Sony post $2.03 billion loss in third quarter. Ouch.

Yup, I’m still around. Prescription-strength painkillers sound like fun but trust me, they aren’t.

In any case, today Sony announced that in the third fiscal quarter, that the company as a whole has lost £1.3 billion – or $2.03 billion. That is, in laymans terms, a complete disaster.

But why?

Well, Sony are blaming the weak yen as most of their trading is done in Japan, excessive price cuts to remain competitive on the market and the floods in Thailand, where many of their parts are produced – increasing the costs and reducing supply.

What this says is that Sony are over-reliant on a small number of suppliers, so any break in their supply chain for even a short duration is disastrous to their business. It also suggests that Sony are over-spending on manufacturing and parts, as well as the added and continued expense of research and development of new technological advancements (such as the Playstation 4 and the new wave of Sony Bravia LCD HD-TVs).

It also comes at a time when Sony are reaching the end of their planned expectations in the Blu-Ray media format. Sony, to their credit, didn’t expect Blu-Ray to be a short-term investment but the market share for Blu-Ray has remained at an almost steady 20-25%, when the projections for this time in their plans had expected the format to have overtaken the humble DVD. This hasn’t happened, and it means the investment in the technology – whilst innovative and brave – will take far more time than they had originally thought to provide a stable, steady return.

Couple this with cheaper and equally high-quality competitors in their markets – Microsoft have generally speaking more timed exclusives, LG and Samsung along with Apple have eaten away into the mobile phone space, there are numerous more laptop makers who provide more for less, Sharp, Bush and Panasonic have become big players in the TV market (once seen as Sony’s behemoth). And the Playstation 3 has sold comparatively worse than the X-Box 360, both of which have sold less (and made far less profit) than the Nintendo Wii – speaking volumes about the pace of technological change in the games industry.

Sony are having an extremely tough time of it. It is predicted that Sony will predict a fifth year of losses in the year of April 2012-2013, which may also have further repercussions on their credit rating and ability to borrow money in a tumultuous economic climate.

The question is – are we seeing the end of Sony?

This is a hard one to quantify, as the value of Sony overall is far in excess of the losses they are making. However, overall Sony cannot continue at an operational loss much longer without risking excessive sanctions and long-term stock abandonment.

In the next year or two, we may slowly start to see Sony sell off certain arms of their business – this will of course generate significant income and provide much-needed cashflow they can invest back into their more profitable areas. Considering Sony is no longer a market leader in many of their markets, and in some cases have an irreparable taint on their character (such as the laptop market, where their overpriced and unreliable Vaio has been overtaken by numerous cheaper and much less recognised brands), this will allow them to ditch their current dead weight.

The other good idea is that Kaz Hirai was promoted to CEO of Sony; this is important as the Playstation brand is one of their strongest assets, and in recent years there has been a surprising lack of enthusiasm to invest in it, as we saw with the PSN Hacking fiasco – the simple fact they hadn’t invested in proper online security for their network is troubling as well as surprising.

Playstation is Kaz Hirai’s baby, and with him at the helm of Sony there is a good chance he will have already been through the tumultuous times with the Playstation brand, how it has been held back, and reinvigorate it in a way that Nintendo did with the Wii. As many are pointing out now – it isn’t power that will be important in the next gen (the new X-Box is said to only be 20% more powerful than the X-Box 360, which is a relatively small increase for a generational leap). Clever ideas, good games and inexpensive, easy-to-use tech for all concerned seems to be the main focus now.

Time will tell. Sony are in a heap of bother, and their future is bleak. It is still too early to be writing their epitaph, as there are many ways in which Sony can continue to survive and indeed, thrive, but even Sony must now accept they have a deeply-rooted problem that isn’t going to go away through simple measures – they will have to take more drastic action if they are to live on for another decade.

Another deeply set issue Sony have is like many companies, they have been outsourcing a lot of their production to China, who are beginning to do the same thing to Sony that Sony did to the likes of Bush in the 80s and 90s – they’re realising hey, we make these parts. And in many cases, we’re making the machines and even designing them. Maybe we can go it alone, and make our own competitive versions? In the future, Foxconn may even end up being troubled as they too outsource to save money – what is the point in making the machines for others when you can brand them yourselves and sell them on at a competitive price and swallow up a chunk of the market in the process?

I, for one, hope that Sony survive. Because the industry, and many other markets, would be hurt if Sony were to go tits-up. Wishing Sony ill isn’t going to make things better – it just shifts the inevitable consequences on another generational leap, where at some point someone will inevitably have to ask themselves the serious question – is this really worth it?

Sony’s presence is important… but they can no longer pretend their business is running smoothly, or that they are in control. They need to take these warnings seriously. They aren’t in control. They’re in serious danger – and a company the size of Sony going down the tubes will have catastrophic repercussions. They need to take the opportunity available to them, right now, to look at what they do – and ask if this is worth their time.

I fear the answers to that… because Sony don’t seem to have them.

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