Sony together with its partner Ericsson once was the hottest phone brand around. Today, it is a shadow of its former self.
Many phone manufacturers have fallen since the iPhone took the smartphone. Large brands like BlackBerry, LG and Nokia have succumbed to the disruption that was Apple’s iPhone. Sony was no exception. Once a heavy weight in the industry, has become a relic of the past. How did Sony lose its footing?
Sony partners with Ericsson
In April 2001, Sony announced it would enter a strategic partnership with Ericsson to become the world leader in mobile phones. The businesses agreed to combine their technologies through a joint venture, bringing Ericsson’s telecommunications to consumers through Sony’s consumer electronics products. The operations would start on October 1st after regulatory approval and with definitive signing of the agreement.
Ericsson President and CEO, Kurt Hellstrom, said in the joint press release that by combining the strengths of both companies, the joint venture would be uniquely positioned to become the world leader in telecommunications, and drive mobile internet. Adding that the cooperation was a perfect match. The company would benefit from Sony’s vast experience in the consumer electronics space, with Ericsson unlocking new global audiences.
President and Chief Operating Officer at Sony Corporation, Kunitake Ando, meanwhile noted that the mobile phone industry was rapidly evolving, seeing fast adoption of multi-media broadband, with major developments set for coming years. Ando’s words can be better contextualized when placed against the changing mobile landscape in its domestic market, which became the leader in mobile internet connectivity spurring a vibrant mobile gaming market.
Ando noted that millions of its customers would be looking for handsets that would be able to handle movies, pictures and games smoothly wherever they were. The partnership proved to be successful in its early days, with the company noting a strong increase in phone sales. Over the second quarter of 2003, Sony Ericsson shipped 6.7 million devices, a 34 percent year-on-year growth and up 23 percent compared to the previous quarter. The total GSM business grew by 84 percent year-on-year, with Japanese shipments increasing by 45 percent.
Sony was not alone. The entire mobile phone market was sawing massive growth, especially as devices came equipped with better cameras, which drew massive consumer appeal. In March 2004, NBC News reported that Asian vendors were leading camera phone sales. Smartphone manufacturers were in fierce competition to equip their devices with the best cameras. NEC, now a relic of the past, sold 13.1 million camera phones, and Nokia shipped 11 million. The total market for feature camera phones had ballooned to 84, coming from 22 million in 2002.
The Apple disruption
Little did the executives know that under the radar, Apple was preparing a revolutionary device that would redefine mobile entertainment. Sony Ericsson’s fortune’s started to dwindle quickly when in 2007 the iPhone was introduced. At its peak, in 2007, Sony Ericsson had €12.9 billion in net sales. This number fell to €11.2 billion in 2008 and more than halved compared to 2007, when net sales revenue fell to €6.7 billion in 2009. A major shift that many corporations would be able to process.
In October 2011, Sony announced it would take full control over the joint venture Sony Ericsson for $1.33 billion. The Guardian commented that the iPhone gave the company a run for its money, forcing it to take drastic measures. Microsoft meanwhile was trying to secure its position in the smartphone market by acquiring Nokia. The bet didn’t play out as Microsoft had hoped, but the pressure on Sony was mounting.
CEO at Sony, Howard Stringer, commented that Sony had transitioned from an analogue to a digital company. Saying that while the transition had taken longer than expected, it was able to position itself to take on the technological prowess of Microsoft and Apple. Sony was held by major natural disasters, Stringer added, which had hampered its abilities to create a competitive product. Sony built a strong entertainment business and the PlayStation Network was home to 90 million members.
Electronics sector analyst at Nomura, Richard Windsor, told the Guardian that content was key to remain relevant in the smartphone and tablet market. However, within Sony themselves there has been reluctance to combine content with Sony Ericsson business. By taking full ownership of the mobile division, opportunities to combine content may be possible. But it might already be too late. Analysts at Liberum Capital commented that with less than 2 percent market share worldwide, Sony Ericsson’s position was fragile.
