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The Fall of a Giant

Prabhat Sakya, Fool U.K.
June 18, 2012

LONDON -- These days, most investors, me included, would say that high-quality blue-chip companies should make up the core of your investment portfolio. We are blessed with a market where a range of great blue-chip businesses are priced incredibly cheaply.

Throw in some impressively high yields, and it looks like you can't go wrong. We would expect a portfolio of blue-chip high-yielders to produce both dividend income and capital growth over the next decade and more.

But I would warn that it isn't always as simple as that. Giants can rise, but they can also fall. Take the example of Sony (NYSE: SNE  ) .

An illustrious history
Sony was founded in the wake of World War II by Masaru Ibuka and Akio Morita, from an electronics shop in a bomb-damaged department store building in Tokyo. Over the 60s, 70s and 80s, the company developed into one of Japan's industrial champions, playing a key role in the Japanese economic miracle of the time.

Back in the 1970s, the Japanese were seen as making cheap and inferior copies of Western products. Sony was perhaps the one brand, above all others, that transformed that reputation.

By the late 80s, Sony products were being sold all over the world. They had a reputation for being at the cutting edge of technology, and their quality was impeccable. If you wanted to buy the best quality television, hi-fi, or other electronic product, you had to choose Sony.

The Apple of its day
The scientists and engineers at the firm came up with innovation after innovation. In 1979, they invented the Walkman. In 1983, Sony launched, with Phillips, the compact disc, thus transforming the music industry. In the same year, they introduced 3.5" floppy discs, which became the standard for personal computers. In 1994, the first PlayStation was launched, which sold 100 million units in 10 years.

It's hard to imagine it now, but back in those days, Sony was producing hit after hit. It could do no wrong -- it was, quite simply, the Apple (Nasdaq: AAPL  ) of its day. People marvelled at Akio Morita's vision in the same way that people talk about the vision of Steve Jobs today.

Sony's rise coincided with Japan's rise, and also with the incredible bull market in the Japanese stock market. As Japan boomed, Sony's share price went through the roof.

The first mistake
By 1989, the total value of Japanese companies represented an astonishing 42% of global market capitalization. Sony had become hugely valuable, and thus hugely powerful. It used its power to buy CBS Records in 1988 and Columbia Pictures in 1989. It did so in the pursuit of "convergence," linking film, music, and digital electronics via the internet.

This pursuit turned out to be misguided, and it was Sony's first strategic mistake. But, nonetheless, the business continued to be successful through the 90s. By 2000, Sony was valued at $100 billion and remained one of the world's leading companies.

A turning point
If I had to point to one day that marked the beginning of Sony's decline as the worldwide leader in technology, it would be October 23, 2001. On that day, Steve Jobs, sporting his trademark turtleneck jumper and jeans, took to the stage to unveil the next revolution in music: the iPod.

In one fell swoop, Apple stole from Sony the m