In wake of record loss, Sony announces big changes

Its first full-year operating loss in 14 years is a scorcher: Sony on Thursday set up a last-minute analyst-and-press call to announce a 2009 forecast predicting 260 billion yen (about $2.93 billion) in operating losses.

And the tumult's just beginning.

Sir Howard Stringer, Sony's chairman and CEO, was blunt throughout the call -- impressively so considering Sony corporate culture. "We simply have no alternate but to dramatically change the fundamental ways we view our business and the ways we create, manufacture and distribute our products," he said. Lateness to market in particular "will no longer be tolerated," and networked products will be embraced with fervor -- with new emphasis on what consumers want and a de-emphasis on tech advances for the sake of tech advance. And: "Simply put, we will execute more quickly and move beyond our tradition impulse toward consensus."

The company has revised its sales and operating revenue forecast down to $86.7 billion, down from October's $101.4 billion estimate. The $2.93-billion operating loss compares year-over-year to a profit of $5.4 billion. Net income year over year is predicted to be a $1.69 billion loss, compared to $4.16 billion in profit during 3Q '07-'08. (Numbers are calculated on today's exchange rate of US$1 = 88.77 JPY.)

Sony's been taking, in retrospect, rather small steps to prepare the market for this news, revising its annual forecasts down in July and October of last year. The previously announced layoffs of 16,000 employees were also part of that process and will be accelerated in light of current events. And though it seems like thin gruel against the looming joblessness of a large village's worth of people, Sony's three CEOs say they'll waive their bonuses for the current fiscal year (which ends in March), cut their own bonuses for the next year, and decrease their salaries. Management-level employees will likewise see cuts in base pay and bonuses.

What happened to the company that said that diversified, entertainment-heavy outfits such as theirs are particularly well-positioned to weather the storm? Games are indeed predicted to be stronger than other sectors, but even that division will deliver $335 million less than previously forecast. Competition is hitting Sony hard, too, on every front from the digital home (Microsoft, Apple) to the mobile phone (LG, Samsung). Overall, electronics income is forecast to be $3.81 billion lower than previously forecast.

But there are a lot of factors beyond the economy and Sir Howard's impatience with Sony's slow-moving corporate culture playing into this announcement. The relative strength of the yen is presenting a real problem for the Japan-based firm, representing (for instance) a bit over an eighth of the loss in the Electronics segment alone. Restructuring charges and, in the case of the Financial Services segment, losses in the Japanese stock market affecting earnings for Sony Life Insurance Co. Ltd play a role as well.

Change is coming, and not the cheerful let's all-gather-in-DC-for-a-party type. In a departure from the usual we're-staying-the-course cant one hears on these calls, Sony says it'll restructure its games, music and movie businesses at a cost of $1.9 billion. Outsourcing will increase, and several production centers worldwide (in France, Slovakia, and Japan) will close.

The electronics division will see consolidation of manufacturing sites and layoffs too, with the Ichinomaya LCD TV plant closing and 30% headcount cuts planned for the Design Operations team. The company says it expects those changes to save the company around $90 billion by the end of the '09-'10 fiscal year.

Stringer noted that the executive team had been analyzing the necessary cuts -- $2 billion of them -- since October, acknowledged that managing the pace of the planned transitions "will be an achievement of itself." he noted that the company's still in the throes of executing his plans for transition, which exposes them to heightened peril in these times "Our own historical legacy sometimes constrains us. We are aware that there is too much old Sony and not enough new," he said, citing fixed costs and the eternal "silo wars" he has deplored at the company in the past as continuing problems.

Sony's actual Q3 earnings call is slated for next week.