Sony’s decline
As the world was welcoming the iPhone and Samsung’s Android powered devices, Sony had found itself in a vicious cycle with declining sales. Sony’s smartphone division would end up in treacherous waters over the course of the 2010s, seeing large lay-offs and shuffles among its executive team. In August 2012, Sony revealed it would cut 1,000 jobs in the mobile division, which are part of a plan to reduce the workforce within the business unit to 10,000 by March 2013.
The lay-offs correlated with Sony’s failing revenues, which had come under stress during the economic meltdown of 2008, which had put a massive dent in consumer spending. The losses for Sony continued for years, starting in 2008, when the company reported a loss of $1.01 billion. The following year, operating results deteriorated, with losses totaling 439 million in 2009. Between 2010 and 2011, Sony accumulated over $8 billion in losses. It would take up to 2015 for the company to enter a stable recovery.
In October 2014, Sony said it would replace the head of its smartphone unit, Kunimasa Suzuki, amidst disappointing results. Suzuki would be succeeded by Hiroki Totoki, who would take over Sony Mobile Communications. LG employed a similar strategy, hoping that a change in leadership could turn the ship for its ailing business unit. In January 2015, Sony announced a workforce reduction in its smartphone division of 1,000, on top of the earlier 1,000 cuts revealed earlier. The smartphone division should shrink by an upward of 30 percent, dropping to 5,000 by the end of the fiscal year 2016.
In February 2015, Sony announced a strategic realignment to restore faith with investors and focus on its growth areas, being image sensors, its entertainment divisions and PlayStation, which were selected at business units that would have to restore the structural losses the company was enduring in recent years. The dedication of Sony to restructure its organization has been applauded by investors with Reuters noting that the company’s stock had risen by 80 percent in the previous year.
Chief Executive at Sony, Kazuo Hirai, would continue divesting in its smartphone business, which has seen pressure from Chinese rivals. Reuters highlighted that some analysts and investors predict that the company will eventually exit the smartphone market altogether as sales continue to decrease. Sony had already spun-off its television business, the news outlet pointed out, with massive job cuts on the horizon to stabilize its cash position.
Hirai could do little to curb the ailing smartphone business. In July 2015, declining smartphone sales and their subsequent losses, were nullifying Sony’s success with the PlayStation 4. The Verge, citing figures published by Sony, found that its smartphone division was pulling down its financial results in the first quarter of the year. While the PlayStation 4 had been a massive success for the company, it exemplified the struggle the electronics company had found itself in.
By July 2016, the size of its smartphone had decreased so much that it was finally turning a profit. The size of its smartphone business had fallen by a third, seeing sales fall to 3.1 million in the previous three months. A steep fall from the previous 7.2 million. The Verge already questioned whether Sony should remain in the smartphone business, as competitors were selling over 100 million devices, with Sony appearing as a blimp on the radar with its low volumes.
Problems at the company were simultaneously compounding as it was struggling to maintain stable sales in its most profitable business unit, image sensors. Sony was able to increase sales in its TV division, which came as a surprise to industry observers. The situation for Sony’s smartphone division hadn’t changed much as years passed by. Smartphone sales had nearly flat lined for the consumer electronics giant, with unit sales falling below 2 million smartphones sold in the first second quarter of 2018, a drop of 1.4 million compared to the same period last year.
In May 2019, Sony said it would exit the Indian smartphone market after seeing its market share drop to 0.01 percent, failing to curb the rise of South Korean and Chinese brands. Sony has struggled for almost a decade to get a footing in the upcoming consumer market. In May 2012, Sony was still convinced it could gain In a statement cited by the India Times, the company explained it would swap its feature phone strategy to smartphone to anticipate evolving demand.
