Kazuo Hirai Is Stepping Down: He Saved Sony, and Watched Japan Lose Its Voice in Consumer Electronics | QDaily Business History

The consumer electronics market is bigger than it has ever been. Sony is no longer one of its central players.

Kazuo Hirai, the man who saved Sony, has said he will "graduate" in two months, stepping down as chairman of the board.

"Since handing the baton to Mr. Yoshida as CEO last April, I have had the opportunity, as chairman of the Sony Group board, to ensure a smooth transition and support the management team," Hirai said in a prepared statement. The time had come, he said, to graduate from Sony after 35 years.

Hirai joined the predecessor of Sony's music division straight out of university in 1984. He went on to serve as executive vice president of Sony Computer Entertainment America, then president and CEO of Sony Computer Entertainment, then executive vice president of the Sony Group. After he turned around the massive losses on the PS3 and returned the gaming business to profit in fiscal 2010, he became a star inside Sony. In 2012, he succeeded the American Howard Stringer as president and CEO of the Sony Group.

"Has Sony gone bankrupt today?" "No."

That exchange became a widely shared meme about Kazuo Hirai in China's tech circles. But when Hirai first took the helm, Sony's bankruptcy was not entirely unimaginable.

By then Sony had posted losses for four straight fiscal years, and in the twelve months ending that March it had recorded a then-unprecedented loss of 456.7 billion yen (about $4.09 billion at current exchange rates).

By the time Hirai decided to step down as CEO in 2018, Sony's share price had doubled and net profit had reached a record 490.8 billion yen (about $4.49 billion).

Kazuo Hirai saved Sony. But Sony had become a different company — a smaller one, in a sense.

Take the most important consumer electronics category, smartphones. Sony Ericsson, the joint venture Sony formed with Ericsson, had once been the world's fourth-largest handset brand and had fought Nokia for control of the Symbian operating system. As late as 2017, Hirai was still saying the company could not leave the market — yet across all of fiscal 2018 Sony sold fewer than 10 million handsets, roughly what Xiaomi moves in a single month.

Sony is a big company: 117,000 employees and a portfolio spanning film, music, smartphones, cameras, televisions, financial services, and semiconductors. Seen another way, it is a small one. That sprawling organization supports a market capitalization of under $54.8 billion. Nintendo, with just 2,271 employees and nothing but games, is worth 70 percent as much.

The Financial Times has noted that Sony remains a consumer electronics group. In a world where the consumer electronics market is bigger than ever, as long as Sony stays in it the company must keep answering one question: "What's the next hit?"

Sony was once a synonym for consumer electronics. It gave the world the Trinitron color television, with its hundreds of millions of buyers, and the Walkman.

Steve Jobs voiced his admiration for Sony many times. At an early-2000s launch he said, "We admire Sony, we love Sony — they inspire us to be as good as they are." By the recollection of some former Apple employees, the iMac nearly ended up named the MacMan. "I think it reminds people of Sony," Jobs said at the time. "They're a famous consumer electronics company, and if the MacMan looks like a Sony product, that might be a good thing."

The consumer electronics market is now the largest it has ever been. The research firm Zion Market Research puts the global market at roughly $1.1 trillion. When Hirai took over Sony, Apple was worth only about $470 billion and had just crossed 100 million iPhones a year. Today Apple is worth more than $900 billion and sells 210 million phones a year — and that is after a period of decline.

Whether Sony still counts as a consumer electronics company is now a real question. Based on guidance for the fiscal year ending March 2019, and compared with its most profitable year, fiscal 1998, the share of total revenue and operating profit coming from Sony's consumer electronics business (gaming included) has fallen from roughly 80 percent to about 50 percent. Sony's cash now comes mainly not from traditional electronics like Walkman players, televisions, and phones, but from PlayStation games and financial services — credit and insurance among them. The company also plans to take its real estate brokerage business public before the summer of 2020.

Consumer electronics took shape as an industry around the 1960s, as television spread across the world — the Consumer Electronics Show (CES) was first held in 1967.

For its first thirty years, the industry was essentially created and led by Sony and a cohort of Japanese companies. But for the past two decades and more, the companies setting its direction have been American — Apple, Google (which controls Android), and the internet companies that decide what features people actually use on their devices.

By the time Hirai took over Sony, this trend had run for more than a decade and looked impossible to reverse. Under him, Sony cut across the board and stopped the bleeding — and gave up the fight for control of the market.

Sony's rise at the head of a young consumer electronics market began with the Trinitron — the fruit of 22 unbroken years of technical refinement

The television set was the defining consumer electronics product of the 1960s. CES, now the world's largest consumer electronics show, was once essentially a television trade fair. In January 1967, around a hundred companies gathered for the first Consumer Electronics Show, bringing the best technology of the day — mostly color TV.

The peak of color television was Sony's Trinitron.

"Trinitron" was the trademark Sony registered for its proprietary picture-tube technology, which the Institute of Electrical and Electronics Engineers (IEEE) called the most significant advance in color television since its commercialization in the 1950s. Where most early rivals used a spherical cathode ray tube, the first-generation Trinitron curved horizontally but ran straight vertically — a cylindrical tube. The image looked flatter and more natural, and distorted less than a spherical tube when viewed head-on or at an angle.

