Does Sony need a new game plan?

It is just as well that Akio Morita never lived to see in the new millennium. His death, in October 1999, with dot.com hype building to a crescendo, saw Sony�s founder bow out at a time of maximum optimism for the electronics-to-records group.

With its audio-visual gizmos and interests in film, television and music, the Japanese company looked perfectly placed to ride the next wave of the Internet. Broadband was going to open the web to video and sound.

Sony�s PlayStation game console had sold 80m units in five years and captured 70% of the computer games market. With further advances, PlayStation could be plugged into digital networks, transforming the console into a broadband Internet-access device capable of downloading games, music and films.

Morita, arguably the most famous businessman in post-war Japan, died, aged 78, with images of this bold new era burning bright in his mind. He was not around to witness the bursting of the Internet bubble, and, with it, the collapse, or at least derailment, of those grandiose plans.

Things came to a head in April this year in what City analysts have come to call �the Sony shock�. The electronics giant disclosed a net loss of 111bn yen ($930m) in the first three months of 2003. Compounding a bleak picture, Sony halved its forecast profits for 2003/04 and said shipments of PlayStation 2, a major profit driver, would be 10% lower, at about 20m units.

The news, which caught analysts off-guard, sent Sony�s share price crashing to a seven-year low. The company now faces an uphill battle to win over jittery investors and push through wide-ranging reforms. Sony is in the thick of a three-year restructuring programme aimed at squeezing more profit from its core consumer electronics business, which accounts for two-thirds of sales.

Sony has seen hard times before. Its story, indeed, is one of pioneering innovations and marketing genius - punctuated by occasional howlers. One of its worst debacles came in the late-1980s, in what, today, looks uncannily like a preview of AOL�s ill-fated merger with Time Warner.

Long before the Internet revolution, Sony, the ultimate electronics giant, was sold on the idea of �synergy�. Its electronic hardware - personal stereos, video cassette recorders (VCRs) - dovetailed neatly with films, music and other software. Just as AOL looked to Time Warner, so Sony set its sights on two giants of the US corporate stage: CBS Records and Columbia Pictures.

If buying CBS Records, with artists including Michael Jackson and Bruce Springsteen, ruffled feathers in New York, the 1989 acquisition of Columbia, owner of the Columbia and Tri-Star studios, was seen as an all-out attack on the heart of America. The $3.4bn deal was likened to �buying a part of America�s soul�. Yet there was no denying the commercial logic. Columbia, with its library of 2,700 films, including classics like Lawrence of Arabia, provided the content to balance Sony�s interests in consumer electronics.

Sony�s critics did not have to wait long. By 1994, the Columbia acquisition was being described as a disaster of epic proportions. Dazzled by the Hollywood lights, a star-struck Sony management had spent $700m hiring two top film producers, Peter Guber and Jon Peters, the men behind hits such as Batman. Sony bought their production company, Guber Peters Entertainment, for $200m, and paid another $500m buying them out of a long-term contract with Warner Brothers.

Film flops

This was just the beginning. Sony Pictures spent $100m renovating its Hollywood headquarters. After all that, Peters quit after a year, and other managers were quick to follow. Capping it all, Sony was straddled with box-office flops such as Last Action Hero starring Arnold Schwarzenneger.

The damage was laid bare in November 1994, when Sony wrote off $2.7bn of goodwill on the Columbia acquisition. Once the numbers were added up, analysts claimed that the deal had cost Sony the best part of $7bn. The write-off sent Sony deeply into the red and saw Sony�s shares fall 8%.

The push into music and films was a huge departure for Sony. The company traces its history to 1946 when Akio Morita and a friend from his Navy days, Masaru Ibuka, started a small electronics company, Tokyo Telecommunications Engineering Corporation. Their first product was an electric rice cooker.

The breakthrough came in 1950, when the company developed Japan�s first tape-recorder. Five years later came Japan�s first transistor radio. In 1958, the company�s name was changed to Sony, conflating sonus, the Latin word for sound, and sonny, meaning little son. The idea was to convey youthfulness and energy.

By the late 1960s, Sony was firmly established as one of the world�s great innovators. But it was about to suffer its first big setback. In 1975, the company unveiled the Betamax VCR, set to revolutionise home video viewing. A year later, JVC launched its rival format VHS, with twice the recording time of Betamax. Sony was horrified: technology freely disclosed to JVC during talks about unifying product specifications had been incorporated into the VHS format. JVC�s product had fewer components, making it cheaper to manufacture. The electronics industry was soon divided into two camps.

Sony fought long and hard to save Betamax from oblivion. But by 1988, Sony was marketing both VHS and Betamax, and the company finally admitted defeat. It had been an expensive lesson.

The Betamax debacle aside, Sony continued to crank out the hits. In 1979, the company unveiled the Walkman personal stereo, allowing consumers to listen to music while exercising. Sony�s marketing department was not convinced, but Morita, with a keen instinct for what would sell, overruled them. The Walkman remains one of the products most closely associated with Sony.

Other innovations included the CD player, the MiniDisc, the Digital Handycam and the DVD video player.

Sony, today, embraces Sony Music Entertainment, with artists including Ricky Martin, Shakira and Jennifer Lopez; the film division, with hits like Spider Man and Men in Black II; and a games division, driven by PlayStation 2. Sony Ericsson, formed in October 2001 as a joint venture with Ericsson of Sweden, is the world�s fifth-largest maker of mobile phones.

But the music business has lost sales to digital piracy.

Under pressure to produce innovative new products, Sony recently unveiled the PSP hand-held games machine, to be launched in 2004. Another new machine, PSX, will combine TV, hard disk drive and DVD recorder, creating an integrated entertainment platform for music, games and films. Sony hopes to revitalise its electronics division, which has been hit by low sales of Vaio personal computers and traditional home electronics.

Sony is further concentrating on DVD recorders, flat-screen TVs and digital cameras. At the same time, the company is taking the axe to its manufacturing operations in a bid to become more competitive. This two-pronged approach - structural reforms and innovative game and electronic launches - is working to a tight deadline. Sony�s chief executive, Nobuyuki Idei, has set a goal of a 10% operating profit margin by 2006, when the company celebrates its 60th anniversary.

By then, Sony hopes to have consolidated its position as a global media and technology company, anchored by a famous brand name. City watchers will be hoping that there are no more shocks looming along the way.

Jon Ashworth is business features editor at The Times.