A failing product line-up
The problems with Sony weren’t a novel occurrence, but had already been in the making before the iPhone hit the shelves. In April 2012, President and Chief creative director of Ziba, Sohrab Vossoughi, commented that Sony’s products were great during the 1980s and 90s. Consumers all over the world were trying to get their hands on Sony’s latest gadgets, which were at the bleeding edge of technology. The Walkman and the Trinitron televisions, were massive hits with consumers.
Since then Sony had lost touch with its customer base. While the company was still making high quality products, they were seeing less and less appeal with its target audience. The electronics giant had now found itself in a fight for survival, citing a New York Times observation. The product line-up from Sony had become a wishwash of products which seemingly operated separately from each other.
Vossoughi points toward a radical shift in the consumer electronics landscape that had sent Sony into a panic. The iPhone did everything right that Sony got wrong, he noted. The iPhone came in only two colors, but rocked an extensive app library that the user could customize through the App Store. Consumers could fully customize their device to their liking. Apple leaned heavily into the software experience, while Sony stuck to what it was comfortable with, hardware. This proved detrimental for its business.
Sony had fundamentally missed what consumers were looking for, experiences. Its products were one-offs, very good at the task they were assigned to do. Sony showed it could deliver novel ideas to consumers through portable hardware or brighter televisions. But as all consumers got accustomed to technologies, they were seeking novelty through experiences. Hardware would no longer suffice. Throwing specs around to dazzle customers was not longer enough. Consumers wanted to know what the product could offer them, Vossoughi observed.
Sony also held off Google’s Android unnecessarily, which was exemplified when it received a golden opportunity and further distanced the company from consumer demand. In 2010, CEO at Sony Ericsson, Bert Nordberg, during an interview with the Swedish publication Sydsvenskan, said the company refused to build Google’s Nexus phone when the tech giant approached them. Sony told Google would solely produce phones under its own brand and not serve as a subcontractor. It would be HTC, who saw a similar downfall as Sony, who would create the first Nexus phone.
The electronics giant still has the technological capabilities to turn the ship around, Vossoughi explained. It had vast engineering resources and media assets, with the PlayStation being the best example of its prowess to create outstanding products that attract millions of customers. However, even at the time Sony was trying to reposition the PlayStation 3 to withstand the innovative technologies used by the Xbox 360 and the Nintendo Wii.
In hindsight, Vossoughi were overly optimistic, as Sony’s decline in the mobile space only accelerated. The company recovered through the PlayStation 4, reclaiming its position as the best console manufacturer around. A strategy it couldn’t replicate in the mobile space. One might argue this could be attributed to the unprecedented shockwave the iPhone had caused in the mobile communications space. Yonekura Seiichirō from news outlet Nippon made similar observations. Sony had become a victim of its own success.
Sony had massive success with the Walkman, combined with the popular artists Sony had under contract, it delivered an offer consumers would line-up for. The tides started to turn for Sony in 2003. During the internet bubble, which brought a downfall to many start-ups and drove many established companies into disarray, meanwhile Sony’s stock soared, boasting record profits. However, as the economy started to stabilize and the internet was seeing increasingly larger adoption, Sony was unable to capitalize during this era of digitalization.
The electronics company, whilst having all the right hardware, was unable to connect its hardware digitally. The problems compounded for Sony as it was late by introducing its line of flat screen televisions, which were gaining significant momentum over the early 2000s. As the fiscal year ended on March 31, 2004, Sony’s stock had dropped by 30 percent, which acted as a ripple for investors who started to drop the company’s shares. This massive shedding of Sony stock came to be known as the “Sony shock”.
Instead of countering the investor negativity, the company launched a DVD recorder, going against the upcoming internet trend and it cannibalized the sales of its recently launched PSX console, which had an embedded DVD recorder and hard-drive. Seiichirō noted this was a crucial blunder from the leadership team, who failed to coordinate an encompassing strategy. Sony’s strategy was heavily rooted in hardware, which led to the company overly relying on unit sales to drive revenue. Trading in this secure cash flow for an internet-based business model.
