's what I do know: You'd get a really big company with about $18 billion in combined sales. It would be saddled with a lot of real estate, and it could achieve some cost savings by shutting down some of those stores. But this isn't some roll-up strategy (like Larry Ellison is doing at Oracle) where costs can be quickly squeezed out and a bigger outfit can just roll in the cash. With this, you have two companies struggling to keep up with both more nimble (Netflix, Amazon.com) and much larger competitors (Best Buy, Wal-Mart, Comcast). It's a lousy place to be.
Sun Microsystems CEO Scott McNealy had a colorful assessment of the planned merger between Hewlett-Packard and Compaq: it's like two garbage trucks, he said, backing into each other in slow motion. (Beep, beep, beep...thunk.)
That brings me to Monday's rather stunning news that Blockbuster, the giant video chain that's seen better days, is trying to buy Circuit City, the giant consumer electronics retail chain that's also seen better days. The offer, which was made in February and is just now becoming public, is worth $6 to $8 per share--between $1 billion and $1.3 billion total. It's about a 54 percent premium above Circuit City's value before the news broke.
This hybrid garbage truck unveiled Monday has a brighter future than Blockbuster/Circuit City.
(Credit: Volvo Trucks)Now you can argue McNealy was way off base on the HP-Compaq merger, but he'd be spot on if he applied the double-garbage-truck metaphor to Blockbuster and Circuit City. As Peter Kafka at Silicon Alley Insider wrote earlier, it seems like they'd "rather be in a low-margin business than none at all."
In fairness, there is some logic to what they're trying to do. By combining a company that sells the entertainment with a company that sells the equipment that entertainment plays on, you have the mass-market equivalent of Apple's retail stores. If Blockbuster really is developing a set-top box that could allow movie downloads from another Blockbuster acquisition, Movielink, the Blockbuster/Circuit City hookup moves from the realm of the insane to the "nice idea if it were operating in a vacuum" category. At least that's the theory.
But here's the reality: Apple has around 200 retail stores and can meticulously control what is sold in them and how they are run. Apple retail employees go to a veritable boot camp before they're allowed to sell in Apple stores. By comparison, the combined Blockbuster and Circuit City would have 9,300 retail stores, with 5,500 in the United States (though I have to think more than a few of them would be shut down). Quality control? They're going to have to bring in a logistics expert from the military for that one.
Wall Street already hates this. Blockbuster was in the middle of a modest turnaround, after several years of suffering at the hands of Netflix's lightweight mail distribution business and various forms of digital distribution such as on-demand television from Comcast. The company's net income for the first quarter, which ended March 31, is expected to be $30 million, compared to a net loss of $49 million a year ago. Not great, but it's a start.
Pundits already worry a Circuit City takeover could distract Blockbuster executives (they're right) and divert money that could be used elsewhere (they're right about that, too). In afternoon trading Monday, Blockbuster shares were down 14 percent to $2.69 per share.
Circuit City shares, of course, jumped more than 30 percent to $5.12 in afternoon trading. Talk about a company suffering from a changing market...and Best Buy. For the full fiscal year, which ended February 29, Circuit City lost $321 million on $11.7 billion on revenue. The fourth fiscal quarter, thanks to $65 million in reduced costs, did show signs of improvement, with a modest $4.5 million profit on $3.65 billion (sales were down 7.7 percent from same quarter a year ago). But this is not exactly a company with a long line of suitors.
So bring this troubled pair together and what do you get? Well, I'm not sure, to be honest. I suspect Circuit City's ownership also has no idea, since the Blockbuster offer has been on the table since February 17.
Here's what I do know: You'd get a really big company with about $18 billion in combined sales. It would be saddled with a lot of real estate, and it could achieve some cost savings by shutting down some of those stores. But this isn't some roll-up strategy (like Larry Ellison is doing at Oracle) where costs can be quickly squeezed out and a bigger outfit can just roll in the cash. With this, you have two companies struggling to keep up with both more nimble (Netflix, Amazon.com) and much larger competitors (Best Buy, Wal-Mart, Comcast). It's a lousy place to be.
This proposed deal may have one thing going for it: Billionaire corporate raider Carl Icahn is reportedly backing the move and is willing to finance it. He owns about 16 percent of Blockbuster's Class A shares, so I have to think he sees real value in acquiring struggling Circuit City. But as my CNET News.com colleague Dawn Kawamoto wrote a few months back, Icahn's interest doesn't always translate to a Midas touch.
Like most other people who learned about this deal Monday morning, I'm baffled. And I smell desperation.
Video rental giant Blockbuster on Monday announced it has offered to purchase Circuit City Stores for $6 to $8 per share, or about $1 billion to $1.3 billion.
Blockbuster initially made the proposal on February 17, but says Circuit City has not provided the due diligence it needs to make a more definitive offer. On Monday, Blockbuster decided to go public. In a letter to Circuit City CEO Philip Schoonover, Blockbuster CEO Jim Keyes notes that the two companies have been discussing proposed tie-ups since December.
(Credit:
Blockbuster)
Blockbuster says the offer is intended to "capitalize on the growing convergence of media content and electronic devices."
"Our proposal offers Circuit City a significant premium to its existing stock price and creates a game-changing retail concept with a sustainable competitive advantage. We believe the combination will result in a compelling consumer proposition that will drive significant revenue and margin enhancements as well as cost synergies," Keyes said in a statement.
Circuit City issued its own statement saying it had received the offer, and was still evaluating its options.
A combination of the two companies would add up to an $18 billion business, according to Blockbuster's calculations. Both companies have struggled in the past year--Circuit City posted a $200 million loss near the end of 2008, and Blockbuster has been fending off Netflix's success in online video rentals, as well as the growing threat of digital movie downloads.
Last week news leaked out that Blockbuster had a set-top box under development that would stream video content directly into homes, which was seen by many as a last-ditch effort to adapt its business.
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