Shaky Times for Sony

The Sony (NYSE: SNE  ) brand was once synonymous with quality electronics. But the once-untouchable company has begun to lag behind its competitors, as its recent second-quarter results further proved.

Sony reported a net profit of 28.5 billion yen, or approximately $246 million, down 46% from 53.2 billion yen (or $459 million) a year ago. This fall in profit came despite CEO Howard Stringer's implementation of a revitalization plan. In addition, sales in Sony's core electronics unit have been completely unremarkable over the past few years. Once considered the leader in portable music, Sony's music products have fallen behind Apple Computer's (Nasdaq: AAPL  ) highly successful iPod, and its other consumer electronics devices haven't fared much better.

Sony's computer entertainment division has been its shining star. Strong sales from the PlayStation 2 gaming console have kept Sony from losing too much ground, but with the PS2 reaching the end of its lifespan, and with the handheld PSP not meeting expectations for earth-shaking sales, Sony needs to pull one hefty rabbit from under its hat. Microsoft (Nasdaq: MSFT  ) just released the Xbox 360 in time for the holiday season, which will give it quite a head start over Sony's upcoming PlayStation 3. Sony had previously enjoyed a first-mover advantage in consoles, consistently beating Nintendo to the punch.

Now the tables are turned, but Microsoft could be making the same mistake that Sega made with the Dreamcast. By rushing its console to market and not ensuring enough third-party support, Sega failed to provide games that consumers would clamor for. However, if Microsoft uses its head start to secure exclusive content for the Xbox 360, it may be able to take the lead in an industry that has become Sony's sanctuary.

So why doesn't the Sony name pack its former punch? Sony's previous reputation for the highest-quality products let the company set its own prices, something that rivals like Apple can do today. While Sony still produces many high-quality products, it has wrongly attempted to control the market through price discrimination. In order to stay competitive with copycat producers in all areas of its business, Sony has offered products at every price point.

Although this strategy initially proved successful, it ultimately cannibalized Sony's premium products. As consumers continued to purchase Sony products at cheaper prices, they became less willing to pay a premium for the higher-quality ones. Even more detrimental was the reduced perception of the Sony brand image. This has cause a huge drop in Sony's profts, while rivals such as Matsushita (NYSE: MC  ) have seen profits surge as much as 33% during the same time period. Sony has essentially become stuck in the middle. It is no longer seen as the highest-quality manufacturer, but its high price point does not allow it to stay competitive with low-cost producers.

In order for Sony to turn the business around, it needs to restore its brand image as a premium product. Despite its recent troubles, I'm optimistic that its current cost-saving measures may help free up the resources necessary to redevelop its premium brand image. Furthermore, Sony seems to be taking its time with the PS3 to ensure more of the third-party support that has made its previous two PlayStations such tremendous successes. If it can succeed in these two aims, we may only be witnessing a temporary setback for Sony. And with the stock price at a two-year low, this may be the perfect opportunity to buy cheaply.

Fool contributor Tarek Sultani is a freelance journalist and an avid video gamer. He has no financial interest in any of the companies listed above. Feel free to contact him attsultani@hotmail.com.


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