Sony + Music = Entertainment: could a synergized Sony be set to stage a comeback?

It really has been quite a year for Sony. The company that brought the world the Walkman has seen Apple eat away at its share of the personal audio market and watched its brand's luster fade. A quick glance around a subway train in Tokyo shows even in the Japanese capital the iPod has become the must-have accessory for those bone-crunching morning commutes.

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The company has seen its profit from consumer electronics fall, revenue drop 5 percent and its stock price sink to half of the level of five years ago. However, figures for the last fiscal year show that sales at Sony Music Entertainment Japan (SMEJ) grew, and Sony Pictures reported soaring profits for Spider Man 2. A strong contribution from Sony Ericsson Mobile Communications also offset some of the losses suffered by Sony's electronics segment.

While even the man in the street is likely to blame the iPod for Sony's fall, the root causes go deeper. What exactly went wrong at Sony, and more importantly, how does the company plan to recapture market share? Is it possible for the Sony empire to strike back?

The company certainly has weapons in its arsenal to mount a multimedia assault. With hardware and software divisions finally united under new leadership, Sony is gearing up for battle. It has overcome its fear of MP3 and at last released a line of audio players to compete with the iPod; it is getting serious about digital music distribution with an improved online service; and it is at the forefront of the mobile phone ringtone revolution in Japan. The company appears to have changed. Is all this down to one man?

Howard Stringer: Sony's Spider Man?

The surprise announcement in March that Sir Howard Stringer would replace Nobuyuki Idei as Sony CEO received a mixed reaction from commentators, investors, and analysts. While a change was overdue, the choice of a former journalist raised eyebrows. Those wishing for a clear strategy to reverse the slump in the company's core electronics business were not reassured by Sir Howard's comments that he would make Sony "cool again."

As head of Sony Corporation of America, the Welsh-born American revived Sony's music and movie businesses, and observers have noted his increasing interest in the entertainment-related areas of Sony's electronics business. He has been able to reshape the company's brand strategy in the US, and push for greater integration of the company's hardware and software operations. In this respect, he can be seen as a disciple of Idei, who originally championed the idea of convergence: movies and music delivered to consumers over the Internet. The company has long dreamt of bringing different elements of its many businesses together, although the buzzword for this, synergy, has fallen from favor in recent years. The appointment of Stringer shows the importance the company now places on the entertainment side of its business. His comment that "hardware is nothing without content" provides the logic for Sony's latest comeback strategy: the Playstation Portable hand-held game machine that offers users the facility to download music and movies from the Internet, as well as play games.

The company is obviously pinning its hopes on Sir Howard's being able to help Sony exploit new opportunities to connect content and technology. Earlier this year Stringer's description of the success of Apple Computer's iPod as a "wake-up call" was a sign that at last someone was willing to tackle internal conflicts between divisions and put an end to the aura of complacency that had taken root in the company. Apple, with its iPod and iTunes Music Store, was the first to establish a synergy of device and content.

The US company has finally opened its online shop in Japan, and the Japanese music industry is getting ready for a fight. As far back as 1999, when Sony announced its intention to sell over the Internet downloadable music for use with its memory stick Walkman, the issue of digital music in Japan has been an awkward one. At that time, Sony only planned to offer customers music produced by its own artists. This kind of protectionist strategy has made it difficult for Sony to realize its dream of synergy, and inhibited the spread of digital music culture in Japan.

What Went Wrong?

A company trying to sell technology and provide content faces a contradiction. Its manufacturing arm realizes the market wants a device that can handle content from a variety of sources, yet the content side needs to ensure that products are protected and available only through its own choice of format. Sony Music could not very well support a Sony product that encouraged piracy, so it opted out of supporting MP3 and attempted to push ATRAC, its own copy-protected format. Sony's answer to iTunes, SonicStage, was designed primarily for use on Sony's VAIO computer, and the initial launch of Connect, its iTunes Music Store equivalent, also ran into problems. Internal rivalry hindered Sony's attempts to establish the company as a digital music force, despite its unique position of being the only company with a computer division, record label and electronics arm.

As recently as the summer of 2004, it was generally claimed that Japan and America were fundamentally different when it came to consumption and distribution of music. It was argued that Japanese music fans did not use computers to copy and store music; they preferred to rent CDs and copy them onto MiniDisc. The new MP3 format looked unlikely to become popular in Japan, according to this view. Just three months later analysts were predicting that 40 percent of the 1.5 million digital music players in Japan would be sold by Sony's rival, Apple, and that this may rise to 70 percent by the following year. It seemed like Sony was still not completely sure whether to concentrate its efforts on hard disc players or flash-style players. By the summer of 2005 the company's hard disc drive players were starting to take back market share, and its flash memory players had become top sellers in Japan. The latest Sony players even support the MP3 format, a major compromise. These are definite signs that Sony is fighting back, finally managing to connect disparate parts of its business empire.

Content to Connect: SMEJ

Yasushi Ide, corporate vice president of Sony Music Entertainment Japan, in an interview with J@pan Inc, offered his views on the current state of play from the content side. Despite the furor over Sony's defeat at the hands of the mighty iPod, surely the company has not been resting on its laurels. What effect has the march of the iPod and the shift toward digital consumption of music had on Sony Music, according to Ide?

