So-So Sony

Electronics Giant Reprograms Itself
For a New Digital Age

By Phred Dvorak
Staff Reporter of The Wall Street Journal

It has been a decade since Sony came up with its last big hit product, the PlayStation videogame machine. Since then, amid many technology revolutions-mobile phones, flat-screen television sets, digital music players such as Apple Computer's iPod-the company that invented the Walkman has played the unfamiliar role of laggard. Sony's net income in the past four years combined is less than Microsoft makes in a quarter.

With another decade like that, the world's most famous consumer electronics maker could be just another name on the discount shelf. Desperate for hits, Sony's bosses last year tapped Ken Kutaragi, the creator of the PlayStation business, to remake the company's electronics strategy.

Jarring Transformation

Mr. Kutaragi's promotion reflects a huge shift in the consumer-electronics business that is wreaking havoc with Sony's traditional strengths. In today's market, there's little room left for the stand-alone box: From cameras to television sets, just about everything today works on a digital standard and has to be able to communicate with other devices. More and more gadgets live or die on their semiconductors and software. Companies with a lock on key technologies, such as Microsoft and Intel, thrive, while hardware has become a commodity with plunging profit margins.

Ken Kutaragi

So Mr. Kutaragi is determined to build the next generation of Sony gadgets around homemade chips and software that others can't easily copy. To promote teamwork, he's throwing together divisions of the Sony corporate empire that once barely talked to each other.

It's a jarring transformation for a company known for coddled engineers who cared only about their own gadgets, jealously guarding innovations and thinking of other divisions as rivals. The inventors at Sony were peerless in old-time hardware-squeezing the parts of a tape recorder into a tiny box or shaping a TV picture tube to get the sharpest image. But they weren't nearly as strong in programming and chip design, the areas that count most now.

To break down old barriers, Sony has put a videogame whiz-Mr. Kutaragi-in charge of home electronics and a semiconductor specialist atop the TV business. Mr. Kutaragi has integrated semiconductor and programming groups that were scattered across the company.

"These last 10 years we've lost virtually all our basic strength-our technology," says the 54-year-old Mr. Kutaragi. "We had lots of fine analog engineers. ... But when things became digital, the basic [engineering] literacy changed. And suddenly there weren't any executives and senior engineers who could decide what direction to take."

Mr. Kutaragi's vision was shaped by his success with the PlayStation, now a $7.5 billion-a-year business. It relies on data-processing and image-manipulating chips that only Sony makes. "Most of the intellectual creation in hardware will be concentrated in semiconductors," says Mr. Kutaragi. "The product is just a cabinet, a costume."

The success of Apple's iPod is also a lesson. The iPod's basic hardware, a hard disk for storing songs, is a commodity that any company can buy. But the look and feel created by Apple's software, which makes it easy to build a music collection and play it in fun ways, is harder to match.

Sony's struggle to remake itself mirrors that of other consumer-electronics makers. They all dread "commoditization"-the spread of standardized parts that makes it impossible for all but a handful of ruthlessly low-cost producers to survive. That is what happened in personal computers, with Dell emerging as the chief winner.

Mr. Kutaragi is pouring $4.5 billion into semiconductors over three years. Sony is working on an ultrafast microprocessor, called the cell chip, which it is making with International Business Machines and Toshiba. It hopes the chip, which is the centerpiece of a new PlayStation under development, will be a living-room version of the Pentium chips Intel makes for PCs.

Distinct Look

And Sony is creating its own software look, just as Microsoft's Windows and Apple's Macintosh operating systems have theirs. Sony's look features a menu shaped like a plus sign or a crossbar and will be seen on new flat-panel TVs going on the market this month in Japan and next year in the U.S.

But Mr. Kutaragi's strategy is a gamble. The first set of products produced under his reign-still available only in Japan-all take the radical step of marrying video games with consumer electronics. That may confuse consumers. An early pet project of Mr. Kutaragi, a device that combines a video-game machine with a DVD recorder, has struggled in Japan, although Sony still plans to bring it to the U.S. Also, Microsoft and Intel are angling to control the software and semiconductors used in the living room.

Inside Sony, Mr. Kutaragi's grip has yet to extend to some devices, including Vaio personal computers and the Walkman personal-audio division. In a sign that Sony has yet to fully rid itself of internal rivalries, both the Vaio and Walkman divisions recently released products designed to compete with the iPod.