Sony: Play As Work

When Nobuyuki Idei, the president of Sony, stepped to the podium in downtown Tokyo last Friday, he looked tired and distracted; five days before, Akio Morita, Sony's legendary cofounder, had died, at the age of 78 (following story). Idei remembered Morita affectionately. "Sony entered the life-insurance business after Morita-san took a trip to Chicago and noticed that an insurance company owned the tallest skyscraper in the city," Idei told the gathering of Japan's top securities analysts. As the stockbrokers chuckled, Idei continued his story. "Of course, [Japan's] big financial companies all had nice buildings, too. And they all went bust."

Idei spoke for an hour, counting out points on his fingers. His theme: America restructured its economy in the 1980s by learning from Japan; but now Japan must study America. He praised visionary companies like Charles Schwab and, and called on Japan to emulate their rule-breaking ways. "In this century," he said, "it was important to own. In the next, it will be more important to take advantage of what you own."

Japan owns a lot--and takes advantage of very little. After nearly a decade of stagnation, Japanese companies are now devouring their equity by paying unneeded workers until retirement. Even Japan's largest manufacturers--the engineers of their nation's economic rebirth after World War II--fail to realize that "they are beyond the era of the hit product," says E. Keith Henry, a Japanese expert at MIT. The change that is vital to Japanese businesses remains hampered by a national misconception: that layoffs and plant closures are, by definition, negative. "Nobody [in the United States] talks about layoffs because start-up companies in Silicon Valley have hired so many people," Idei told NEWSWEEK in an exclusive interview last week. "This is what we need in Japan."

If so, Sony is doing its bit. Last year operating income in the electronics-to-films-to-music giant fell 34 percent, largely due to weakness in manufacturing, once its core business. In March, the firm announced an American-style restructuring. The plan involves closing 15 factories and shedding 17,000 workers worldwide by 2003--most through plant mergers and natural work-force attrition. The company also simplified reporting lines and its organizational chart. Moreover, Sony has signed up for the digital revolution. Idei has a sweeping blueprint to embrace the Internet and link Sony's electronic goods--including the much-vaunted game machine PlayStation 2, the Vaio line of computers and digital televisions--with the firm's music, movies, game software and financial services. Confident in Idei's strategy, the markets have doubled Sony's stock price since January. "Sony," says Schroders analyst Alan Bell in London, "is the best-placed of Japan's hardware companies with respect to Internet activity."

In one sense, there's nothing surprising about this. Sony has led Japan's recovery before. In the 1950s its goods put an end to the assumption that anything "Made in Japan" was bound to be cheap and shoddy. Two decades later the Walkman, Morita's ultimate innovation, marked the dawn of portable electronics. Yet in the 1990s Sony foundered, missing the first clues that information would soon be as valuable as the gadgets that disseminated it. With its former strengths now weaknesses, Sony is likely to nurture its "content" businesses and downplay electronics. "We've gone from Made in Japan to Made by Japan to What in the Heck Will Japan Make?" says Henry. Led by Idei, Sony is searching for an answer.

Twenty years ago Sony knew what it was all about. As Japan's model electronics company, it stayed on top by designing gadgets unrivaled in the global marketplace. Brilliant engineers kept the industry rich in good ideas; jazzy marketing mesmerized consumers, transforming them, says a Western consultant in Tokyo, into "the kind of people compelled to build their entire home audiovisual systems with Sony components." Yet by the 1990s, Japan was starting to lose its industrial edge. The rise in the value of the yen, a diffusion of semiconductor technology and the increasing competitiveness from Asia's tiger economies all undercut Japan's base. In 1991, the electronics industry employed 1.98 million workers in Japan. Last year employment in the sector dipped below a million for the first time since the 1970s.

Soaring costs drove Sony and its rivals overseas. For Idei, deteriorating conditions prompted a new vision of the company's future--one that did not rely solely on men in white lab coats developing ever-better videocams. Sony, Idei reasoned, needed to link its line of components with a growing library of movies, music and software it had picked up--for what at the time seemed fancy prices--over the past two decades.

