TOKYO -- Before the novel coronavirus outbreak began, Sony CEO Kenichiro Yoshida had many reasons to be optimistic. Under his leadership the electronics-to-entertainment conglomerate had regained its momentum, and with it the respect of its shareholders. Yoshida, a quiet and reflective figure, had seen off an attack by the U.S. activist hedge fund Third Point, and was preparing for the launch of the next generation of its iconic PlayStation games console.
As he readies for Sony's full-year results announcement on May 13, and to make its annual strategy presentation to investors a few days later, the world outside the company's 20-story Tokyo headquarters has changed.
Its shares sunk as four of its factories in China were temporarily shut and its Hollywood studio had to halt production.The initial shock has worn off, and the share price has partly recovered from its March lows. Its video games have even experienced a boost from people needing to be entertained during lockdowns.
But, like other global companies, Sony must now navigate an uncertain environment, not knowing fully the long-term impact, or how drastically its business will be disrupted. Its leader at a crucial time is not a charismatic extrovert like his predecessor Kazuo Hirai, but a cool strategist who helped to steer its transformation as chief financial officer before taking over as chief executive in 2018. His task was always complex and challenging, but COVID-19 has made it monumental.
"The entire way people work or enjoy entertainment may change, but their motivations and inspirations and desire for entertainment will not. It is too early to tell what kind of change [there will be] but we will have to adapt to the new world," he said in an interview with the Nikkei Asian Review. "The value of creating excellent content will remain, whatever the method of delivery is."
Until the pandemic, Sony's revival from disarray in 2012 at the end of Sir Howard Stringer's troubled era as chief executive had been striking -- its shares rose more than sixfold by January this year before falling sharply on the outbreak. Investors cheered when Hirai and Yoshida sold weaker brands, such as its Vaio laptops, and as they curtailed their ambitions for the Xperia mobile phones when it became clear that they would not match Apple's iPhone. They proved that Sony would cut its losses when necessary.
But Yoshida does not simply want to keep slimming Sony. He rejected pressure from Third Point to spin off its image sensors business, which in 2018 held 51% of the world's market for image sensors, including smartphone cameras. He sees a long-term future for Sony businesses that have little in common with entertainment, such as life insurance and medical equipment, which helped to compensate for its electronics losses at times of strain. "In the past, we used diversity to survive. I want diversity to be a strength," he said.
Its success in sensors and in video gaming, with the PlayStation 4 easily beating the Microsoft Xbox in the race to sell more than 100 million units, have allowed him the benefit of the doubt. But with this year's launch of PlayStation 5 overshadowed by COVID-19, and the future of music and television in flux, Yoshida cannot rely on it indefinitely. To restore Sony's halo as the company that invented devices from the Walkman to the PlayStation, he must not simply go slow and steady to please shareholders.
Although Sony has recovered financially, some question its future as an innovative force. "It is sad to see how a once-great company like Sony is going down and down in hardware. I don't want to sound negative, but it is an orderly retreat," said Chang Sea-jin, a professor at the National University of Singapore and author of "Sony vs. Samsung." "Yoshida is a financial guy running a company focused on profits and market valuation, not a great engineer."
'A need for humility'
When people first meet Yoshida, they are often surprised that instead of an extrovert, effusive, globe-trotting chief executive of a tech company, they find an amiable and quizzical figure who devotes as much time and energy to listening to others as talking. Now 60, he joined Sony in 1983 and spent his entire career there, mostly in analytical roles in strategy and finance, working out how to expand the company.
"We realized how much Japan urgently and indispensably required a company like ours, with technological spirit and a set of management policies," Sony's founder Masaru Ibuka wrote in its first prospectus in 1946. It was this combination of innovation and rigor that led to Sony's half-century streak of creation, from Japan's first transistor radio in 1955 to the Trinitron color television in 1968, the Walkman in 1979 and the PlayStation in 1994. In 2018, Yoshida recalled learning from Akio Morita, co-founder, "a sense of management urgency, a need for humility and the importance of a long-term view."
Yoshida's humility is expressed through curiosity. "He came to me and said, 'Let's talk about medical things,' and we met for dinner," said Toru Katsumoto, who heads Sony's medical business and research and development, of their first meeting. "I spoke about medical imaging and tried to explain the technology as simply as possible, but he had read a lot before we met. I was surprised and impressed. Once or twice a month, we have a face-to-face meeting and we exchange ideas freely."
His enthusiasm for educating himself extends to junior employees, even in a country that regards corporate hierarchy as sacrosanct. It helps that he is comfortable talking without a group of executives around him -- he will often sit alone with visitors, throwing out questions. "Some of the younger generation engineers who know about the latest technologies will go to his office to teach him. Yoshida-san did not do an engineering major, but he actually knows a lot about technology," Katsumoto said.
