The present and future of Sony

[NJ5]

There has been a lot of scattered discussion in several threads about Sony's financial situation and future. Discussions like this will become more and more prevalent in the next few months, and there's a lot of misinformation flying around, so I thought there should be a thread to discuss this and accompany the evolution of their situation.

Here are Sony's current problems:

1- Weak Western currencies.

This was already discussed at length in this article, and it's something which also affects Nintendo (although the impact is much worse for Sony). If you want to know why this is such a big problem for them, you can read that article or this one.

This is so much of a problem that according to an article from yesterday, Sony is increasing the price of products it ships to retailers in the UK by up to 33%. No news yet on whether this will affect consoles and games, or if it also extends to other European countries.

2- Fragile profit margins

If you check out Sony's official Investor Relations page, you can see their financial data many years back. For illustration, let's look at the main indicators, revenue and profit for the latest financial years and quarters. The profit margin is simply the profit divided by the revenue, and indicates how much money Sony makes off of every Yen (or dollar or whatever) they have in sales.

Year/quarter	Revenue (billion Yen)	Profit (net income, billion Yen)	Profit margin
2005 fiscal year	7457	123.6	1.65%
2006 fiscal year	8296	126.3	1.52%
2007 fiscal year	8871	369.4	4.16%
2008 first quarter	1979	35	1.77%
2008 second quarter	2072	20.8	1.00%

This has been one of Sony's biggest problems, and Sony's CEO has been pledging to solve it, as you can read in this article.

For reference, Microsoft usually has profit margins of around 30%. Before the currency problem explained above, Nintendo also had great profit margins of around 25%, and after that they fell to around 10%! That alone should tell you how much of a problem the currency exchange factor poses. It's important to note that the currency problem has gotten worse since the last quarter, making it very hard to believe Sony can pull a profit during this holiday quarter.

When you're only making one or two dollars for every 100 dollars you get, and you suddenly start receiving 80 dollars for the same products, that spells big trouble.

3- Lower consumer confidence due to the economic crisis

This doesn't seem to affect the gaming market a lot, but it does affect Sony as a whole. For information on this, there are tons of reports about lower retailer sales and expectations for the holiday season. Some articles:

Article 1
Article 2
Article 3

There are also specific reports on how it's affecting Sony's products, for example:

Sony's TV sales slump
Blu-Ray sales forecast down

4- The economic crisis is nowhere near over

There are tons of articles about this, but here are two:

Article 1
Article 2

Discussion

The factors above, IMO, create a perfect storm for Sony. This is not yet very discussed if you look at the mainstream media, but I believe in January after Sony releases its earnings it will become more and more public, and then we may start seeing Sony's actions to get the company to survive the storm. I'd be very surprised if Sony doesn't become a smaller company in the next few years.

What do you think Sony will do? Big layoffs? Getting out of some markets or cancelling product development?

In my opinion, the best case for Sony is:

1- A recovery of the Western currencies during next year.
2- A successful downsizing/restructuring which allows them to become profitable even with lower consumer purchases.

We could get to a point in which most people don't have money to buy the sort of products Sony makes, making it impossible to justify the existence of such an electronics giant.

The worst case is, of course, bankruptcy. If Sony can't or doesn't want to change itself quick enough, they may have to get "bailed out" (a very fashionable expression these days) or file for bankruptcy, which would either end the company or force it to sell off a lot of its parts.