He was just in time. When the economic history of the late 20th century comes to be written, one chapter will make interesting reading. How and why did Japan miss out on the birth of the digital revolution? In the 1980s Japanese companies appeared to be sweeping all before them; yet it was a bunch of ponytailed, tattooed kids in California who spotted the transformative power of the Internet. While Japan Inc. languished, American firms like America Online and Yahoo! turned themselves into giants. In the unkindest cut of all, the PalmPilot--a product that just screams Sony--was developed by a tiny American start-up; and the coolest mobile phones in the world were made not by Japan's brilliant engineers, but, in all unlikely places, Finland.

For Sony--and maybe Japan--the salvation came not from the Net or telecommunications, but from kids' videogames. (A sociologist could write a good chapter explaining that bit of history, too.) In 1994, after a failed alliance with Nintendo, Sony launched its PlayStation, the first machine that enabled consumers to play computer games on their televisions with software from CD-ROMs. As computer games emerged as the decade's biggest entertainment trend, Sony took the lead. Last year the company's games division tallied 15 percent of Sony's sales and 42 percent of operating profit.

And now, here comes Play-Station 2. The new game platform will trigger stampedes to the toy store when it debuts in Japan next March. With 60 million sets of the original PlayStation sold, Sony's new version already has loyal gamers the world over pining to snap it up when it hits the market. "There are so many game freaks and nerds out there that they'll buy up all the production," says Alan Bell of Schroders. "People are already asking me: 'If I buy one in Japan, will it run here?' "

But the PlayStation 2 is supposed to be more than a diversion from homework. It's billed to be Sony's bridge to the digital age, though initially its only other function will be running DVD movies. It will be another year--at least--before Sony will begin to sell a hard drive and digital cable adapter for its new game machine. At that point, if all goes well, the PS2 will be a tool that families will use to download music, spend money on e-commerce or surf the Net.

So: Is the PS2 the ultimate multifunctional product? Or is it--as some analysts think--a blender that also makes toast? Koichiro Chiwata of Nikko Solomon Smith Barney sees the risk. The PS2, he says, is a smart replacement for Sony's original game device. "But how easy will it be for consumers to accept going on the Internet with a game machine? I don't think Sony has an answer."

Click onto Sony Online Japan and the possibilities come into focus. At Sony Pictures Online, there's a message board to swap gossip about Hollywood stars. At the PlayStation home page, dozens of new games wait to be sampled. At Sony Life, the site for Sony's insurance company, a personal financial calculator called "Your Life: How Much?" factors your vital statistics and plots a lifetime budget. At the Sony Store, you can order everything from cinematic classics from Columbia Pictures to dishes, watches and underwear. The Aibo home page has a photo album devoted to Sony's robot dog.

The Web sites, if you like, are Idei's world. But Sony is still, in part, Morita's company--an exemplar of the older face of Japanese capitalism--and here again, it epitomizes trends visible throughout the economy. Sony's layoffs, so far, have been quite modest, and the company vets its downsizing schemes pre-emptively with local politicians to avoid any panic. In his speech last week, Idei said he "is not, in principle, against Japan's lifetime employment system." As in all Japanese companies, there's an awkward balance between the need to pare down domestic operations and a desire to safeguard loyal workers.

What's changed is the point of equilibrium. In a recent study for Morgan Stanley Dean Witter, analyst Alexander Kinmont argued that Japan reached the point of no return in late 1998; elite business opinion simply concluded that the choice facing the country was change or bust. With restructuring now underway at companies as diverse as Kirin Brewery, Toshiba, NEC and Nippon Steel, a new mood seems to be in the air.

One clear sign of the times: the authorities no longer frown on foreign ownership of Japanese firms. Japanese regulators recently tipped the American Ripplewood Holdings to purchase the Long-Term Credit Bank, which was placed under state control after it went bust last year. Mazda's American bosses have shrunk the work force by 25 percent since 1994. Nissan merged with France's Renault early this year, and next week is expected to announce a plan that could lead to the loss of up to 30,000 jobs.

In this new climate, Idei's gamble takes on additional risk. If the PS2 is a hit, not just as a game machine but as a link to the Inter- net, the company will continue to win plaudits. But if PS2 underperforms, it will drag down earnings in the computer entertainment division, a cash cow. Investors would then be unforgiving--and Sony might have to cut back its manufacturing plants in Japan even more. That, after all, is what has happened to U.S. companies that promised more than they delivered. Capitalism American style means more than brilliant entrepreneurship. It's also about a culture where the markets ask--even of world-famous companies--"What have you done for me lately?" As Nobuyuki Idei knows, he better be ready with the answer.