With PlayStation network, Sony goes back to the future in search of revival

TOKYO Tue Jul 29, 2014 9:17am IST

A man plays a video game on Sony Corp's PlayStation 4 console at its showroom in Tokyo July 16, 2014. REUTERS/Yuya Shino

A man plays a video game on Sony Corp's PlayStation 4 console at its showroom in Tokyo July 16, 2014.

Credit: Reuters/Yuya Shino

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TOKYO (Reuters) - Japan's Sony Corp is hammering out plans to rise from the ashes of nearly $10 billion lost in six years by building a future around its last consumer electronics blockbuster - the PlayStation.

Sony plans to reposition the video console warhorse as a hub for a network of streamed services, according to three senior officials, offering social media, movies and music as well as games. The executives spoke to Reuters on condition they not be named because the matters are still in early stages of discussion.

The plans to coax more revenue from the PlayStation's network of users are being developed by a new breed of managers brought in by Chief Executive Kazuo Hirai. Analysts say if Sony gets it right, the game and network business could earn about $1 billion in the fiscal year from April 2016 - making it the most profitable part of the company bar a financial services unit.

"Network services have been a long-running issue for Sony," said Atsushi Osanai, associate professor at Waseda University's business school. It's a field Apple Inc has dominated with iTunes, while established movie and music services like Netflix Inc and Spotify are expanding fast.

"In the past there was a time when they (Sony) were all over the place and went after everything, but zeroing in first on game users is effective," said Osanai. The company's next progress report will come with its first-quarter earnings on July 31.

At 200 billion yen ($1.96 billion) last fiscal year, some 90 percent of it from games, Sony Entertainment Network's revenue is small compared with the 5 trillion yen at the company's broader electronics business. The division lost 10 billion yen last year and more losses are expected this year as it spends on servers and systems for a surge in users, but the executives - and analysts - expect it to ramp up quickly after that to double-digit margins.

The new thinking is far from Sony's first effort to kickstart a revival. Yet the company that was once the symbol of Japan's technology prowess has often failed in attempts to deliver innovative hits to match successes of old, like the Walkman music player.

The managers lining up Sony's new strategy know a PlayStation network won't fix mainstream loss-making businesses, like its TV division - "a grim electronics portfolio", according to brokerage Jefferies. It's also not the first time Sony has tried to develop networked content services.

But under plain-speaking Kenichiro Yoshida, a former head of Sony's Internet services unit now leading the charge as chief financial officer since April, managers believe focusing on PlayStation to develop a network is potentially Sony's best chance of securing a money-making springboard for revival.

"These are crucial assets that offer the greatest potential upside," said one of the senior officials.

GAME ON

The network's base of 52 million active users is dwarfed by Apple's iTunes with over 800 million, and now just about the same size as fast-growing Netflix. But Sony Entertainment Network's peg to a hit piece of hardware with a potentially captive audience can give the service a future edge, executives say.

Yoshida, 54, knows networks so far have been a black spot for Sony. A PlayStation security breach in 2011 was a major setback to its plans at the time for a looser network that was designed to allow a range of Sony devices to be connected.

The CFO's message to executives is that things must change. "What's made it tough for Sony in electronics is that we were never able to take the lead role in the networking era," Yoshida told a gathering of about 500 managers earlier this year, according to a person who attended the meeting.

While the network plans take shape, this year Yoshida is also overseeing restructuring across the company. Sony is axing thousands of white-collar jobs, has ditched the Vaio personal computer brand, and has placed the TV business in a separate subsidiary - to fend for itself.

High-tech components such as image sensors and batteries for smartphones, and next-generation consumer gadgets such as wearables, have been identified by Sony managers as key potential areas of hardware growth.

"Game and network services are a core part of Sony's electronics and we are currently strengthening our network services by expanding sales of the PlayStation 4 in a bid to raise revenue," said Mami Imada, Sony's general manager of public relations, asked to comment on future strategy for this article.

The latest iteration of the now 20-year-old console has outsold rivals easily, attracting committed gamers rather than the casual game playing audience that is migrating to smartphones and other mobile devices.

Even as Sony plans to extend the PlayStation's role, games are still driving the network services division forward, accounting for 90 percent of revenue. From July 31, Sony is launching a streaming game service, PS Now, the first ever for a console game maker, in the United States.

Sony has sold 8.7 million PlayStation 4s against 5 million Microsoft Corp Xbox Ones as of July 19, according to market research firm VGChartz. Nintendo Ltd's Wii U console, released a year earlier than its rivals, also trails with sales of 6.7 million.

($1 = 101.7900 Japanese Yen)

(Additional reporting by Sophie Knight; Editing by Edmund Klamann and Kenneth Maxwell)

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