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Consecutive record profit sets up Sony to challenge US giants

Games, music and image sensors drive $7.7bn forecast

Sony expects game and music services and image sensor chips to provide about 80% of the record profit it forecasts for the year through March.
Sony expects game and music services and image sensor chips to provide about 80% of the record profit it forecasts for the year through March.

TOKYO -- Sony on Tuesday upgraded its operating profit outlook for the fiscal year to 870 billion yen ($7.7 billion), putting it on course for a second straight record-breaking year.

In a sharp contrast to the years when earnings swung widely due to the performance of its televisions and electronics, the Japanese company looks to have succeeded in stabilizing its bottom line, buoyed by its popular music and gaming services, as well as image sensors for smartphones, in which it commands a 50% global share.

The revised outlook for the fiscal year through March 2019 added on an extra 200 billion yen in operating profit from the previous forecast, lifting it to an 18% growth year on year. Sony's profit would rank sixth among Japanese companies excluding banks -- behind players like Toyota Motor and telecom Nippon Telegraph & Telephone -- and hints at possibly cracking the trillion-yen threshold.

"We will increase our image sensor capital expenditures 20% above our previous plan," Chief Financial Officer Hiroki Totoki told reporters in Tokyo, signaling that the company will press its advantage in the key field.

The three pillars of its success -- games, music and image sensor chips -- are expected to account for about 80% of profits. Sony upgraded its full-year operating income forecast for game and network services by 60 billion yen to 310 billion yen, representing a 75% year-on-year increase. Though sales of the nearly five-year-old Playstation 4 game console have begun to decline, Sony's online gaming subscription services, which count 80 million users worldwide, bring in steady income.

The company likewise targets an 80% growth in the music segment, including profits from shareholding revaluations.

In its image sensor business, Sony expects usage to grow from smartphones to automated driving, further pushing up demand. It plans to invest 600 billion yen in the field over the next three years to lift production capacity by 20% to 30%, widening its lead over competitors like South Korea's Samsung Electronics.

President and CEO Kenichiro Yoshida, appointed in April to succeed the free-spirited Kazuo Hirai, has vowed that Sony "will not put off our problems." Yoshida transformed the electronics business to focus on high-value products rather than pursuing scale, and built a structure focused on delivering steady income without major investments. Though problems remain -- such as the smartphone business, in which Sony expects an operating loss of 95 billion yen -- the reform effort appears all but finished, paving the way for the next battle.

That battle looks increasingly likely to center around the use of customer data. Enormous American tech companies like Google, Apple, Facebook and Amazon.com -- collectively known as GAFA -- hold a large and growing presence in the digital economy, in which stockpiles of customer data determine competitive power.

Video content streaming service Netflix, for example, uses data on what its more than 130 million worldwide subscribers are watching to glean ideas for new content, building both its customer base and its earning power.

Sony's advantage in this area could be the 80 million game customers it has worldwide. Armed with an expected operating cash flow of 830 billion yen, an 8% growth year on year, the company now has a launchpad to compete on a global scale by using its data to deliver attractive content and widen its economic sphere.

Nonetheless, players like Apple and Google generate tens of billions of dollars annually in operating cash flow. Yoshida has said the company "will not aim to reach that level." But in the digital age, strength in amassing and weaponizing data increasingly decides winners and losers.

The inventor of the Walkman has a long way to go. Apple, Google, Amazon and Microsoft claimed the top four slots of Interbrand's Best Global Brands ranking for 2018, with Samsung placing sixth. Sony was 59th.

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