(FROM THE WALL STREET JOURNAL 4/29/15)
By Takashi Mochizuki and Eric Pfanner
TOKYO -- Sony Corp. lost the smartphone war but rings up a sale
on every shipment of Apple Inc.'s new iPhone 6 or Samsung
Electronics Co.'s Galaxy S6.
The Japanese company is the world's largest supplier of image
sensors in digital cameras. To meet surging demand, Sony plans to
invest $375 million in its image-sensor factories on top of nearly
$900 million announced earlier this year.
"Whether it's a device that goes into other manufacturers'
products or sometimes our own, if there's innovation there . . .
that's something I get excited about," says Kazuo Hirai, Sony's
president and chief executive.
This isn't the same Sony that popularized transistor radios, the
compact disc and Walkman. Pushed by the 54-year-old Mr. Hirai and
his powerful second-in-command, finance chief Kenichiro Yoshida,
the company has stopped trying to replicate its glorious past as a
creator of era-defining consumer-electronics gadgets.
Instead, Sony is trying harder than ever to profit from other
companies' innovations, such as the iPhone 6. Each one contains two
Sony-made image sensors and related parts, which generate revenue
of as much as $20 per phone for Sony, analysts say.
Earlier-generation iPhones had one Sony sensor apiece. The "selfie"
craze has strengthened Sony's grip on the market.
Signs that the strategic shift is gaining more momentum have
doubled Sony's long-suffering share price in the past year. Results
due Thursday are expected to include operating income of 68 billion
yen ($571.9 million) for the fiscal year ended March 31. Sony
upgraded its forecast last week from the previous 20 billion
yen.
But because of write-downs in its smartphone business, Sony has
said it expects to report its sixth net loss in the past seven
years. The company won't pay a dividend for the first time since
going public in 1958, and its long-term corporate debt rating was
cut last year by Standard & Poor's Ratings Services to one step
above "junk" territory.
The costly shadow of Sony's struggles in consumer electronics
keeps Mr. Hirai from using the word "turnaround" yet. Still, Sony
has set a target for operating income of at least 500 billion yen
in fiscal 2017. Nearly half the total is expected to come from
image sensors and Sony's videogame division.
"If we're talking about the organization and our strategies and
where we want the company to be next year, two years from now,
three years from now," says Mr. Hirai, "yes, we're starting to turn
the corner."
In February, Sony reorganized its businesses into three tiers
determined by growth prospects and investment priority. At the top
are image sensors, videogames, movies and music. Cameras, video and
audio equipment are in the middle. At the bottom: smartphones and
televisions.
That move puts tiny smartphone parts in the same category as
Sony's popular PlayStation 4 game consoles. Their sales topped 20
million in March, far ahead of Microsoft Corp.'s Xbox One.
Sony already got rid of its personal-computer business, and Mr.
Hirai has said it would consider selling the TV or smartphone
units. Mr. Yoshida is leading a cost-cutting drive to reduce yearly
headquarters costs by 30% compared with fiscal 2013.
"We should move on from the worn-out image of Sony as just a
consumer electronics maker," says Atsushi Osanai, an associate
professor at Waseda Business School in Tokyo who used to work at
Sony as a product strategist.
Breaking away from the past has caused angst among longtime Sony
engineers, who are used to seeing themselves as the elites of
Japan's high-tech industry. "A lot of the mad scientists have left
the company," says Junichi Hasegawa, a former PlayStation engineer
who quit Sony five years ago.
Sony still has a long way to go. Despite the recent jump, its
shares are down more than 70% from their split-adjusted peak in
2000. Sony's projected sales for the latest fiscal year are less
than half the size of Apple's in 2014.
Meanwhile, the company's Sony Pictures Entertainment unit
suffered through turmoil late last year caused by a hacking attack,
which exposed internal emails.
Threats from hackers led Sony to cancel the release of "The
Interview," a spoof of North Korea, though the film was later shown
in some theaters and online. Amy Pascal, who ran Sony's movie
business for more than a decade, is stepping down in May as Sony
Pictures co-chairman.
Panasonic Corp. and NEC Corp. also have shifted their focus to
supplying businesses, partly reflecting the growing emphasis
throughout corporate Japan on profits over market share.
Sony has no plans to walk away from consumer-electronics niches
where it remains strong, says Mr. Hirai. His eyes glimmer when he
talks about high-end audio or ultra-high-definition wall
projectors, and he is especially interested in the creations of
Sony engineers, like cameras.
