Sony's New Day

There are ghosts at Sony. You can hear them speak. On the ground floor of the company's Tokyo headquarters is a small museum. Behind a wall of glass, on a prominent pedestal, stands one of the original tape recorders produced in 1950 by a new enterprise called Tokyo Telecommunications Engineering Co. (thankfully, the familiar name combining the Latin sonus and "sonny boy" came a few years later). Press a button and the voice of cofounder Akio Morita fades in. Morita and his partner, Masaru Ibuka, who gave Sony a legacy of creating irreverently innovative, culture-transforming devices, are dead, of course. But Sony's current executives constantly invoke their names--even as they explain how they are taking the company through the most dramatic transformation in its history.

Sony, home of transistor radios, Trinitron, Walkman, Betamax, Bruce Springsteen, Spider-Man and Gran Turismo, now wants to be known as the home of connected entertainment in the digital age. CEO Nobuyuki Idei understands that the Net and the chip have exploded Morita and Ibuka's world. He compares the old Sony to a prop plane that he is outfitting for jet propulsion: from a company that makes stand-alone products shipped in boxes to one that produces an almost organic swarm of interconnected devices, services and experiences, all riding on the blurred pulses of a ubiquitous wide-spectrum network. (Do you hear a stirring of ghosts?) "We have to change our culture from the manufacturing industry to knowledge-based global culture," he says. "Kind of a reinvention of the business model itself."

What enables Idei to think that such a thing can be done is Sony's breadth. It is the only company with premium positions in both the gizmo world and the media world. At AOL Time Warner, synergy is an epithet, but in Tokyo the promise not only survives, but thrives. To Idei, everything comes together with his beloved buzzword: broadband. Sony will create not only network-connected products but also devise services that deliver the content--much of which Sony owns through its own music, movie and game divisions. (The early models for this include the wildly popular online game called EverQuest and an interactive television guide.) Sony may even have a hand in new forms of currency used to purchase such services: through its own bank, the company offers Tokyo train commuters a smart-card payment system.

To realize this vision requires not only imaginative new products that exploit the vaunted "Sony DNA," but altering the dynamics within Sony itself. "The company was built in a vertical silo fashion, to cultivate the independence that was prized by Mr. Morita," says Howard Stringer, CEO of Sony USA. "At the end of the analog age, the operating companies actually didn't get along well." Idei realized that this had to change. "Now everybody in every aspect of the company is talking to each other," says Sir Howard.

The necessity for such bridge-building led to the recent ouster of Sony Music's longtime leader Tommy Mottola, whose unwillingness to confer with the rest of Sony on a new business model forced the change to an outsider, NBC television executive Andrew Lack. "If you keep talking about networks, you have to practice good networking in your own company," says Stringer. Lack's new job will be to try to figure out how to add value to Sony's music division by integrating J. Lo and Bob Dylan into the interlocking stream of revenue generators that Sonyites call the Ubiquitous Value Network.

To get a sense of the risks involved in Idei's plan, just ask him whether any current Sony product embodies what he's talking about. "Not yet," says the CEO. In fact, the entire strategy is a leading pass to a speedy receiver who may or may not be going by the same playbook as the quarterback. Even if the scheme ultimately works out, there's financial peril in pursuing a game plan that won't fully pay off for years. By 2005, Idei figures, the broadband world he's talking about will have arrived, and Sony will cash in.

But while Idei feverishly implements a leapfrogging generation of products, much of the world is painstakingly slow to adopt the high-speed Internet infrastructure that will let them come alive. Some customers, particularly in developing nations, are many, many years away from even beginning the digital transformation: last year about 30 percent of Walkman sales were units that use the antediluvian medium of cassette tape.

Then there's the problem of piracy and digital rights. In Morita's day, Sony had no qualms about unleashing the Betamax and taking the consumer's right to make personal copies to the Supreme Court (and winning). But now it's one of the world's big-gest owners of copyrighted material. Sony has already made missteps by crippling some of its network-based music devices to prevent copying, outraging its customers. "We have learned from that bitter experience," says Sony's president Kunitake Ando, who contends that as a content holder and an electronics giant it is in a perfect position to struggle toward a solution. But if, as Ando says, Sony will soon begin selling copy-protected audio CDs in Japan and later in the United States, consumers will howl even louder.

Finally, all this has to be done while competing head to head with the likes of Microsoft, AOL and about a zillion other companies in electronics, computers, film, music and photography. All while the global economy is miserable, war and terrorism are afoot and, oh, Sony's income in the fiscal year ending last March had dropped by 40 percent. If it weren't for bright spots like Sony Pictures (Spider-Man will wind up being a billion-dollar franchise) and PlayStation (generating more than half of Sony's profits last year), who knows if Idei would maintain his quiet confidence?

