Sony (NYSE:SNE) doesn't plan on exiting the smartphone business anytime soon, according to a recent report in Arabian Business. Sony Mobile CEO and President Hiroki Totoki stated that smartphones are "connected to people's lives," so Sony "will never ever sell or exit" the mobile business.
Although Totoki sounds confident, the odds aren't in Sony's favor. The mobile division, Sony's only unprofitable stand-alone business unit, posted an operating loss of $1.8 billion last year. Cheaper Android devices from Chinese challengers like Xiaomi, Huawei, and Lenovo have commoditized the market and flattened price expectations. Meanwhile, Samsung dominates the "premium Android" market, which Sony also targets. That's why Xperia handsets only claimed 2% of the global smartphone market last year, according to Gartner.
So, why doesn't Sony -- which also produces gaming consoles, home electronics, movies, music, and more -- simply cut its losses? After all, it sold its VAIO PC unit and split its TV unit into a separate subsidiary last year for similar reasons.
Sony doesn't think things are that bad
Sony's $1.8 billion loss looks bad, but Totoki points out that the loss was exacerbated by the 2012 purchase of Ericsson's half of their mobile joint venture, Sony Ericsson. Sony now admits that it overpaid for Ericsson's share at $810 million, so it had to write down the purchase as a loss last year. With that writedown out of the way, Sony expects mobile operating losses to narrow to $328 million this year.
Looking forward, Sony plans to reduce the mobile unit's headcount by 20% and slash mobile division operating costs by 30% by the end of 2016. Sony already laid off 1,000 employees from its Swedish manufacturing and R&D centers, and announced that it would cut a total of 2,100 jobs by the end of the year.
Totoki hopes that those efforts will "streamline the organization as well as [its] product portfolio." Last November, Totoki told investors that the top priority was to make the unit profitable, but warned that annual sales could decline "by 20% to 30%."
Focusing on diversification
For now, Sony doesn't seem worried about the fragmentation of the Xperia brand. Sony still offers dozens of Xperia devices with similar sounding combinations of letters and numbers, presumably to reach as many customers as possible.
Sony's flagship devices are its Z devices, but many of the devices have been criticized as being too similar to each other. The Xperia Z4, which was only launched in Japan, only sported minor hardware upgrades from the Z3 in a nearly identical chassis. After that critical backlash, Sony rebranded the device as the Z3+ for international release. It also recently launched the C4, dubbed a "next generation selfie phone" for its larger display, 5-megapixel front-facing camera, and selfie-centered software features.
It's unclear if this Samsung-like scattergun strategy will pay off, but Sony might have to reduce the number of its devices to cut development costs in the future.
A mobile hub
Unlike VAIO, which was being dragged down by the fading PC market, Sony wants Xperia devices to latch onto other growth markets, like gaming consoles and wearables.
Last September, Sony introduced PS4 Remote Play for Xperia, which let Xperia owners stream and play PS4 games across Wi-Fi networks. It isn't a unique feature for Xperia devices, since the PS Vita can do the same thing, but it's an innovative way to connect Sony's gaming and mobile businesses. Sony could also eventually bring PS Now, its cloud gaming service, to Xperia devices.
Additionally, Sony has a growing portfolio of wearable devices, which currently includes three tiers of products: an Android Wear smartwatch (SmartWatch 3), a minimal smartwatch with a microphone for answering calls (SmartBand Talk), and a basic fitness tracker band (SmartBand). Sony's wearables aren't exclusively tied to Xperia handsets, but they represent another way to expand the company's mobile brand to the growing wearables market. Totoki hopes that Sony will "develop even more categories [of connected devices] in the future."
What does this mean for investors?
Sony's mobile revenue rose 11% annually in 2014 and accounted for 16% of its top line. But the bottom line is what matters here: Sony's operating income rose 159% annually last year to $571 million, but that figure would have been much higher without the mobile unit's $1.8 billion loss.
Looking forward, investors should focus on the mobile unit's bottom line and see if profitability improves. But if Sony keeps ceding market share to rivals like Xiaomi and Samsung, boosting the unit's bottom line could be tough.
Leo Sun has no position in any stocks mentioned. The Motley Fool recommends Gartner. 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.