Sony And The Financial Pressure

Friday, April 08, 2005

THE FINANCIAL PAGE
ALL TOGETHER NOW
by James Surowiecki
Issue of 2005-04-11
Posted 2005-04-04

In 1979, Masaru Ibuka, the co-founder of Sony, asked the company’s engineers to make him a portable stereo cassette player that he could take on a plane. Within a few days, the engineers had delivered a prototype. The headphones were gigantic, and the device required special batteries, but it worked, and when Akio Morita, Sony’s C.E.O., saw it, he realized that this was more than a gimmick—it had the potential to change the way people listened to music. In a matter of months, Sony launched the Walkman, one of the most successful products in history, and the story came to epitomize what made the company great: innovation instead of imitation, a dedication to big ideas, and a willingness to pursue its obsessions no matter what others thought.

A quarter century later, Sony is still pursuing its own obsessions, but it hasn’t produced anything like the Walkman for a long time. Today, Sony is known for floundering into new markets, not for creating them. Its televisions, music players, and portable devices—the old mainstays—no longer lead the pack, high price tags notwithstanding. Its profits have shrunk, and its stock price is a third of what it was five years ago. Last month, the company replaced its C.E.O. with Howard Stringer, the head of its entertainment business, who’s neither an engineer nor Japanese. The old ways, apparently, will no longer do.

Companies often become victims of their own mythologies. Sony’s track record of game-changing inventions—the transistor radio, the Walkman, the Trinitron—led it to believe that success lay in self-sufficiency and absolute control. Sony’s ideal future was one in which just about everything—TVs, DVD players, cameras, computers, stereos, handhelds, digital songs—bore the Sony brand. The company became an exemplar of what’s sometimes called the “Not Invented Here” syndrome: if it wasn’t invented at Sony, the company wanted nothing to do with it.

“Not Invented Here” is an old problem at Sony. The Betamax video tape recorder failed in part because the company refused to coöperate with other companies. But in recent years the problem got worse. Sony was late in making flat-screen TVs and DVD recorders, because its engineers believed that, even though customers loved these devices, the available technologies were not up to Sony’s standards. Sony’s cameras and computers weren’t compatible with the most popular form of memory, because Sony wanted people to use its overpriced Memory Sticks. Sony’s online music service sold files in a Sony-only format. And Sony’s digital music players didn’t play MP3s, which is a big reason that the iPod became the Walkman’s true successor. Again and again, Sony’s desire to control everything kept it from controlling anything.

To be fair, “Not Invented Here” has an excellent pedigree. For much of the twentieth century, innovation was dominated by big corporations—G.E., Dupont, I.B.M., A.T. & T.—which had gleaming research laboratories and armies of engineers who churned out world-altering creations. But that era is gone. Although successful companies still invest heavily in research and development, they increasingly collaborate with and borrow from others. R. & D. budgets have shrunk at many big companies (which now routinely form R. & D. alliances), and small companies have picked up the slack. Firms that were once exemplars of going it alone have dedicated themselves to playing well with others. Procter & Gamble now gets more than thirty per cent of its innovations from outside. Pharmaceutical companies rely more and more on partnerships with small biotechs to come up with new drugs. Intel, looking for new ideas, invests hundreds of millions of dollars a year in venture capital. I.B.M. has made “strategic alliances” a cornerstone of its business. Even Apple Computer—once the most imperially self-reliant of companies—has changed. Steve Jobs used to fantasize about controlling everything down to the sand in Apple’s computer chips. Today, Apple works contentedly with companies like Motorola and Hewlett-Packard.

The trend, in other words, is toward what Henry Chesbrough, a business professor at Berkeley, has dubbed “open innovation.” With so many companies investing so much money and energy in innovation, it’s hard for any one of them to consistently outsmart the rest. And technologies are so complex that it’s impractical for a company to gather all the resources it needs under one roof. The spirit of collaboration extends to customers, too. In the new book “Democratizing Innovation,” Eric von Hippel, a management professor at M.I.T., shows that, in fields ranging from surgical instruments and software to kite surfing, customers often come up with new products or new ways of using old ones. Some companies encourage their customers to modify their merchandise. Others, however, do not: when a devoted user of the Aibo, Sony’s robot dog, wrote applications that would allow the Aibo to dance to music, Sony threatened the man with a lawsuit.

Ultimately, Sony doesn’t have much choice: it will either change or continue to come up short. Companies are a little like nations. In an era of globalization, a healthy economy relies on a steady flow of ideas, resources, and capital from outside. So it goes for a big company, in an era of open innovation. Sony should know. While its mythology is all about self-reliance, its history is full of acquisition, collaboration, and partnership. The transistor radio, the color TV, the compact disk: Sony didn’t invent any of these on its own. But it did figure out how to make billions of dollars selling them. If Howard Stringer wants to put Sony right, he should take a hard look at that dancing dog.

—James Surowiecki

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One Response to “Sony And The Financial Pressure”

  1. Amy Says:

    Hi MikePopped in through the Adult Cyber Cafe. Just wanted to let you know you have a great space going.

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