Today Sony presented its fourth quarter 2008 results, and even if Sony warned the market last week of weakened sales and profits, yet the results provided few bright spots as sales of consumer electronics products declined sharply and Electronics turned from healthy profits to substantial losses.
Sales were down 24.6% in the quarter on a yearly basis. Operating income went from profits of JPY 236.2 billion last year to a loss of JPY 18 billion. Profits were also down 94.8% to JPY 10.4 billion.
Sony's problems are centre around a few core issues. Firstly is the strong yen which erodes much of its margin potential in international sales. This is not just a problem for Sony, but for the whole Japanese export industry. Given the near zero rate interest rate in Japan there are also fewer tools in the tool box for Japanese policy makers. Secondly, is the pricing pressure as vendors clear channels of inventories, retailers reduce stock and consumers cut back on spending. These factors have created a market with severe pricing pressure. This, in a market were vendors are very poor at creating distinct brands and clear market differentiation, leads to a market where we expect a shake out of vendors and supply chains.
Sony Electronics takes the brunt of the weakened global economy. Sales are down by almost 30% in the year, while profits tumble from JPY 200.6 billion in profits, to a loss of 15.9 billion. We suspect the main reason for this tough landing is Sony's bullish outlooks for the TV market at the beginning of the financial year (April 1st 2008). It expected to sell 17 million TVs in the year, up almost 70% from the previous year. I cautioned against such brave ambitions and questioned the impacts on profitability given my concerns about the world economy. Sony's forecast for the remaining year is now 15 million TVs, which combined with the slump in profits indicate that Sony has done some very unprofitable channel clearing in the Christmas quarter.
The Game division has been under pressure to return to profitability. When Sony changed tack for Game to focus on profitability over volume we were concerned about the impacts on shipments, and long term (software) profitability. Developers spend their efforts on platforms based on margins per title, cost of developing for a specific platform and expected install base of a given platform. The danger for Sony in the Game division market is that developers will allocate resources to Xbox 360 and Nintendo Wii since the Playstation 3 is losing ground due to higher retail price points and Sony's policy of focusing on short term profitability and not the long term market position. Sales for the quarter also reflect these decisions. Revenues are down 32% while operating profits are just head above water at JPY 0.4 billion. This 'fall off a cliff' drop in sales is reflected in declining sales across the board for hardware and software for all platforms (PS2, PSP, PS3), aside from PS3 software which grew for the quarter. Profit driver Playstation 2 met the wall during the Christmas quarter and dropped over 50% for hardware and software as Sony has struggled to keep the ageing platform alive with new energy. However, if Sony is looking for a weapon to fight the Nintendo Wii with, the PS2 is the game. Although Sony's current pricing policy for the PS3 can be justified by looking at spread sheet snapshots, we do question the long term business sense of limiting the install of the platform while waiting for production costs to come down to a more consumer friendly range.
