Sony - “Wii Are In Trouble”
Note: this post was
carried today on Wallstrip
Overview
When I think of what Sony used to mean to me, the following
adjectives come to mind: Innovative, High Quality, Close to the
Customer, Smart, Long-term Focused. When I think of what Sony means to
me today, and the sentiment that is reflected across the Internet, most
of these adjectives are not currently in play. While Sony is certainly
capable of innovation, a new adjective set might include Customer
Unfriendly, Not So Smart, and Short-term Focused. Needless to say, none
of this bodes well for the stock price, which has encountered a
roller-coaster ride from $34 up to $52 and back down to the current
$40. Clearly not a ringing endorsement of current management or their
strategic direction. Sony is, in fact, living out the plot of one of its horror movies, “The Grudge”:
The normal façade of a modest house in Tokyo belies the
hidden terror within. It is possessed by a violent plague that destroys
the lives of everyone who enters. Known as The Grudge, this curse
causes its victims to die in the grip of a powerful rage. Those who are
fatally afflicted by the curse die and a new curse is born–passed like
a virus to all those who enter the house in an endless, growing chain
of horror.
Sounds kind of like what is going on at Sony these days. Sad to say,
all is not well, much to the chagrin of those long SNE. Read on.
ISSUE #1: Customer Awareness as a Historic Asset? See Asset Destruction in Process
Exhibit 1: The Sony Rootkit Fiasco
From BoingBoing
Mark Russinovich, a security researcher, discovers that
Sony has been sneakily installing “rootkit”-based DRM on their
customers’ computers. Rootkits are black-hat hacker tools used to
disguise the workings of their malicious software. Removing Sony’s
rootkit nukes your Windows installation.
And a little history and perspective from Sony Management, via an interview with Thomas Hesse from Sony BMG’s on NPR
In an interview with NPR late last week, Sony BMG’s
Global Digital Business President Thomas Hesse downplayed the recent
DRM fiasco saying he objected to terms such as malware, spyware and
rootkit. “Most people, I think, don’t even know what a rootkit is, so
why should they care about it?” he said.Hesse acknowledged that the controversial First 4 Internet
technology that installs and “cloaks” the DRM software without a user’s
permission shipped on about 20 CDs. But “no information ever gets
gathered about the user behavior,” he claimed. “This is purely about
restricting the ability to burn MP3 files in an unprotected manner.”
Pure genius? Not. And it gets even worse - when (now Governor-elect) Elliott Spitzer got involved:
“It is unacceptable that more than three weeks after
this serious vulnerability was revealed, these same CDs are still on
shelves, during the busiest shopping days of the year,” Spitzer said in
a written statement. “I strongly urge all retailers to heed the
warnings issued about these products, pull them from distribution
immediately, and ship them back to Sony.”
Punch line: Sony put a rootkit on some CDs to stop the ripping and
burning of MP3s, in order to essentially manage music rights. Why?
Could it be because of Apple’s dominance of the portable digital music
business? Was Sony testing a way to slow their progress and regain
ground? Who knows, except that their actions spawned a PR nightmare
among the smartest and most influential members of their user base -
the tech-savvy users and bloggers. Not a segment of your customer base
that you should be pissing off.
ISSUE #2: The Battery Melt-down: Crisis Management Required
Who can forget the recent history of Dell and the exploding laptop
battery. What started out as a little video clip on the Internet
(showing a laptop bursting into flames) became the Web 2.0 version of
the J&J Tylenol scare.
Exhibit 1: Dell laptop explodes at Japanese conference
From The Inquirer.net 6/21/2006
AN INQUIRER READER attending a conference in Japan was
sat just feet away from a laptop computer that suddenly exploded into
flames, in what could have been a deadly accident.Gaston, our astonished reader reports: “The damn thing was on fire and produced several explosions for more than five minutes”.
This story with the accompanying photos spread like “wildfire” (yes,
we over at IA are witty) on the Internet. Action was taken by Dell, the
maker of the offending laptop, two months later when more incidents
began to appear on the Internet. Trivia question: Which company was the principal battery supplier to Dell? You guessed it - Sony. But wait - it gets even better.
From InfoWorld August 2006:
Dell, Sony discussed battery problem 10 months ago
Dell and Sony knew about and discussed manufacturing problems with
Sony-made Lithium-Ion batteries as long as ten months ago, but held off
on issuing a recall until those flaws were clearly linked to
catastrophic failures causing those batteries to catch fire, a Sony
Electronics spokesman said Friday.Spokesman Rick Clancy said the companies had conversations in
October 2005 and again in February 2006. Discussions were about the
problem of small metal particles that had contaminated Lithium-Ion
battery cells manufactured by Sony, causing batteries to fail and, in
some cases, overheat.As a result of those conversations, Sony made changes to its
manufacturing process to minimize the presence and size of the
particles in its batteries. However, the company did not recall
batteries that it thought might contain the particles because it wasn’t
clear that they were dangerous, Clancy said.“We didn’t have confirmation of incidents [involving fires] until
relatively recently. We received reports, but didn’t know if there were
environmental situations not related to the systems themselves,” he
said. “Different measures were taken in February and in October [2005]
to further ensure that there were as few of these particles as possible
and that they were as small as possible.”
You have got to be kidding me. Did these guys learn anything from
the Rootkit PR debacle? As I’ve discussed in previous posts, there are
tried and true ways of getting out in front of serious PR problems,
acknowledging them early, dealing with them openly and honestly and
protecting the safety of your customers. Sony Management’s reading of
their customers likely response to he Rootkit strategy backfired in
2005, and they repeated the same mistake with the battery problems in
late 2005/early 2006. It didn’t need to happen this way. 4.1 million
batteries were going to be recalled in any event, so why not use the
problem as a PR opportunity to do the right thing and regain the
confidence of your key constituency, your customers? Because Sony
Management doesn’t get it, that’s why. This is not the customer-focused
company I remember from the Walkman days. Something has happened to
Sony’s DNA - and it’s not good.
