Sony (NYSE:SNE) has lost money making television sets for 10 straight years. To return the TV business and the company in general to profitability, CEO Kazuo Hirai has made the choice to spin the failing division off as a wholly owned subsidiary.
The CEO was clear, however, in a recent strategy statement that he was not going to exit the TV business and no sale of the soon-to-be stand-alone was planned.
Sticking with a failing business in a field with low margins, intense competition, and little upside makes no sense, but a spinoff might. The new company, Sony Visual Products, will be a more nimble operation, according to Hirai, who detailed the benefits of the move in his statement.
Last year we were unable to achieve our goal of returning the business to profitability, and instead recorded a tenth consecutive year of losses. This is a fact that I myself take very seriously. As stated in our TV business profitability improvement plan announced two and a half years ago, we completely reassessed our previous strategy focused on growing volume. We implemented measures such as the significant reduction of panel procurement costs, and the reduction of fixed costs related to design and R&D. Furthermore, last year we accelerated the shift to high value-added models, such as our 4K TV lineup, and received acclaim from customers that we are once again delivering truly "Sony" products. Yet despite all this, we still couldn't achieve our goal of returning the business to profitability.
This is Hirai throwing in the towel on the TV business as it exists now while holding onto the idea that it's possible to make money making TVs. Sony has revamped, restructured, and improved its TV line, but the heavy competition in the field has made it impossible to make money.
It's ridiculous that the company let a division lose money for 10 years, but overall profits masked the failures in the TV business. With Sony now losing money, covering the TV division losses became impossible and something had to be done.
Though the company insists that the spinoff is not a prelude to selling the television business, Hirai did recently say he was open to bringing in an equity partner. That move is not imminent -- in most cases investors are not lining up to take a stake in a company with a long pattern of losses and dubious prospects.
The TV division is not dead
The struggling TV business was dragging Sony's overall results down but Hirai believes the company was also part of the reason the television division failed to make money.
Going forward with the new company, we will transfer over the functions absolutely essential for running the business. And at the same time, we will drive ahead with restructuring the sales companies, as well as the headquarters and indirect functions supporting the TV business. By doing so, we intend to steadily reduce fixed costs and establish a new business structure that can minimize the impact of external market fluctuations. In terms of the new company's management, Masashi Imamura and his team will continue to oversee the business, and run the new company with continuity and consistency as we proceed to reduce costs and execute our high value-added strategy, including 4K, while also working to establish speedy, more flexible operations.
Not being part of the overall Sony structure should free the TV business from some expense while also allowing the division to react more quickly. Whether the new company fails or succeeds, Sony will be let out from under a business that has been an anchor on its results.
Hirai not only believes the television business will make money, he defends an aggressive sales projection of 16 million units sold. He also forecasts a return to profitability for the division this year as it becomes a stand-alone company. Getting back to profitability won't come without pain and Sony plans cuts of 20% across the sales parts of its organization relating to the TV business and a 30% cut in corporate overhead. (The company is also making similar cuts in the remains of its PC business.)
These are deep cuts but Hirai has shown that he is driven by practical business concerns, not nostalgia. Making massive changes to a product line that was once a signature business for Sony shows leadership. These cuts and running the TV business as a separate company should allow Sony to focus on the areas where it makes money now.
The rest of Sony is pretty healthy
Remove the television and PC divisions -- as Sony is in the process of completing -- and the company makes money. Sony has a strong film division powered by the Spider-Man franchise, but its greatest success at the moment may be the PlayStation 4 console, which has taken the lead in the battle to control the living room over Microsoft's (NASDAQ: MSFT) Xbox One.
While console hardware itself is essentially a break-even business, having a large base of installed systems gives the company a license to make money. As the video game business moves away from physical CDs to digital downloads Sony has a huge opportunity to cut out the middleman and make money on every PS4 title sold, whether it owns the game or not.
Sony now makes all new releases available digitally except for the ones requiring a physical peripheral device (like the popular Skylanders games, which involve physical character toys). In 2012 NPD Group reported that $14.8 billion was spent on video game content. Over $6 billion of that was physical video games -- a category that will largely disappear going forward to be replaced by downloads.
Pushing PS4 sales where games are but one of the lucrative monetization channels makes much more sense than fiddling with TVs, which are a low-margin one-time sale. Put a TV in someone's home and that pretty much ends the relationship. Sell the same person a PS4 and you essentially install a Sony store in his or her living room.
Sony is entering the third year of the three-year plan Hirai laid out when he ascended to the top job. As a leader he has shown a willingness to make tough choices and do things that are uncomfortable. The moves he is making are bold but they appear to be pulling the company out of a slow fall and positioning it to thrive going forward.
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Daniel Kline is long Microsoft. He tends to buy whatever TV is the best combination of big and cheap. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.