A home full of Sony products is inevitable these days, since they're a leading producer, developer, maker, and marketer of electronic equipment, game consoles and software, recorded music, motion pictures, videos, and television programs. But do they develop, produce, make, and market a business worthy of your investment dollars?
Investors who believe "the trend is your friend" will find Sony an enemy. Analysts expect a decline in 2001 profits of 81.5%. Ouch. While they expect the trend to reverse in 2002, I'd say that's a long way off. Too many unforeseeable events -- like an unstable yen, increased competition, or problems with new products -- can perpetuate the trend downward.
So far this year, the stock has fallen 18%. The fundamentals don't look much better. Gross margins? Down. Operating margins? Down. Net margins? Down. Sales and operating revenue in United States, Europe, and other areas? Down. I haven't seen so much down since I gave up pillow fighting in my college dorm.
No doubt Rick will be hyping Sony's prospects based on the success of its PlayStation 2. And why not? It's the cash cow of Sony's overall business, accounting for 40% of Sony's $2.8 billion operating profit. Good thing one of its divisions is producing some milk.
Unfortunately, many other divisions are barren.
Motion picture sales for fiscal year 2000 were down 9.8% compared with the previous year. It's no wonder. Sony was deemed the worst studio of 1999 by the Hastings Bad Cinema Society. It lost big-time bucks by producing such classic losers as Dick, Jakob the Liar, Idle Hands, and Jawbreaker. It's likely you don't remember these turkeys. It's even more likely you didn't pay your hard-earned dollars to see them.
In an attempt to turn around the film division, Sony has invested $75 million in "Revolution Studios," a film company run by Joe Roth. "Joe is truly one of a kind," according to John Calley, Sony Pictures chairman and CEO. "He's produced and directed films as well as run studios with extraordinary success."
Extraordinary success? Roth's well-known love affair with big-budget extravaganzas was responsible for the devastation to Disney's balance sheet the past few years. He also was the director of "Revenge of the Nerds 2 -- Nerds in Paradise." One of a kind what?
Don't expect the music division to be adding anything to the bottom line but grief. Sales for FY'00 decreased 6.8%, largely due to sluggish sales in the U.S., Europe, and Brazil. Maybe things will be better in Antarctica.
Now Sony has sunk its hopes and fortunes on 12-year-old ersatz soprano Charlotte Church, who critic David Patrick Stearns calls "another short-lived media phenomenon." Not too much long-term profitability there. The score of Titanic single-handedly bailed out the music division last year, barely keeping it afloat. Plus, this year, Sony has significantly cut back on new releases in the hopes of avoiding crashing into another sales iceberg.
In the land of dubious business plans, Sony is bringing new products to markets that already have established leaders in their fields. Its handheld computer, the Clie, will be competing with Palm. All makers of handheld computers (including Sony) will have trouble filling orders this holiday season due to ongoing parts shortages. And, according to David Thor, a handheld analyst with ResearchPortal.com, Sony's Clie is merely "a safe entry -- it's not bold, and it's certainly not earth shattering." You can be sure Palm management does not have sweaty palms.
Sony will play David to Nokia's <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: NOK)") else Response.Write("(NYSE: NOK)") end if %> and Ericsson's <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: ERICY)") else Response.Write("(Nasdaq: ERICY)") end if %> Goliath by attempting to increase its share of the mobile telephone market about 10 times from the current 2-3%. If it doesn't come up with a slingshot, I wouldn't bet on this underdog.
The largest problem with Sony is that it throws too much product into the world. This "we have every product for everyone" mentality is not ideal for profitability. In order to succeed in the digital age, Sony will need to streamline product offerings, concentrate on core competencies, and capitalize on its technological competence. Consumers don't enjoy having proprietary innovations forced down their throats.
Inefficiency results when too many similar products with little distinguishing differences exist. Consumers get confused, while administrative expenses rise. For example, Sony markets 20 different types of portable CD players, all requiring different SKUs, packaging, and logistics.
Last, but certainly not least, with Sony's P/E hovering around 90, only investors who believe in fairy tales will find Sony a worthwhile investment.
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