How Stringer and Sony Beat HD-DVD
Here’s a great article that Forbes did earlier this month about Howard Stringer and his success at Sony. There are also several relevatory paragraphs about how Sony worked together to crush HD-DVD. While there is alot of biographical information at first, the information at the end of this story is rather interesting. One must wonder if Louis V. Gerstner Jr. had never wrote Who Says Elephants Can’t Dance?, that Stringer and Sony would be as well off as they are today.
Three years ago Sony handed one of the business world’s biggest fix-it jobs to Howard Stringer. He had been running Sony’s U.S. operation for six years, but the choice was still unorthodox: Stringer was born in Wales, not Japan, and he wouldn’t be moving to Tokyo when he took over one of Japan’s most revered companies. The challenge was daunting: The electronics and entertainment giant was struggling with red ink and management paralysis. Stringer didn’t profess to have the answers. “Look, I didn’t know what I was doing,” he says today.
But he knew where to look for help. Before he started, he read Who Says Elephants Can’t Dance?, Louis V. Gerstner Jr.’s book about fixing IBM when it was a corporate dinosaur much like Sony. “You can read Gerstner’s book and see a pretty good game plan” for turning around Sony, he says. “It is blindingly obvious, and if it weren’t, I wouldn’t have been able to do it.” As Stringer works to transform Sony, he says he continues to tap Gerstner for advice: He’s hired the former IBM chief executive as his personal corporate guru.
The self-deprecating Stringer seems to be just what Sony needed. He’s relied on his sense of humor and personal charm–the kind that famously lured comedian David Letterman away from NBC when Stringer was president of CBS–to win over Japanese executives wary of an outsider but weary of the company’s turf wars and lagging performance. His hard work and relentless travel–between Tokyo, his home in New York City and the home outside London where his wife and two teenage children live–are starting to show results. Sony has $10.8 billion of cash on its balance sheet and a slew of new products on shelves, including PlayStation 3, a high-end digital camera and a superthin TV that will star in the next James Bond film.
For years Sony persuaded consumers to pay a premium for its gadgets by inventing them first–think Walkmans and camcorders. Today it loads them up with superior technology, which produces clearer TV pictures or tells digital cameras to shoot when the subject smiles.
Stringer’s goal is to connect its devices–televisions, music players, PlayStation machines–to one another and to a new Sony network for downloading movies, TV shows, games and other digital content. Downloading goes via the PlayStation 3 console, turning it into a home computer server that can handle movie rentals as well as play games. In addition, Sony’s Bravia flat-screen TVs will allow viewers to connect to the Internet and stream Hollywood hits without a set-top box or cable subscription; already the TVs can do this with YouTube and other free Internet channels. Sony will send the new Will Smith movie, Hancock, to Internet-ready Bravia TV sets in November, before it can be seen on DVD or on cable. In Stringer’s vision of the future, consumers will pay Sony first for televisions and other hardware, then pay Sony again to download movies, music and TV shows. “The battle for me is the networking of these devices,” he says. “I have to succeed at that.”
But how could Stringer get his devices talking to each other in a company whose executives were barely talking to each other? When he took over, Sony was so dysfunctional–and divisions guarded their territory so fiercely–that managers working for one division wouldn’t return phone calls from their counterparts in another division. Cheerleading, cajoling, schmoozing over soccer games, Stringer talked about how far-flung units must battle Sony’s competitors instead of one another. He pointed to the revenue Sony would reap if the company’s different arms would cooperate on marketing. It sounds obvious, but his predecessors had failed to pull it off.
For Stringer it would take a crisis to finally galvanize his executives into pulling in the same direction: In the battle to replace the DVD Sony would beat back an assault by Toshiba on Sony’s Blu-ray technology, the high-definition video format and the linchpin of just about every one of Sony’s business lines. To get the best available picture quality, consumers will need to replace almost every video device they own–televisions, video players and video cameras.
Net profit for the year ended Mar. 31 was $3.2 billion, triple the previous year’s, on revenue of $89 billion, up 6.9%. But the pretax, preinterest profit margin was just 4.2%, missing Stringer’s 5% target and lower than that of rivals such as Samsung Electronics. “He’s done a lot, but he’s got a lot more to go,” says Gerstner, who doesn’t coach any other chief executives and initially turned down Stringer (who flew down to Florida and arrived at Gerstner’s home holding a dog-eared copy of the IBM book before Gerstner agreed).