In Idei's master plan, consumers are ushered into the zone of Sony by one of four portals: television, game console, personal computer or mobile phone. One of its bolder initiatives is called Cocoon, currently sold in Japan as a TiVo-like digital video recorder, with software that tries to figure out what you like. Future systems will include Internet connectivity, DVD-burning and a home-theater version. Cocoon is a Trojan horse: placed at the entry point for television and Internet signals, it offers Sony a perfect chance to funnel a host of services to the consumer, from advanced program guides and music channels to pay-per-view showings of "Maid in America."

Another Sony plan is designed to help the company stay ahead of competitors like Samsung and Sharp, which have retooled in hopes of demanding the premium prices that Sony commands as the world's No. 1 brand (according to a Harris poll). Idei's scheme is built around a previously obscure abstraction: qualia. "Qualia is the kind of comfort you feel when you see a beautiful landscape, or meet warmhearted people," he explains. Later this year, Idei says, "we will introduce premium products and marketing services under the Qualia name." The devices may be available only by special order, and the services won't be offered to the hoi polloi. In order to qualify for the elusive Qualia designation, the product has to be certified by a special committee of two: Idei and Ando.

Even without the Qualia label, the PlayStation 2 is the hero of Sony's bottom line. And PlayStation czar Ken Kutaragi hopes to be the architect of the entire new electronic infrastructure of the corporation. Kutaragi is the perfect example of Sony old and new. A fiercely independent engineering visionary, he created PS1 and 2--and ran his division with cavalier disregard for the suits at headquarters. "He's kind of a symbol for Sony, how the rule breaker can survive with the rule maker," says Idei, who has tried to make Kutaragi more of a team player by giving him broader responsibility. "And now," says Idei, "the rule breaker has become the rule maker."

But the radicalism remains. Kutaragi has his own version of a broadband strategy. Sony has struck a billion-dollar deal with IBM and Toshiba to create a super-powerful chip--1,000 times mightier than the one in PlayStation 2--that will be the basis of a modular computer called a "cell." Clearly this cell will be part of PlayStation 3 (though Sony won't confirm anything about PS3 while the current console is still reaping megabucks). But Kutaragi has a broader plan. The cell technology (expected to arrive around 2005) is the basis for a "home server" device that could be the center of all media and information in the home. Additional cell computers would be the brains of every Sony device--a game console might have five cells, and a PDA might use only one. The cells, as members of the network, would all be connected, in effect creating a peer-to-peer web that would transform every home into a kind of domestic (and legal) Napster.

Meanwhile, Kutaragi is working on enhancements to the current PlayStation. Perhaps as early as this year, consumers will be able to begin souping up the PS2 into a broadband-entertainment equivalent of the Swiss Army knife. He's asked what might eventually be in it. "What do you want in it?" he replies. And proceeds to nod at each suggestion: music server... personal video recorder... digital picture center...

Who knows what Sony's sainted founders would make of all this? Quite possibly, the Sony project that would thrill them most is Sony's showcase "personal entertainment robots," spearheaded by the artificial dog Aibo and now expanded to include SDR-4X, a walking, talking and even dancing prototype for a biped humanoid device in the spirit of the beloved anime figure Astroboy. Toshitada Doi, who heads Sony's Digital Creatures Laboratory, believes that one day robots, acting as personal companions and smart interfaces to an otherwise puzzling world of technology, will be Sony's most financially profitable product line. "Bigger than the computer industry," he predicts.

At the recent consumer Electronics Show, the SDR-4X was the featured guest in the climax of Kunitake Ando's keynote. The much-anticipated presentation was carefully crafted to emphasize the strides Sony was making toward its broad-band goal. Beginning with music video clips from J. Lo and a trailer from the "Charlie's Angels" sequel (its costar Drew Barrymore dropped in to help demo Sony's new toys), the speech was crammed with cool Sony stuff: next-gen flat-panel screens, DVD camcorders, Airboard screens that controlled a range of devices and even a prototype VAIO PC "sensor" computer shaped like an ashtray you'd find in a hotel bar.

After the keynote, Ando unwound at a dinner for a few journalists, where talk turned to the knotty problem of digital rights. He startled everyone by speculating that in the long term, given the nature of Internet copying, record labels may not have a future. "When you have a problem like this," he says, sighing, "I really wish we were a simple hardware company." But of course the mission of Morita and Ibuka was never all that simple: their passion was succeeding at tasks that their competitors never considered. Pushed by those ghosts, Ando and his boss Idei can go nowhere but forward. "We don't want to go back to being a box company," says Ando. "If we lose our dreams it's not Sony at all."