So, let's talk about Sony. I read an news piece this morning about Sony's plan to lay off 60% of EMI Music Publishing's employees when they take control of the firm they're paying $2.2 billion to buy. That's on top of the 20,000 layoffs they announced last week.
That's a lot of layoffs, but they all speak to an underlying problem at Sony that, I think, is going under-discussed (if nothing else). Like a lot of technology firms in the 1980's, Sony decided that the key to their future success was to be vertically integrated. Instead of just making televisions and VCRs, they'd make the content that was played on them. Now, to give Sony some credit, this line of thinking was based on some real and tangible concepts. First, the music industry, especially in the Japanese market, has a long history of hardware makers also producing content. From Edison's cylinders through to Japanese music giants like Toshiba-EMI, this isn't exactly new ground. Sony's own experience with the failed Betamax VCR format also showed them the risk of launching new technologies without guaranteed content at launch.
It's with these facts in mind that Sony purchased Columbia/Tri-Star in 1989. Also in 1989, Sony purchased CBS Records. Then, starting in 2004 and concluding in 2008, Sony brought BMG into their music stable. Alongside these acquisitions, Sony started Sony Imagesoft in 1989 to create and publish video games.
If it seems like Sony was focused on content creation in the late 1980s/early 1990s, you'd be right. Although Sony saw successful hardware launches during the 1990s, such as the Playstation, they had a frighteningly long list of failures as well. DAT, launched by Sony as an recordable alternative to CDs in 1989 failed to take off, at least in part because it was hobbled to prevent illicit digital copying of copyrighted content. Mini-Disc, launched by Sony in 1992, a portable digital medium, also hobbled, also failed.
As Sony launched hardware failure after hardware failure, their core businesses, televisions, CD players, VCRs, tape players and, later DVD players limped along with incremental improvements, but without any real or meaningful technological breakouts. Clearly, their energies and focus were elsewhere, with new investments coming in content on a regular basis. In new hardware technologies, Sony's presence became less and less pronounced. Instead of jumping into the mobile phone arena with both feet, Sony opted to partner with Swedish company Ericsson. Rather than be first to market with a cutting edge MP3 player that leveraged their Walkman history, Sony arrived late with a hobbled player, fearful of the digital music's potential impact on their music business. Whereas Sony's Trinitron brand had become synonymous with quality in the world of CRT televisions, Sony opted to use other's hardware when they launched their first plasma screened HDTVs and were slow to shift to LCDs when the market began to shift away from plasma. All the while, Sony continued to price their hardware products as though they were the industry's pinnacle of both quality and innovation.
My argument then, is this. Instead of focusing their energies on bringing new and innovative technologies to market, Sony decided they'd create a safety net for themselves. They became more and more risk adverse as their tech products failed and their content products came under assault from piracy and decreasing margins. This is the downward spiral that they find themselves in today. I honestly don't believe that it's possible for Sony, in their current structure, to turn this around. Fundamentally, the goals of the content and hardware arms of the business are at cross-purposes to one another. Content wins from being platform agnostic and hardware wins by being content agnostic.
I believe Sony must separate its content and hardware businesses. The hardware side of the business needs to innovate without fear. When Apple launched the iPod in 2001, they did so with a plan for the iTunes store (which finally opened in 2003), but without any actual digital download model in place. They knew that much of the initial demand for the iPod would come from people with illegally downloaded MP3s from Napster and other sources. Because they had no content arm that was threatened by this, they were able to go to market without reservations. When Sony went to market with their first digital music player in the 1990s, instead of using the already ubiquitous MP3 format, Sony used the proprietary ATRAC format, again, to prevent a negative impact on their content business.
The content side needs to get ahead of new technologies and revenue models, perhaps sacrificing short term profits for long term category growth. Instead of fighting new technologies and delivery models, they might be well served to get out ahead. Perhaps they could take a page from the app store model? Instead of selling a few hundred back catalog music titles for 99¢, they could sell thousands or millions for 2¢ or 10¢ each? How about the same logic for films? Force 10 from Navarone, a film from 1978 is available on Blu-Ray for $11.99. The price to download the film? $9.99. Now, a film made in 1978 is, in 2012, fully amortized. Any costs associated with the film, save digitizing it and marketing it as a digital download, are already recouped. Anything Sony makes on this film is pure profit. I've really got to want to see this film to spend $9.99 for it. On the other hand, it's a low barrier, low risk purchase for $1. Does Sony make more money selling Force 10 from Navarone to 10,000 fans or 100,000 casual viewers? As long as Sony (and all content producers) overvalue their output, they encourage consumers to avoid or steal that content. As a restaurant operator once said, no restaurant ever went broke with a full dining room but more than one have failed with high margins.
Both groups, I think, have a chance to succeed separately, but together their respective needs will pull the business deeper into a death spiral from which no part of the business will survive intact.