Struggling in the US
Sony’s inability to deliver a strong line-up of products wasn’t the only malfunction in Sony’s overall strategy. The electronics company failed to capitalize on the U.S. market, with phones never seeing support from every major carrier in the country, Simon Hill from Digital Trends noted in April 2016. The much anticipated Xperia Play, which had to deliver a PlayStation experience on a smartphone, only received support from Verizon and AT&T back in 2011. Previously, Sony always had shaky releases in the United States.
John Oxley from Xperia Blog, told Digital Trends that Sony’s US strategy has always been a mystery. There were no clear signs as to why Sony failed to strike deals with major U.S. carriers. In March 2016, Sony unveiled three new, highly anticipated, Xperia X devices, during the MWC in Barcelona. The company promised it would release the new phones swiftly in the United States, however, little was heard after this proclamation.
Hill observed a long history of failed launches by Sony. AT&T was one of the most reliable partners for innovative devices. But As the iPhone was taking the world by storm and Android was seeing massive uptake, Sony was struggling to maintain momentum. In 2013, it came with the Xperia Z line-up, which saw a six-month delay. An eternity in a market which was undergoing rapid shifts in consumer demand. Competitors meanwhile were pushing for annual releases.
The situation started to deteriorate over the course of 2015, when Sony didn’t release any new device through U.S. carriers, instead opting to sell directly to consumers. An atypical strategy for the U.S. market, where consumers buy phones directly at the carrier. In the same year, Sony announced three high end phones. The devices garnered some enthusiasm, but again the U.S. carrier would offer the new phones. Devices meant for the United States, also saw features removed, such as fingerprint sensors.
Oxley, from Xperia Blog, told Digital Trends they were surprised Sony wasn’t able to partner with a U.S. carrier to launch its Xperia Z5 line-up. Adding that his team received over a hundred emails with readers wondering whether the phone would come to the U.S. Eventually the Z5 and Z5 compact would make their way to the U.S. through Amazon and Best Buy. Sony deemed the move appropriate at the time.
A Sony spokesperson told Digital Trends that the company was seeing a shifting consumer preference for unlocked phones, allowing for great flexibility and customizability for customers. This trend couldn’t be denied, but Oxley explained that whilst this might’ve been true, through the frequent delays, Sony had severely hampered its opportunities. Furthermore it had closed down its own webshop, which made purchasing a device for interested customers notoriously harder.
In isolation these incidents and strategic decisions make little sense, but we must not forget that Sony had been drastically restructuring its smartphone division, divesting to shrink the business. While the real reasons as to why Sony kept the U.S. market at arm’s length will remain a mystery, the fact the company had stated the mobile business was no longer a growth opportunity, could serve as an indicator for Sony to not make a greater effort to push carriers and keep its webshop up and running.
A disastrous strategy
Sony follows a line of many manufacturers who failed to anticipate the meteoric rise of the iPhone and Google’s Android. However it’s easy to point toward the iPhone for the inability of Sony Ericsson to curb the trend. Behind the scenes a lot more was going on that allowed Apple and Google to take the market by storm. Firstly, Sony, together with Ericsson, were already badly positioned in the United States, where it was unable to, or unwilling, to strike deals with major carriers, who were the first entry point for customers to purchase new phones.
Secondly, Sony was reluctant to work together with Google, which became abundantly clear when it refused to build a Nexus smartphone. In hindsight, even accepting to build a Google phone wouldn’t have saved the plummeting sales. Sony’s executives redrew whatever capacity there was left from the business unit over the course of 2015, leaving it more vulnerable than ever before.
Sony was also unable to unlock growth opportunities in upcoming economies such as India where Samsung and Chinese brands reigned supreme. Sony was the only one who had to give in to the dynamic forces in this market. LG succumbed to the pressures of intense competition and had to redraw as well. Hence, one might argue that Sony’s faith had already been sealed before the iPhone was released and little could be done to turn the tides.