According to Susumu Yoshida, one of the engineers who developed it, Sony had built an early Trinitron-like prototype in the early 1960s, the Chromatron. But it could not be mass-produced reliably. To break even, Sony had to price the line high. Even so, it sold 13,000 Chromatron sets. Sony's engineers kept refining the design and raising yields, and in 1968 they delivered the first-generation Trinitron color television.

It revived American color TV sales directly. Three years later, half of American households had a color set.

In 1973, the Trinitron became the first consumer electronics device to win an Emmy. Before production ended in 2007, Sony had sold 280 million Trinitron televisions and computer monitors built on the technology.

In 2016, Time magazine ranked the Sony Trinitron second on its list of the 50 most influential gadgets of all time (the iPhone ranked first), noting that a television is only a box of wires and tubes — and that among all those boxes, Sony's 1968 Trinitron stood apart.

The Trinitron's huge technical leap and the commercial success that followed grew out of a commitment to engineering that Sony had kept since its founding.

On an afternoon in May 1946, two university lecturers and engineers — Masaru Ibuka and Akio Morita — gathered with more than twenty others to found Sony's predecessor, Tokyo Tsushin Kogyo K.K. Their first product was a rice cooker; they went on to try bread machines and electric blankets.

Japan's economy and cultural life were recovering from the war. Almost every Japanese household owned a radio, but government rules limited broadcasts to air-raid warnings and official announcements. Sony seized the moment and built a signal converter that let old sets pick up programs on the new bands.

By the 1950s, Hi-Fi had begun to catch on; people wanted purer, truer sound. The external speakers on radios of the day were built mainly around vacuum tubes, and people believed more tubes meant better sound — which drove speakers larger and larger, and radios bigger along with them.

Akio Morita and Masaru Ibuka found that the transistors coming out of Bell Labs could replace vacuum tubes and make possible an ultra-compact, battery-powered radio. With help from a friend then living in the United States, they licensed the transistor patent from its holder, Western Electric, in 1953 — around the time "Tokyo Tsushin Kogyo" was renamed "Sony." By then Sony had more than 120 employees, more than half of them engineers. Two years later, they produced their first transistor radio under the Sony name, the TR-52.

Even so, Sony still struggled to control quality, and "Made in Japan" was a byword for cheap, shoddy goods. On products bound for the United States, Sony printed its "Made in Japan" label as small as it could, while it sharpened its research, development, and manufacturing.

From the 1950s through the 1970s, Sony brought out a standard-redefining product nearly every few years: a portable transistor television with an 8-inch screen in 1959; a 5-inch model in 1962; the Trinitron color television in 1968; the color videotape recorder in 1971; Betamax in 1975.

The Trinitron was the first great release of all that pent-up technical investment. Eleven years later, in 1979, the consumer electronics market saw its first true mass phenomenon.

The Walkman cemented the hold of Sony — and Japan — on the consumer electronics market

In 1979, Sony launched the TPS-L2 portable stereo cassette player and named the line the Walkman. It grew out of Sony's 1978 TC-D5 stereo field-recorder series (called the Pressman), which had a recording function but was far too bulky. Co-founder and president Masaru Ibuka loved to listen to music wherever he went; he asked his engineers to build a device that would let him enjoy music alone on a plane, and then to mass-produce it.

By executive vice president Akio Morita's account, almost no one inside Sony backed the idea.

People were used to listening at home, or on long road trips through the car stereo, or in restaurants and other public places where a speaker was shared. In the 1970s, cassette recorders and tape players trended bigger and bigger — much like the vacuum-tube radios of earlier decades, with buyers convinced that larger meant better. The biggest player in 1979 was about the size of a small car.

Then Sony's Walkman arrived. It sold out all 30,000 units of its first run in three months. Aiwa, Panasonic, Toshiba, and other brands quickly followed with their own portable cassette players, pushing cassette sales past vinyl records for the first time in 1983. In 1986, "Walkman" entered the Oxford English Dictionary.

Time magazine later picked apart why the Walkman succeeded, noting that its launch coincided with the aerobics boom: millions of people were working out with a personal stereo in their ears. From 1987 to 1997, the Walkman's peak years, the number of people walking for exercise rose 30 percent, much of it credited to the Walkman.

Sony was easily the biggest winner in the category. In the decade after the Walkman launched, Sony held 50 percent of the U.S. market (46 percent in Japan) while pricing its players about $20 above the competition.

The Walkman let people listen alone, cut off from the world. It gave consumers something they wanted but hadn't known they wanted until it existed.

No Sony product before or since has quite managed that: the Trinitron arrived after color television was already popular; the PlayStation entered a home-entertainment market that Atari and Nintendo had already opened up.

The Walkman was also a victory for a new medium. Cassette tape was not the highest-fidelity format of the day, but it was the smallest and most portable. Sony bet on tape's future, and won.