Yoshida's quieter approach and willingness to rethink past expansionism has something in common with a new generation of technology leaders, including Sundar Pichai at Google and Satya Nadella at Microsoft. Benedict Evans, an independent internet and technology analyst, sees other similarities in the way that Nadella and Yoshida pleased investors: "A lot of what Nadella did was capitulate and say, 'This is where we are now and this is what we are going to do,' rather than chasing the glories of the past."
Fellow executives insist that Yoshida is more than a backroom thinker -- he spent seven years outside head office at its internet services arm Sony Network Communications, taking it public as its president in 2005. But more of his career has been spent in strategy and finance under other CEOs, including Nobuyuki Idei in the late 1990s. Perhaps as a result, he has a clear philosophy of leadership, including the need to consider all angles before making difficult decisions.
A leader must "make necessary decisions at necessary times and take responsibility for the result. Unnecessary quick decisions are not good. Any necessary decision is tough, and it is very difficult to know it is objectively correct." he said. Alongside this responsibility, he puts two other tasks -- "to lay out the direction of the company, which includes its purpose and direction as well as identity" and "to decide who to entrust with what tasks and for how long."
His approach is even appreciated by Third Point, the hedge fund that has pressed him to restructure Sony. Third Point is known for attacking some CEOs aggressively, but it praised "the thoughtful leadership of Yoshida-san" when it took a $1.5 billion stake last June. Despite their differences, this harmony has endured, helped by his willingness to consider the fund's proposals in detail. "His attitude is not just 'I'm doing this because I've been forced to,'" says one person close to Third Point. "They think he is a good operator who wants to create value."
Ready player one
If video games were still in the vanguard of consumer electronics, Sony would be in a powerful position. The PlayStation 4 has been a huge hit since its 2013 launch, with cumulative sales exceeding 100 million units, more than twice those of Microsoft's Xbox; Sony's "Marvel's Spider-Man" game for the platform has sold 13 million units alone. While Nintendo's Switch is loved by casual gamers, hard-core gaming enthusiasts remain Sony devotees.
Sony also made its earnings from gaming less cyclical by reducing financial dependence on launching and selling a new version of PlayStation every six or seven years. In 2015, it launched PlayStation Now, an online streaming service allowing users to pick from a collection of more than 400 titles to play on their consoles or PC for about $10 a month. PlayStation Plus, another service on which users can access online multiplayer games, has 38 million subscribers.
Its emphasis on recurring revenues has pleased many investors. "Sony is the only Japanese electronics company to have surpassed its profit levels [from] before the Lehman crisis. Yoshida knew the company had to become sustainable and continuity in growth was valuable. That is why he made 'recurring' a keyword," said Masahiro Ono, an analyst at Morgan Stanley MUFG Securities. "I believe this makes him a successful CEO."
In the long term, Sony faces the growth of cloud-based gaming over fifth-generation networks, and the launch of smartphone-based platforms such as Apple's Arcade and Google's Stadia. But for now, streaming drawbacks such as latency in multiplayer games gives consoles an edge and bolsters its franchise. In February, it predicted that games and network services will comprise 23% of revenues and 27% of operating profit in its 2019 full-year results, which will be announced on May 13.
Sony surprised many analysts last May by announcing a cloud gaming tie-up with its main gaming rival, Microsoft -- an acknowledgement that the dominance of the console may be on the wane.
Sony's interactive business has also gained from COVID-19, and the eagerness of people to be entertained at home. Social distancing only encourages gamers to interact remotely with each other. It has responded with a Play at Home initiative, including letting gamers download some titles free. "There is huge demand on the games side. ... It is vital for employees to feel that they do good for society, and delivering content to homes is socially very important right now," Yoshida said.
The pandemic has been less helpful for the planned launch of PlayStation 5, scheduled for release during the 2020 year-end holiday season. The console will be compatible with ultrahigh-definition 8K displays and have a solid-state drive to offer quick loading times. "The PS5 will likely be very high-spec and users can anticipate a deeper sense of immersion," said Yoshiharu Izumi, a senior analyst as SBI Securities. But no matter how eagerly Sony gamers await the PS5, the pandemic makes an attention-grabbing launch harder.
Sony's bigger problem is that the games console, no matter how well the PS5 launch goes, is dwarfed by the smartphone. Sony's 100 million PS4 sales are tiny in comparison to Apple's installed base of 1.5 billion devices. Sony was outsmarted by Apple first with the iPod and then the iPhone, having failed to adapt the Walkman for the internet era. It was an expensive strategic error that leaves Sony hoping somehow to regain leadership in the post-smartphone era of consumer technology.