He started by stating that although sales for fiscal year 2004 grew 6.9 percent year on year owing to an increase in album and single sales, he was not optimistic about the company achieving a similar figure for the current fiscal year. The Recording Industry Association of Japan (RIAJ), he pointed out, reported a staggering 65 percent drop in production of recorded music in the first four months of 2005 compared with the same period in 2004. In terms of sales the company was "conservatively maintaining its expectations," and aiming for slightly higher profits. Albums and singles from the company's main artists like Orange Range, Hirai Ken, and Porno Graffitti contributed greatly to sales. Orange Range took the prestigious Japan Gold Disc Artist of the Year Award in March and captured second and third place in the Song of the Year category.

The industry blames piracy for the severe drop in sales of CDs, as legal downloads do not yet compensate for the loss in revenue. An attempt to manufacture copy-control CDs (CCCD) backfired when consumers noticed the discs sounded inferior to regular CDs, and now record companies are concentrating on digital music distribution. Ide stressed that music companies must also find new revenue streams to make up for the decline in CD sales. One such stream is music publishing and licensing. In Japan tie-ups with television and film companies are important for ensuring the success of a song. Sony has been working hard to secure licensing deals for music by its artists to be used as theme songs for television or on movie soundtracks. The success of the Spider Man 2 soundtrack album shows how potentially lucrative this strategy can be, he added.

The days of record companies relying on hit albums to make money are coming to an end. As well as strengthening the company's position in music publishing, Ide said that despite the criticism, Sony has been working hard to establish itself as a distributor of digital music. A Sony affiliate, Label Gate, offers a download service called Mora, which works with SonicStage 3.2 software, and will re-launch its Connect service in autumn. The online service was a good example of where the company went wrong, according to Ide. Connect sold songs in a format only compatible with its own devices. Sony hoped to use the service to sell its range of non-hard drive players such as the Hi-MD Walkman, but they never sold well in the US and the service flopped. With the re-launch, a single management team will control development of the Connect software and Walkman hardware, reducing the "confusion" of the past, as Ide put it. The Connect service will eventually also offer movies, a key element of Howard Stringer's synergy plan, and there is talk that both Sony's mobile phone and PlayStation divisions will also utilize the renewed service.

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Sony's grand plans for integration are starting to look like more than just a Nobuyuki Idei pipe dream. The strong performance within the group of Sony Ericsson Mobile Communications, which launched the W800 Walkman-brand digital-music-playing mobile phone in March, and more recently the W31S "music phone," which carries SonicStage software for CD ripping, would suggest that perhaps the iPod may come to look like yesterday's gadget. The new phones have gained a strong foothold in the market on the back of the popularity of chaku-uta, or ringtone downloads. The new chaku-uta full (full-song ringtone) services have come to compete with online music services in Japan, where there are 80 million cell phones in use.

While online music services in Japan were slow to get off the ground, both polyphonic ringtones and the newer chaku-uta ringtones have provided record royalty fees for JASRAC (Japan Society for Rights of Authors, Composers and Publishers). However, as Ide explained, in their infancy, this business did nothing for record company profits. The original composers were able to receive a share of the profits but record companies like Sony, despite being largely responsible for making the song a hit, received nothing. In order to rectify this anomaly, record companies started cutting a section from an actual track and selling it as a ringtone. This allowed the companies to retrieve part of their promotional costs and pursue the new service as a lucrative alternative to Internet downloading. The new full-song ringtones also sounded far better than the primitive synthesized versions sold previously. Good enough, in fact, to listen to rather than just use as a ringtone.

Sony Music and several other record companies set up Label Mobile Inc in 2001 and were well prepared for the boom that followed. Ide attributed the popularity of ringtones to the ease with which customers can be invoiced (via monthly mobile phone bills) and the fact that younger music fans may not have access to a computer or credit card, but almost certainly have a mobile phone. Chaku-uta full handsets are flying off the shelves in Japan, with over 2 million sold as of May this year, and the number of sites selling songs is growing all the time. All this is good news for record company executives like Ide, who claimed that with the updated Connect service and Sony's immense marketing power, at least domestically speaking, the company is about to bounce back. He hoped that the iPod's moment may have passed and that on the hardware side the company was counting on its flash-based audio players.

Idei's Dream Set to Come True

There can be no doubt that the iPod upset the apple cart at Sony. With the new CEO, Howard Stringer, a man who observers have claimed is perfect for the job of mending relations between the company's hardware and software divisions, Sony is obviously hoping the dream of synergy will become a reality. The company has the potential to become a multimedia titan, with Stringer, the Sony entertainment king, feeding music and movies into a smaller but smarter range of products.

There is talk of the Cell, a CPU the company is developing with Toshiba and IBM. Sony is keeping quiet on this one, but claims it will be at the heart of a new generation of products that can receive content via the Internet. The smart money is on Sony to come back stronger than ever before.

Sony Pictures Entertainment recently announced the creation of an all-digital library for its huge collection of video footage. In time, movies and TV as well as music will be available to consumers with portable devices. Things are finally starting to connect at Sony, a view shared by Yasushi Ide. "Howard Stringer is incredibly well suited to lead the new Sony," said Ide. "The fusion of basic entertainment such as movies, music and games with our electronics divisions will likely increase and produce some startling results. The things that Nobuyuki Idei always talked about but never realized will be done by Mr. Stringer."