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Sony needs a new Walkman

After restoring its finances, the Japanese group must rediscover its lost spark

| Japan
Sony needs another game-changing invention that will prove its potential.

Longtime Sony watchers can debate when exactly one of Japan Inc.'s best turnaround stories began. April 1, 2014 is as good a guess as any.

That was the day then-CEO Kazuo Hirai plucked Kenichiro Yoshida from relative obscurity and named him chief financial officer. At the time, Hirai had held the top job for two years -- long enough to see how the likes of Apple, Google and Samsung had run away with industries Sony once dominated. Long enough, too, to realize he needed help stopping the hemorrhaging that had sent shareholders fleeing.

That year was epochal for another reason: a North Korean hacking scandal involving a data theft from Sony's Hollywood movie subsidiary that made a proud Japanese icon the butt of jokes. One Saturday Night Live skit on Pyongyang's cyberbreach had actor Mike Myers cracking: "Why pick on Sony? They have not had a hit since the Walkman."

Hirai and Yoshida were not amused -- they went to work. Wisely, they cut off many a gangrenous limb. Sony scrapped its money-losing personal computer business, stomached layoffs and a $1.7 billion write-down on smartphone operations, took an ax to a flailing television unit and invested more in unglamorous microchip businesses. They tried to reform the corporate culture, making some headway in taking down Sony's notorious silos -- competing divisions jealous of each other's budgets that barely talked and stymied the company's once-fabled innovative spirit.

It is a work in progress, but it has already generated a revival that has Sony reporting its best operating profit in two decades: $6.61 billion in the fiscal year ended in March. Hirai passed the baton to Yoshida in February. And earlier this week, the 58-year-old Yoshida made his first big move as CEO: paying $2.3 billion to gain control of EMI Music. It is increasing its stake from 30% to 90% by buying out most of the stock held by the partners with which it originally bought into EMI in 2012.

It makes Sony the No. 1 music publisher at a moment when streaming services are adding new life to the entertainment game. Sony now owns more than two million songs from the likes of David Bowie, Kanye West, Frank Sinatra, Queen, Alicia Keys and Pharrell Williams. Sony is also grabbing a 39% stake in Peanuts Holdings, which holds rights to the "Peanuts" cartoon and comic empire, featuring popular characters Snoopy and Charlie Brown.

Equally important, Yoshida said Sony will push on with investments in sensors critical to evolving technologies from self-driving cars to artificial intelligence. Semiconductors, too -- a vital profit stabilizer.

Yet one question Yoshida has yet to answer: What, exactly, comes next for Sony in terms of big new hit products? The kind of products with which it made its name.

As much as Sony is an exemplar for how other Japanese giants can cut bloat, refocus on core competencies and restore profits, it is a microcosm of where the economy finds itself. Sony, like Japan, had its heyday in the 80s, back when it revolutionized consumer electronics and its wares dwarfed the global competition. Yet executives, like Tokyo policymakers, grew complacent.

As chieftains rested on their laurels, Steve Jobs of Apple fame eclipsed Sony founders Masaru Ibuka and Akio Morita. Nearly 17 years after the iPod outpaced the Walkman, which arguably remains the Japanese group's signature achievement, Sony still has not come up with a globally-competitive answer. Nor has Sony topped Apple's iPad or Samsung's ubiquitous Galaxy line of smartphones and tablets. While Sony scaled back on smartphone ambitious, a rebooted Xperia line of phones and tablets -- or an entirely new concept -- could increase its global reach.

Herein lies Yoshida's challenge: getting his army of engineers, programmers and networkers to conjure up a game-changing invention -- or two -- that unlocks Sony's true potential. Yoshida aided Hirai immeasurably in returning Sony to profitability. That is no small feat, considering the travails of Howard Stringer and Nobuyuki Idei before them. During his 2005 to 2012 stint, Stringer, Sony's first non-Japanese boss, spent most of his time struggling to get a handle on the global colossus; the rest praying for a weaker yen and grappling with shocks ranging from the global financial crisis to floods in Thailand that wiped out key factories.

The Hirai-Yoshida team finally got Sony into shape. Yet it now stands at the starting gate, plotting a course for catching up with rivals these next 10 to 20 years.

One worry is that Yoshida is not a product man. Just before his death in 2011, Jobs made a parting shot aimed at one-time game-changer Microsoft. No, Jobs said, Microsoft is not a threat because the board replaced visionary Bill Gates with a salesman -- Steve Ballmer -- not an innovator. Only time will tell if replacing Hirai, who spent years honing PlayStation products, with finance executive Yoshida will serve shareholders.

On the bright side, the EMI purchase is the mergers-and-acquisitions equivalent of hitting the "play" button -- acquiring control of a regular revenue stream.

Apple's cash-flow success rests on an ecosystem built around cutting-edge hardware. Its iTunes model informed the evolution of Amazon, Google, Samsung and others. Sony, too, to some extent. One of Hirai's preoccupations was crafting a network of games, music, movies and other content around physical PlayStation consoles. The resulting income stream from a loyal community of customers is bolstering Sony's bottom line. Yoshida calls PlayStation's roughly 80 million subscribers Sony's key "community of interest."

Grabbing control of EMI this week means Sony has more content with which to grow that orbit. Financial stability is a vital pillar of future success. But imaginative risk-taking is what make a technology power in today's globalized world great. Sony now has a solid financial base. Now it must show it has the capacity to tolerate disruption required for corporate invention.

An obvious missing link is splashy new hardware that appeals to a broader array of consumers -- those with little interest in sitting before a gaming console. Whether that means new advancements in smartphones, tablets, watches or other wearable technology is up to Team Yoshida. Even better, devising something we have not seen before -- a new gadget that surprises and delights the globe. In other words, regaining the innovative mojo that once changed the world.

The days when Sony can cut its way to profitability are ending. In recent years, Sony limited red ink by selling real estate and relying on banking and insurance units. Yoshida needs to turn his own musings into action. In 2014, just a month after becoming CFO, Yoshida chided predecessors for not changing along with the global electronics industry. Now that Sony has righted itself, it falls to Yoshida to prove he can build as well as he can cut.

For now, Yoshida is sticking with the realism he learned from Hirai and setting conservative targets. He is focused on "raising profit quality." Hence investing in content as a means of "increasing the proportion of recurring revenue," not least EMI's streaming revenues.

Yet that conservatism may fall flat with shareholders hoping for a bit of the old Sony magic. The company that Ibuka and Morita founded in 1946 traced Japan's resurgence from the ashes of war to global dominance. It did so by hitting dramatic homeruns innovation-wise, not with modest tactical gains.

Now that Sony is ready to swing away to the revenues coming from its music portfolio, it falls to Yoshida to wow the tech world anew, not just protect what he and Hirai achieved. For Japan Inc.'s sentimental favorite, the hard part is just beginning.

William Pesek is a Tokyo-based journalist and author of "Japanization: What the world can learn from Japan`s lost decades." He is a former columnist for Bloomberg and Barron's.

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