By Kiyoshi Takenaka - Analysis
TOKYO (Reuters) - Sony Corp (6758.T) won the home movie DVD format war, but the consumer-electronics giant faces an even tougher battle persuading shoppers to buy Blu-ray discs in an industry which is looking to the download era.
With Sony’s current three-year business plan set to end on March 31, Chief Executive Howard Stringer also has to convince investors it has a new growth strategy for the maker of PlayStation game players and Bravia flat-screen televisions as it gets squeezed hard by rivals.
“The end of the format battle does not automatically guarantee a swift shift to Blu-ray,” said Kazuharu Miura, an analyst at Daiwa Institute of Research.
“The big challenge is how they communicate Blu-ray’s benefits to the potential users who already own DVD machines.”
Toshiba Corp (6502.T) called time on its rival HD DVD format this week, leaving the Sony camp free to pursue a home movie market worth up to $24 billion a year.
But Sony has become heir to that fortune at a time when more consumers are bypassing stored movies and games altogether and downloading them.
“We believe it is highly likely that the Internet will become the mainstream method of distributing visual content, in the same way as with music,” Mitsubishi UFJ Securities analyst Yukihiko Shimada said in a research note.
Industry specialists say, however, it will be quite some time before telecommunications infrastructure becomes strong enough to allow people to download high-resolution feature-length movies with reasonable time and costs.
Sony does have its eye on this market too. Stringer said in December he sees its PlayStation 3-based online content distribution service, the PlayStation Network, as a key growth driver for the Japanese company.
Both Microsoft (MSFT.O) and Apple Inc (AAPL.O) already offer downloading services for non-game entertainment content such as TV programs. Sony’s PlayStation Network now mainly offers videogame software and game-related promotional video clips.
Sony announced that its PlayStation 3 game console would be equipped with a Blu-ray player more than two years ahead of the actual console launch in a bid to win support for the format from hardware as well as software providers.
But Sony is paying the price of seeding the market with future high-definition movie buyers. The cost of the console’s Blu-ray function and its high performance chip forced Sony to take a loss on each console sold even though it was initially priced twice as high as rival Nintendo Co Ltd’s 7974.OS Wii.
Sony’s game division is expected to post an operating loss in excess of more than $900 million for the full year, making it together and the flat TV business Sony’s two biggest earnings drags.
“By eliminating losses in these two operations next business year, Sony’s profit could get a boost of some 150 billion yen,” Credit Suisse analyst Koya Tabata said.
Sony expects PS3 manufacturing costs to fall below selling prices in the second half of the business year starting in April.
It also hopes that new titles, such as Konami Corp’s (9766.T) “Metal Gear Solid 4: Guns of the Patriots”, due to be launched this spring, will drive demand for PS3 consoles and help it catch up with Nintendo’s Wii and Microsoft’s Xbox 360.
But support for the PS3 from game software publishers may not be as solid as that extended to the Blu-ray format from electronics makers and Hollywood film studios.
Nintendo said in October Capcom Co Ltd (9697.T) would develop the latest version of its blockbuster “Monster Hunter” action game for the Wii. The game had previously been developed for Sony machines, and the switch fed speculation that support for PlayStation franchise may be slipping.
Competition is no less fierce in liquid crystal display TVs.
Sony beat Samsung Electronics Co (005930.KS) to become the top LCD TV supplier in the key North American market in the last quarter of 2007, but Sony’s market share was just 0.5 percentage point above Samsung‘s, according to research firm DisplaySearch.
Sharp Corp (6753.T) is building the world’s largest LCD plant, while Panasonic maker Matsushita Electric Industrial Co (6752.T) is planning a $2.8 billion panel factory, all aiming to boost their share of the fast growing market.
“This is one area where none in the industry is doing particularly well in terms of profitability. I see no specific solution for Sony. They just have to boost sales and achieve economies of scale,” Daiwa’s Miura said.
Sony now expects an operating profit margin of 4.6 percent this business year, missing its business plan target of 5 percent.
“What Sony management has been required to do over the past few years is bring the firm back to a decent level of profitability. Whether it’s 4.6 percent or 5 percent, the mission is completed,” Nomura Securities analyst Eiichi Katayama said.
“The point is if it can offer us a clear vision for the next three years and beyond ... Yes, it needs to turn loss-making businesses profitable. But how the conglomerate will transform itself is far more important an issue.”
Reporting by Kiyoshi Takenaka; editing by Louise Heavens