Reuters reported on Monday that Japanese electronics titan Sony (NYSE:SNE) may pull out of the market for plasma flat-panel television sets by as early as spring 2005. The company is currently the second largest assembler/seller of plasma sets. But it does not make the plasma display panels itself, buying them instead from plasma panel makers such as Pioneer (NYSE:PIO), LG Electronics, Fujitsu, and Hitachi (NYSE:HIT) -- the latter two of which have a joint venture set up to produce plasma panels.

According to Reuters, which in turn cited Japan's Nihon Keizai Shimbun, Sony is considering quitting the plasma TV market next year in order to focus more on products for which it has a technological edge -- specifically, the manufacturing of LCD panels and sets, and rear-projection TVs. It's also worth pointing out that Sony's plasma division suffered a significant setback late last month when it ran into problems keeping up with demand for plasma sets in Europe. That's likely to hurt this quarter's results for the company's television business as a whole, which is currently losing money at the rate of a quarter billion dollars a year.

In a situation like that, Sony may be making the smart move by imitating European rival Philips (NYSE:PHG), which in October made a strategic exit of its own. Philips pulled out of the market for LcoS chip-based rear-projection TVs in order to sidestep intense competition there and to focus on markets where it holds an edge (including, coincidentally, plasma televisions).

At the same time Sony is contemplating a retreat from plasma, China reports that plasma TV leader Matsushita Electric (NYSE:MC) is increasing its lead in the market, boosting its output of the panels to meet increased demand. Matsushita's Ibaraki, Japan, plant, a joint venture between Matsushita and Japanese peer Toray, is expected to increase production by 25% to reach 100,000 plasma panels per month. What's more, the venture expects to double its total production at three existing plants and a planned fourth plant and to ramp up production to 2 million units per year by March 2006. If Matsushita's numbers prove accurate, that could give the joint venture a 40% market share.

Most reports by industry analysts this year agree that, despite all the manufacturers' protestations that they have no intention of lowering prices, the retail cost of a plasma set has fallen by about 25% this year. This is just one more reason for Sony to exit this market. Meanwhile, rivals like Matsushita will be hoping that with Sony gone, they'll get a little breathing room and perhaps be able to slow the fall in prices a bit.

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Fool contributor Rich Smith has no position in any of the companies mentioned in this article.