Two of the biggest messes inherited by Stringer–the TV manufacturing and PlayStation businesses–are still dragging down earnings, but he’s promised Wall Street that both will turn profitable this year. The TV operation got in trouble because it didn’t keep up with the latest technology and was slow to cut manufacturing costs by moving production to lower-wage countries. High development costs and missed deadlines have always plagued the PlayStation business as Sony’s engineers tinker endlessly with each model. The powerful PlayStation 3, which uses an IBM-Toshiba-Sony chip that can do 256 billion calculations a second, costs $400 and was late coming to market. Outside videogame outfits have still designed only a limited number of games for it. But one PlayStation-only game released in June, Metal Gear Solid 4, has been driving sales of the machine. Sony expects to sell 10 million in this fiscal year, while holding prices steady, enough to put that business into the black. Morgan Stanley says Sony might easily sell 14.5 million.
The company’s adrs recently traded at $40.90 on the New York Stock Exchange, up 17% from when Stringer took over in June 2005, and Goldman Sachs, Deutsche Bank and Morgan Stanley all rate the stock a buy. “Sony remains our top pick in the Japanese consumer electronics sector,” says Goldman.
Stringer will draw on his unconventional background to implement his blueprint. A burly 66-year-old who studied history at Oxford, he immigrated to New York in 1965, only to find himself drafted. He fought for the U.S. in Vietnam, then returned to New York as a documentary TV producer for CBS News. After serving as Dan Rather’s producer, he rose to president of the network. He became a U.S. citizen in 1985, yet Queen Elizabeth II knighted him in 1999. After a stint leading ill-fated tech company Tele-TV, he took a vaguely defined job as president of Sony Corp. of America in 1997. He tried learning Japanese but gave up. Within two years he was running the U.S. operation.
By that time Sony had been sliding for years. Sony engineers invented Betamax, only to see the cheaper VHS become the standard for videocassette recorders. Sony missed the move to flat-panel TVs while it championed its dated Trinitron TVs. It dreamed up the Walkman, but Apple created the Walkman of the digital-download age, the iPod. Sony’s net profit margin slipped to 1.2% in fiscal 2004, and the company decided it needed a turnaround–and needed a foreigner to pull it off. A transplant boss (Carlos Ghosn) rescued Nissan. Why not Sony? “Strange people get jobs in strange times,” says Stringer. “I got this job in a crisis.”
He needed a plan, fast. Step by step, it’s all there in Gerstner’s book. Like Gerstner, Stringer leaned on a smart finance guy from outside (Chapter Three) and moved quickly to stop the red ink by cutting $2 billion in costs. To raise cash and realign the company’s strategy (Chapter Six), he sold $1.5 billion in noncore businesses, such as a semiconductor factory. Last fall Sony sold a $2.8 billion, 40% stake in its financial and life insurance company in one of Japan’s biggest initial public offerings. Like Gerstner, Stringer made a clear strategic choice not to follow Wall Street calls to break up the company, opting to try to turn Sony’s breadth into a strength.
Along the way, Stringer surrounded himself with smart people and didn’t micromanage them–partly because, like Gerstner, who had joined IBM from RJR Nabisco, the media executive didn’t know enough about many of the company’s business lines to do so (Chapter Two). “Given my background–which is either a strength or a weakness–I run things by people,” Stringer says.
While visiting Tokyo he catches up with colleagues in the Westin Hotel bar. He phones each of his direct reports a couple of times a week–sometimes at home on weekends–and often spends just half the time talking business. He invited a handful of executives to his Tokyo hotel suite at 4 a.m. this spring to watch the European Cup soccer final. One came in pajamas. Sir Howard was barefoot. They all took turns yelling at the TV, alternately cheering and consoling one another during the tense game. When his beloved Manchester United finally beat Chelsea in overtime, Sir Howard was on his feet, jumping up and down.
Following the boss’ lead, Sony has loosened up. A huge inflatable soccer ball dangles from the lobby ceiling in the Tokyo headquarters. “Okay, we’re good again, but we need to be great,” Stringer told executives at a management meeting in May.
Indeed, until last summer Sony’s turnaround was ticking along, but Stringer’s “Sony United” concept was still little more than a slogan. Suddenly Sony faced a crucial test: Its Blu-ray technology was in jeopardy. To contain the mass of bits needed to display movies in high definition, Sony and partners (including Philips, Samsung and lg Electronics) came up with Blu-ray–the discs are read by blue lasers–while Toshiba pushed a cheaper format called HD-DVD. A standards war was brewing–another Betamax-versus-VHS battle.