Yet even Sony's successful videogame division is changing.
Analysts say PlayStation's most exciting future growth could come
from its digital network, a seller of online games, movies, music,
TV and other content. Much of that comes from outside
suppliers.
The image-sensor business is a major part of Sony's shake-up.
The company makes them at four Japanese factories, including one in
Kumamoto on the southern island of Kyushu. While carrots grow and
cows graze in a field outside the city, robots whiz around the Sony
factory, delivering silicon wafers to chip-making machines.
Few iPhone or Galaxy users know their smartphones are made
partly by Sony. The latest-model image sensor, called the Exmor RS
IMX230, can capture images with a resolution of as much as 21
megapixels. Sony says the sensor is the first for a smartphone to
include autofocus technology borrowed from fancier cameras to
capture fast-moving subjects.
Sony has been making image sensors for many years, and its
strength grew out of Sony's roots in the camcorder business. "We've
been stocking up know-how for a long time," says manager Tetsuo
Nomoto.
In 2012, Sony made a technological leap with a system that
essentially layers two chips on top of each other, each the size of
a small fingernail. One chip captures the image pixels, while the
other contains the sensor's circuitry. Stacking the two chips helps
smartphone makers produce thinner devices compared with previous
versions, which have both chips on one layer.
Analysts say a Sony rival in image sensors, OmniVision
Technologies Inc., of Santa Clara, Calif., hasn't yet been able to
mass-produce stacked image sensors. OmniVision declines to
comment.
Ryosuke Katsura, an analyst at UBS AG, says the method for
aligning the two layers so that the image sensor produces such
high-quality photos is a closely guarded secret at Sony.
At least for now, analysts say, Sony is the only company that
can meet the demand of high-end smartphone makers, even Samsung,
which also manufactures image sensors. Samsung declines to
comment.
"Unlike memory chips, making image sensors requires
craftsmanship, and that's not something competitors can copy in the
short term," says Hideaki Miwa, analyst at Techno Systems Research
Co.
According to the Tokyo research firm, Sony sold 40% of all image
sensors last year, up from 35% in 2013. Total sales of image
sensors grew to an estimated $8.65 billion last year, up more than
80% since 2009.
Some analysts say keeping up with demand might be Sony's biggest
immediate challenge. In the long run, Sony could be vulnerable
because of its dependence on Apple, which sometimes has shifted
suppliers with little warning.
Satoru Oyama, a semiconductor analyst at IHS Inc., says Apple
likely would consider buying image sensors for iPhones elsewhere if
another company could match Sony's quality and price.
"Sony can keep its position for at least a few years, but five
years from now? There are no guarantees," Mr. Oyama says. Apple
declines to comment.
To help shield itself from relying too much on Apple, Sony has
begun marketing image sensors to low-cost Chinese smartphone makers
such as Xiaomi Inc. The sensors also can be used in autonomous
driving technology, another possible source of growth for Sony.
At the same time, Sony is trying to generate new types of sales
for one of its oldest and most reliable cash cows: the videogame
business. PlayStation consoles are highly cyclical, with sales
spiking when new models are introduced. Some analysts say the
console business is doomed in the long run because of the rise of
games played on smartphones.
Sony disagrees. In November, the company predicted its videogame
unit would have sales of 1.4 trillion yen to 1.6 trillion yen in
fiscal 2017, up from a target of 1.38 trillion yen in the fiscal
year that ended in March. Sony increased that projection in
February.
Much of the forecast growth will come from Sony's entertainment
network, which offers a growing range of services paid for with
monthly subscription fees, says Andrew House, chief executive of
Sony Computer Entertainment. "You smooth out some of the peaks," he
says, adding that he is aiming for "a complete redefinition of what
the PlayStation platform is all about."
The business led by Mr. House recently added music from Spotify
AB and movies from Netflix Inc. U.S. customers in selected areas
can watch television shows using a new service called PlayStation
Vue. In March, Sony released its first made-for-PlayStation TV
series, a crime drama called "Powers." The streaming-video show was
produced by Sony Pictures TV.
"Powers" was panned by some television critics, though Mr. House
calls it a "great engagement of two halves of the company."
Overall, the free version of PlayStation Network has more than 64
million active users, who visit at least once a month. The
$50-a-year PlayStation Plus premium service has more than 10
million subscribers, according to Sony.