"The things Sony did that placed them on every magazine cover stopped mattering. Half of the products don't exist and the other got consumed into smartphones," said Evans. "The world moved to software and they did not make the leap. They own a studio and the world's biggest music publisher, but those have no strategic leverage for hardware."
The irony for Sony is that it is increasingly successful in smartphones -- not as a brand, but as a components maker. The fact that many devices have three or four cameras has raised demand for its CMOS (complementary metal-oxide-semiconductor) sensors so much that Sony is investing more than $900 million to expand capacity by building a new plant in Nagasaki Prefecture. Sony estimated in February that its sensors business would produce more than 1 trillion yen in revenues in the 2019 financial year, and only slightly less in operating profits than its games business.
It was the sensors operation that attracted Third Point to Sony last June, arguing that it was one of the most undervalued large-cap businesses in the world. The hedge fund wanted Sony to spin off sensors into what it said could become a $35 billion stand-alone business, and to focus on gaming, music and films as an entertainment group. Yoshida responded with a strategic review of its assets, but decided last September to hold onto sensors, instead selling off the remaining 5% stake it held in fellow Japanese tech company Olympus.
"I greatly value an open dialogue with shareholders. It is incredibly important as well as useful for us as I carry out my duties," Yoshida said of Third Point. "Any proposal creates an opportunity for us to rethink our business portfolio [and] the demand to focus is very important." But he shows no inclination to succumb to short-term demands from investors. "Management is very operational, and investors are clearly financial. They have a put option and can sell at any time."
Wonder and excitement
For a company famed for consumer entertainment, Sony has always taken a liberal view of its scope. It not only makes sensors for smartphones, but high-end professional cameras and surgical microscopes. Its financial services arm Sony Financial Holdings, which began by offering life insurance in 1981, has a subsidiary that operates nursing homes. In 2013, at the low point of its post-Lehman crisis, Sony Financial contributed two thirds of Sony's profits.
Sony's motto is "kando" -- making products and services that create a sense of wonder and excitement, and most of its consumer devices are for entertainment. But it is clearly thinking more broadly about the future. At the Consumer Electronics Show held in Las Vegas in January, it unveiled a self-driving concept car that would use its sensors to navigate. "The megatrend after smartphones will be mobility, and we will contribute to its evolution from the perspective of safety, security and entertainment," Yoshida said.
Such diversity is more characteristic of a Japanese conglomerate than a Western company, and Yoshida emphasizes the financial value of having a broad portfolio of products with differing life cycles. "As well as entertainment, we have businesses to support people, like medical or life insurance. The time scale is long in medical equipment, quite opposite from smartphones. This diversity stabilizes the company."
Diversity could also hold back Sony's valuation. "The big thing that Third Point keeps telling them that Sony is a great global company, but it is not perceived in the way it should be," said one person close to the discussions. Hideki Yasuda, an analyst at Ace Research Institute, agrees that perception lags reality. "Yoshida's accomplishment has been huge and has contributed to growth, but investors have not appreciated Sony's strength. The point is to bridge the gap between the Sony that investors see and the transformed one," he said.
Hirai and Yoshida worked to correct one of Sony's worst conglomerate weaknesses -- that its hardware and entertainment arms were silos that did not communicate with each other. "Six or seven years ago, it was really siloed and we did not talk to the entertainment people -- the synergy did not happen. But we now have a real relationship," Katsumoto said. "Jim Ryan [head of games division Sony Interactive Entertainment] and Tony Vinciquerra [head of Sony Pictures Entertainment] are partners, and even friends."
While Third Point has pushed for it to spin off sensors, others have suggested it should exploit the intense demand for film and television content from streaming services such as Netflix and Apple TV+ by selling its studio -- the biggest independent one still standing -- during what could be a price bubble. Yoshida demurs. "That is a financial way of thinking," he said. "Visual content is clearly a core for a creative entertainment company. We need to think about the long-term future of the business."
Having restored investors' trust, Yoshida prefers to keep his options open in a changing world. As its display at CES showed, he wants Sony to take a bigger share of the growing market for self-driving vehicles by selling packages of sensors, including crucial "lidar" vision sensors, to automakers. Further into the future, he sees Sony sensors and technology embedded in many devices. "I sometimes think that the 'internet of things' is just a transition to the 'intelligence of things.'"
The impact of technology is now clouded by the outbreak of COVID-19, making it harder to judge. But Sony's medical products, and even its life insurance business, might turn out to be hidden strengths in the world after coronavirus. Entertainment has a social value, but so does keeping people healthy and secure. "Right now, what I can do is keep our employees safe," Yoshida said. "It is the most important thing."