ISSUE #3: Why are we feeling so Blu when Wii should be feeling happy? Supply-chain and Strategic Hell
Sony has been losing ground for years in Home Entertainment. The
long-time edge in portable music - gone. The game-changing Walkman is a
name scarcely known by today’s young influencers. Apple is the new
King. In the face of stiff competition, Sony has been concentrating its
hopes on its next generation gaming consoles. Sad to say (but no
surprise), things did not go exactly as planned. Microsoft was able to
beat Sony to market for Christmas 2005 with their next generation
console. Microsoft has been waiting a year for Sony’s new entrant -
PS3. With Sony’s hand forced by delays, PS3 shipped this November 17
with an eye towards going head-to-head with Xbox 360. Without question,
Sony needed an edge, so they chose to go way, way up market to try and
bring the coolest high-tech gaming engine to market. This relied upon
Blu-ray technology. Unfortunately, this go-for-broke strategy with an
immature technology has raised two unintended consequences: (1)
supply-chain problems; and (2) a potential paradigm shift.
1. Supply-chain problems
In order to make Blu-ray players you need these things called Blue
Laser Diodes. And if you want to make high-end consumer Blu-ray
players/recorders you also need these things called Blue Laser Diodes.
And if the supply of Blu-ray diodes is limited you have an issues of
scarcity and production allocations that need to be addressed. Ergo, in
Sony’s case two different divisions were competing for the same scare
component to achieve their strategic objectives. This is a story that
just can’t end well, and, in fact, because of this “crowding out”
Europe will essentially miss PS3 for Christmas. You have to read the
stuff below to believe it.
In EE Times on October 24, less than a month before PS3 launch
Sony delays Blu-ray Disc player again
In news coming out of Japan this week, Sony has apparently delayed
again the release of its stand-alone BDP-S1 Blu-ray Disc player to
December or possibly not till 2007. The player was scheduled to due to
arrive on retailers shelves this week. Originally, the BDP-S1 was due
out in July, but was postponed until August, then to October 25.Apparently, the delay seems to have been a strategic decision that
is based on availability of blue laser diode supplies rather than any
trouble with the player - unlike the problems that Samsung has recently
encountered. As early as a year ago, it was speculated by several
journalists and industry insiders that Sony would have problems
delivering both PS3 and a stand-alone Blu-ray Disc player. Not
surprisingly, the Blu-ray diode used in the BDP-S1 is the same one used
in Sony’s PlayStation 3 game console, which is set for release on
November 17. According to experts and analysts in Consumer Electronics,
there simply doesn’t seem to be enough parts to go around.
Who’s driving the bus here, folks? One team, right? Wrong.
2. Paradigm shift? Nintendo and the Wii
Is Nintendo Changing the Game?: An Innovator’s Dilemma (thanks,
Clay). Sony and Microsoft have been battling it out in a classic
“feature war,” replete with ever-higher levels of graphics quality and
more and more realistic polygon images. That is where they believe
games are going. On the other hand Nintendo, an earlier winner of the
game wars, has concentrated on a revolutionary controller that allows
motions to be captured as part of playing the game. With Sony’s delay
problems we have the opportunity to witness the juxtaposition of two
new product launches with different fundamentally gaming approaches. On
the one hand, Sony is going straight for the hard-core gaming market
against Microsoft, with an expensive $500 - $600 machine that has
roughly the same resolution as Xbox 360. On the other hand, Nintendo is
offering a $250 machine with fewer high-tech graphics but with clear
emphasis on a revolutionary controller that seeks to make the gaming
experience active, fun, and more accessible to wider audience. Nintendo
has worked to make natural hand movements displayed and reflected both
on the screen and in the game, creating a much, much flatter learning
curve. In short, fun and success are much closer at hand than in the
high-end games of Sony and Microsoft.
Sony appears to be going after the existing market while Nintendo is
looking to expand the market, opening it up to people who have either
never played or are causal players intimidated by the high-end games.
From Dr. Christensen (The Innovator’s Dilemma) himself:
“Consistently, established firms attempt to push the
technology into their established markets, while successful entrants
find a new market that values the technology.”
Nintendo just seems so smart and thinking outside-the-box, while
Sony seems so slow and hamstrung by convention. Add to this the fact
that the Wii has garnered lots of buzz, has far lower development costs
than for the PS3 and Xbox 360 ($5-$8 million vs. $15-$20 million) and
has laid the foundation for lots more game titles than the higher-end
consoles (and rapid and prolific third-party development is the
lifeblood of success for a gaming platform), it would appear that
Sony’s technical tour de force may not win the war of economics in the
end.
And this is not just our view of the Wii. Check out these articles:
Nintendo’s Wii Is A Revolution - Forbes.com November 13th
Question of the Week: Are Games Industry Professionals buying a PS3 or a Wii? - Gamasutra.com November 17th
Game makers say Wii a bargain - Yahoo! News November 16th
Wii Launch NYC: 5,000 Wiis in Times Square - Gizmodo.com November 18th
Conclusion
Sony, the once-dominant home entertainment giant is a shadow of its
former self. Loss of customer focus, lack of out-of-the-box thinking
and crushing internal and external competition is laying it low. It is
hard to see a near-term scenario that results in a rosy picture for
SNE’s shares. And in light of the Yahoo! Peanut Butter Manifesto, it seems that Sony could benefit from such a wake-up call.
Thanks to Rob Passarella for his assistance with this post
The author does not currently own securities of Sony.
