“SYNERGY AND OTHER LIES” would be a good first reading assignment for Sir Howard Stringer, Sony’s new chief executive, to be followed by “The Synergy Myth.” Then Sir Howard should recognize that the Sony he inherits is constitutionally incapable of making one (electronics) plus one (entertainment) equal three.
Both books were written by Harold Geneen, the number cruncher who directed International Telephone and Telegraph during its heyday in the 1960’s. He engineered 350 mergers and acquisitions, which brought such names as Hartford, Avis, Sheraton and Madison Square Garden under one roof. Mr. Geneen, however, harbored no illusions that ITT’s individual components could be coordinated in mutually beneficial ways. Each had to make its numbers wholly on its own.
Sir Howard now presides over a company that appears – superficially – to be the polar opposite of an ITT-like conglomeration of unrelated businesses. Sony is accustomed to thinking of itself as consisting of two well-matched halves: electronics and entertainment. At the Consumer Electronics Show last month, Sir Howard observed, “A device without content is nothing but scrap metal,” a platitude beneath mention – unless, perhaps, one were a mite defensive about owning both a widget factory and an entertainment factory.
Sir Howard is expected to gently coax the consumer electronics half to stop sulking and to walk over to shake hands with the Hollywood half. And then, step back, everyone, for alchemical magic, convergence, synergy!
At first glance, digital music is the field in which Sony’s considerable assets seem best suited, with a little rearrangement, for a comeback. On one side, Sony has 50 years of experience in producing portable music players, beginning with transistor radios in the 1950’s and extended by its Walkman franchise that has sold more than 340 million players. On the other, it owns one of the world’s largest music labels to supply content. Yet in the iPod era, Sony’s headstart counts for nothing. It’s as if the company were the Sony Graphophone and Wax Record Company.
The cassette-playing Walkman, even though it was outrageously successful, did not help Sony prepare for the digital player. The Walkman was nothing but hardware, and surprisingly simple. The first one was built in 1979, when a Sony executive sent a request to the company’s tape recorder unit to rig up a portable cassette player that could provide stereo sound but still be light enough for him to take along on international flights. A small team pulled out the recording mechanism and speaker of the company’s monaural Pressman, a cassette recorder used by journalists, installed stereo circuitry and added earphones. It was ready in four days.
The predigital Walkman evolved over the years into more than an astounding 1,120 models. But its essential nature remained unchanged: it was dumb hardware. When Apple Computer introduced the iPod in November 2001, Steve Jobs described his new player as “the 21st-century Walkman.” With 98 years remaining in the century, that was an early call. But he was correct. The iPod in 2001 was a Walkman successor, but smarter, its hard drive easily navigated with well-designed software.
In April 2003, however, when the iTunes Music Store opened, the iPod became something else again: part of an ingeniously conceived blend of hardware, software and content that made buying and playing music ridiculously easy. Apple accomplished this feat by relying on its own expertise in the twin fields of hardware and software, but without going into the music business itself.
Much earlier than this, Sony had gone Hollywood. Flush with profits generated in no small measure by the Walkman, and taking advantage of the strong Japanese yen, Sony acquired CBS Records for $2 billion in 1988 and Columbia Pictures for $3.4 billion the next year. Neither transaction could be said to have been the outcome of thoughtful internal discussions about strategy. The possibility of marrying hardware and entertainment was a consideration, but a fuzzy one.
However dubious the original rationale, the music and movie acquisitions have turned into Sony’s brightest, most profitable spot at the moment. It’s the portfolio effect you would expect in a classic conglomerate: parts of the business that are doing well cover for those that are not. Of course, the theory assumes that a given unit’s difficulties are merely cyclical. But Sir Howard’s consumer electronics business, whose DNA only supports premium pricing and lacks the software gene, may not bounce back, ever.
Last week, Sony announced a bunch of new Walkmans positioned against the ultralight iPod Shuffle. They reflect the same insular hardware culture that learned the wrong lessons from the earlier success of the Walkman. The game today, however, is not necessarily about spec sheets and weight in grams.
At Sony, having both digital players and music in the same corporate family has actually been detrimental to its hardware interests. The music label directed the hardware group to make copying impossible, to the extent that until recently, customers could not enjoy on their Walkmans the music from their own legally bought CD’s that they had encoded in MP3 format.
Sony Connect, the late-arriving, woefully designed answer to the iTunes Music Store, still lamely insists on using Sony’s proprietary compression standard. Apple got away with holding to its own standard only because it got everything else right, and was early to boot. Sony Connect must lag somewhere around 300 million song sales behind Apple, but pretends otherwise.
Arguably, Walkman product managers are even more blind to market reality than those at Connect. Today, they are selling the 20-gigabyte Network Walkman for $50 more than the comparable iPod, even though it cannot use any music sold on Apple’s site or on those of the many competitors that use Microsoft’s widely licensed compression standard.
A company thrives when it has all that it needs to make a compelling product and is undistracted by fractiousness among divisions that resent being told to make decisions based upon family obligations, not market considerations. Mr. Jobs appreciates the advantages of keeping content separate from distribution. At Pixar, he’s in the digital movie business, which uses many skill sets that are used over at Apple, too. Yet he has elected to let the two live happy separate existences, without falling for the synergy myth.
The reach of a company with the optimal mix of assets can extend in all directions – and right through the front door of its competitors. Last month, Wired magazine reported that 80 percent of Microsoft employees who owned a digital player owned an iPod. Coming as he does from the entertainment side of Sony, a healthy distance from the home of the Walkman, Sir Howard appreciates, no doubt, more than other Sony executives how far behind his company is.
Randall Stross is a historian and author based in Silicon Valley.