Retailers such as Best Buy and Wal-Mart didn’t care what the standard was; they just wanted consumers to feel confident enough about which format would prevail so that they would buy new videodisc players to go with their high-definition televisions. But with Blu-ray and HD-DVD players selling neck and neck, the two rivals were in a standoff, and many consumers were delaying their purchases. Toshiba and Sony each wanted the big Hollywood movie studios to pick sides.
Paramount announced last August that it was choosing the Toshiba technology over Blu-ray. Reports flew that Toshiba paid Paramount and its DreamWorks unit $150 million to clinch the deal, which Paramount parent Viacom doesn’t deny. Toshiba began selling HD-DVD players for $99, hoping to outsell Blu-ray players and lock in its advantage. The news triggered “sheer and utter panic” at Sony, says its U.S. chief financial officer, Robert S. Wiesenthal. Except in Tokyo. In Japan Blu-ray accounted for 90% of videodisc players sold, so to Sony executives there it seemed that Blu-ray had already won the format war. But Sony’s U.S. executives knew that the huge U.S. market was now up for grabs.
In Tokyo the night the Paramount news broke, Stringer set up a global conference call to brainstorm ideas for stopping Toshiba. He called on every division to play a part, seizing on the crisis to force the company to work together. A company changes its entrenched habits only when it is under stress. So says Gerstner, in Chapter Seven.
One suggestion was quickly implemented. Sony had wanted gamers to use PlayStation as a videodisc player more often. So if they found a Hollywood movie in the box when they bought the machine, they’d likely test-drive the film, not just play the car-racing games. “Howard rang me up and told me, ‘I really need you to pack half a million units of Spider-Man with PlayStation 3,’” says Michael Lynton, chief executive of Sony Pictures Entertainment.
This was a startling change from when Lynton joined in 2004: “The picture company didn’t talk to the music company, and we didn’t talk to the electronics company.” Divisions could haggle for a month before agreeing on, say, how much the Sony studio would pay for Sony TVs or cell phones used on movie sets. Not anymore.
For the studios and retailers, Sony’s big argument was that even though Blu-ray and HD-DVD were neck and neck in player sales, Blu-ray was really ahead by 1.8 million. That’s if you count the videogame fans who own PlayStation 3 players, because they play Blu-ray discs. So Sony executives went to work persuading Hollywood studios that Blu-ray wasn’t the next Betamax. It fell to Wiesenthal, Stringer’s U.S. finance man, to lobby one studio, Lionsgate, to make sure it didn’t agree to payments from Toshiba (which doesn’t own a studio). “The relationship between Sony and Lionsgate was going to continue a lot longer than the relationship between Toshiba and Lionsgate,” he argued, making cell phone calls from a boat while on vacation off Long Island, N.Y. “Toshiba was not going to cofinance one of their movies.”
Peter Dille, a marketing official at Sony’s U.S. games unit, suggested wooing rival Hollywood studios–Lynton’s competitors–by including snippets of their movies in PlayStation 3 ads. The free advertising would get the industry’s attention. Message to Hollywood: “This does more than play games,” Dille says.
With Toshiba cutting its price, Sony needed to sell more players. Its headstrong gaming division agreed to cut PlayStation 3’s price by $100, then began selling an even cheaper version with half the memory, even though it would crimp the division’s profits. Sony executives from Los Angeles, San Diego, New York and Tokyo converged on Best Buy headquarters in Minneapolis to spend a half-day in meetings. Sony offered to help pay for Best Buy ads in Sunday newspapers nationwide, to pay for Blu-ray store displays and to offer discounted Blu-ray packages–a Bravia TV sold with a Blu-ray player and five free discs, for instance. Sony execs also made pilgrimages to Wal-Mart, Target , Circuit City and other chains.
Despite rumors to the contrary, Sony executives say they did not pay movie studios to side with Blu-ray in the format war. But Sony did spend more than $60 million advertising PlayStation 3 from November to January in the U.S., according to tns Media Intelligence, bringing free attention to Hollywood movies and retailers alike.
The swing vote turned out to be home entertainment giant Warner Brothers. After scrutinizing holiday sales of players, Warner announced on Jan. 4 that it would adopt the Blu-ray standard. On Feb. 15 Wal-Mart agreed to sell Blu-ray machines exclusively. Four days later Toshiba said it was ending its HD-DVD business. In the first half of the year, the number of Blue-ray machines in use more than doubled, to 6 million. Stringer’s plea for unity had paid off. Says Andrew House, Sony’s marketing chief: “We have laid the ghost of Betamax to rest.”
Article courtesy of Forbes.
