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Sony’s Bread and Butter? It’s Not Electronics

Kiyoshi Ota | Bloomberg | Getty Images

Sony is best known as a consumer electronics company, making PlayStation game consoles and televisions. And it loses money on almost every gadget it sells.

Sony has made money making Hollywood movies and selling music. That profitable part of the business is what Daniel S. Loeb, an American investor and manager of the hedge fund Third Point, wants Sony to spin off to raise cash to resuscitate its electronics business.

But as Mr. Loeb pressures Sony executives to do more to revive the company's ailing electronics arm, some analysts are asking, Why bother?

Sony, it is suggested, might be better off just selling insurance. Or just making movies and music. But not electronics.

A new report from the investment banking firm Jefferies delivered a harsh assessment of Sony's electronics business. "Electronics is its Achilles' heel and, in our view, it is worth zero," wrote Atul Goyal, consumer technology analyst for Jefferies, in the report, released this week.

"In our view, it needs to exit most electronics markets."

The maker of the Walkman and the Trinitron without electronics? What would it do?

Although Sony sells hundreds of products as varied as batteries and head-mounted 3-D displays, it so happens that Sony's most successful business is selling insurance. While it doesn't run this business in the United States or Europe, Sony makes a lot of money writing life, auto and medical policies in Japan.

Its financial arm accounted for 63 percent of Sony's total operating profit last year. Life insurance has been its biggest moneymaker over the last decade, earning the company 933 billion yen ($9.07 billion) in operating profit in the 10 years that ended in March.

Sony's film and music divisions, which produced hits like the Spider-Man movies and "Zero Dark Thirty" and recorded musicians like the cellist Yo-Yo Ma and the electronic music duo Daft Punk, have contributed $7 billion to the company's bottom line over the last decade.

In that time, Sony's electronics division has lost a cumulative $8.5 billion.

Hardly Sony's crown jewels, experts say.

"The problem is that the board is still absolutely focused on fixing electronics," said Kouji Yamada, a visiting professor at Hitotsubashi University in Tokyo and research director of Mission Value Partners, a Sonoma, Calif., investment company.

Sony's chief executive, Kazuo Hirai, said last Wednesday that its board would consider Third Point's proposal, even as it emphasized that the discussions were preliminary and that it had not set a time for a response.

But to a small band of analysts, Mr. Loeb's prescriptions for Sony are shortsighted, merely milking the company's profit-making content business for good money to throw after the bad.

As proof of the untenable future facing Sony's electronics, critics point to its televisions and smartphones. Competition is intense, and in cellphones Sony remains a bit player. Even where it is more successful, in digital cameras or game consoles, it is struggling to stay abreast of stronger companies.

Sheer lack of managerial attention could soon start to hurt Sony's insurance and entertainment divisions, Mr. Yamada warned. Sony Financial Holdings, a publicly traded company of which Sony owns 60 percent, has been under performing its peers on the Tokyo stock exchange. Its share price has risen just 4 percent this year, compared to a 36 percent increase in shares of its rival, Dai-ichi Life Insurance.

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And in the entertainment business, where alliances and tie-ups are starting to dominate strategy, Sony's film and music units could be slowed by having to deal with a board that sits in Tokyo and does not have its hand on the pulse of a fast-moving industry, Mr. Yamada said.

"Maneuvering three completely different industries, that's too much," Mr. Yamada said. "These should all be separate companies."

Sony maintains that its varied units make up a coherent whole. But the history of how it acquired its hodgepodge of companies suggests otherwise.

Sony's co-founder, Akio Morita, first got the idea of buying a finance company on a trip to the United States in the 1950s to promote the company's new transistor radio, according to an official recounting of its corporate history. On that trip, Mr. Morita was stunned by the sight of Chicago's skyscrapers, especially the Prudential Building that dominated the Chicago skyline.

"Why would a life insurance company have such an enormous building?" Mr. Morita marveled. "One day, we will also establish our own bank or financial institution and build a building like that."

Mr. Morita's wish was finally granted in 1981, when Sony started a life insurance venture in Japan with Prudential, the large American insurance company. Perhaps disappointingly, Sony Financial Holdings has its headquarters on the fourth floor of a nondescript midrise building in Tokyo.

Sony's acquisitions of Columbia Pictures and CBS Records in the late 1980s got a lot more attention. Mr. Morita, a co-founder of Sony, and another executive, Norio Ohga, had long contended that content was crucial in promoting Sony's expanding electronics universe, first wading into music with a venture with CBS Records in 1968.

But infighting between hardware and movies hindered that objective from the start, as did misaligned incentives that led Sony to wrestle with how to build devices that let consumers download and copy content without undermining sales at its music labels or film studios.

"Sony has tried to make this strategy work for a long time," said Gerhard Fasol, president of the Tokyo technology consulting firm Eurotechnology Japan, "But it's never really worked. Each part would be better competing on its own."

Insurance never had that conflict. Sony's 4,100 "Lifeplanners" would visit homes and offices to offer advice and make sales. Sony also runs a Web-only bank, Sony Bank, which accepts deposits and offers mortgage products, investment trusts and foreign-exchange margin trading.

On Wednesday, Mr. Hirai defended the company's continued focus on electronics. "Electronics has a future. And it is in Sony's DNA," he said at a corporate presentation. "It is my mission to revive it."

There are some glimmers that Sony is finding its way again, even as Apple and Samsung widen their lead. Sony's sleek new XPeria Z smartphone has received generally rave reviews. Photography buffs have called its high-end, full-frame RX1 camera the most advanced compact camera.

"Not so long ago, we had despaired at Sony's ability to ever again produce stellar products (especially when faced with duds like the Dash alarm clock and the Rolly music player)," Damian Thong, Tokyo-based technology analyst at Macquarie Securities, said in a report published Thursday.

"Yet we now have had a consistent run of beautifully designed, technologically advanced, class-leading products," Mr. Thong said. "We think these products hark back to Sony's glory days."

Last quarter, Sony was back in the black, but its electronics division continued to lose money.

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