The Walkman's form evolved from the original cassette to CD, to MiniDisc; Sony even launched the flash-memory NW-MS7 Walkman as early as 1999. When Sony stopped making the cassette Walkman in 2010, it had already sold more than 400 million Walkman units in all, half of them cassette-based. To this day, Sony still sells its music players under the Walkman name.

Back-to-back triumphs with the Trinitron and the Walkman gave Sony the capital to push into the music and film businesses. As early as 1968 it had formed a joint venture with CBS, then America's largest broadcaster. In 1988, Sony bought CBS Records — which had record operations in more than 40 countries — for $2 billion. The next year, Sony announced the purchase of Columbia Pictures for $3.4 billion, taking on $1.6 billion of the studio's debt. By 1992, on the strength of films including Terminator 2, Basic Instinct, and Gladiator, Sony had lifted its U.S. box-office share from 9 percent to nearly 20 percent.

"The Walkman holds a special place in the hearts of Japanese consumers," wrote Jake Adelstein, a contributing reporter at the Japan Subculture Research Center. John Sculley, Apple's CEO from the early 1980s to the early 1990s, later recalled that Steve Jobs was "like a kid with a new toy" when he first got hold of the original Sony Walkman.

The PlayStation was another bet on the right medium that paid off handsomely.

In 1988, Sony and Nintendo signed a deal to jointly develop a new games console — but three years later Nintendo walked away. That same year Sony announced it was building a CD-based console called the "PlayStation" and set up Sony Computer Entertainment to run the project. The games industry was skeptical of a Sony without Nintendo's backing; observers figured even Sega would give it serious trouble, let alone Nintendo.

Sony brought in Namco — which had its own history of friction with Nintendo and was fighting Sega in arcades — and the two signed a deal to co-develop PlayStation launch titles. Other developers followed. In December 1994, the PS1 launched. Against the Sega Saturn, released a month earlier, the PS1 offered 23 launch titles — five times as many. It was also priced $100 below the Saturn.

At the 1995 E3 conference, Steve Race, then CEO of Sony Computer Entertainment America, walked on stage to deliver the PS1 keynote and said a single word: "299." Sitting in the audience, Sega CEO Tom Kalinske turned to a colleague and said, "Oh, shit." The PS1 broke a million units in its first six months and sold more than 102 million over its lifetime, making it the fourth-best-selling console in history.

Sony had chosen CD — large in capacity, easy to ship and store. That let it produce lavish 3D games with cinematic cutscenes; even with the texture-mapped surfaces, the overall graphics still looked impressive. The PS2 carried on the PlayStation's glory; it remains the best-selling console of all time, with cumulative sales above 155 million.

Nintendo's answer to the PS1, the N64, launched in 1996 and stuck with cartridges — more expensive to make and holding a tenth the data of a CD. The N64 is now the second-worst-selling console in Nintendo's history; the company didn't recover its standing until the Wii in 2006.

Sony's loss of control over consumer electronics began with one defeat after another in proprietary hardware formats

Much of Sony's success with the Walkman and PlayStation came from betting on a new standard medium and replacing the old one with something better: tape over vinyl, CD over tape. After that, Sony set out to define its own standard wherever it possibly could.

In the late 1990s, the home of an idealized Sony fan would hold Betamax cassettes for movies, a MiniDisc player for music on the go, a camera storing photos on a Memory Stick, and even a Walkman that ran on battery packs shaped like sticks of chewing gum. And the latest Sony "MP3 player" he was saving up for would not actually store music in MP3 format.

Sony's wish to control hardware standards made sense: it made switching to a rival's products harder for users, and competitors who wanted to use Sony's formats had to pay licensing fees. This was the moat Sony built on its absolute lead in consumer electronics.

But moats are not so easy to build. Of all the format wars Sony fought, the one that hurt it most was the PS3.

The PS3 shipped with a Blu-ray player — a new medium standard Sony had won. Building the console to support it dragged out development and pushed back the launch. A chain reaction followed: the engineering complexity raised the price, and the delay sapped game developers' enthusiasm. Without developers, consumers stayed away.

CNET estimated the PS3's total component cost at $725 to $905, while rival Microsoft's Xbox 360 reportedly carried a bill of materials of only $501. Microsoft launched the Xbox 360 in 2005 at a loss-making $399; a year later Sony launched the PS3 at an even steeper loss, at $499 and $599 — more than the competition, yet still below cost. By then the Xbox 360 had already sold more than 10 million units.

Pricier, later to market, and with fewer games, the slow-selling PS3 became a financial black hole for Sony. In the PS3's first year, Sony lost $1 billion. By comparison, Sony lost only $458 million in the PS2's first year, then posted profits of $759 million and $1.3 billion in the two years that followed.

The PS3's failure was not just about the product — the Xbox 360's notorious "Red Ring of Death" was a far worse defect, yet it didn't fundamentally dent console sales. Sony's deeper problem was that as the digital and internet era arrived, and as software became the thing that set consumer electronics apart, Sony was still trying to lock down physical media to lock in profits.

The sharpest irony is that Sony won the Blu-ray-versus-HD-DVD war and put Blu-ray into both the PS3 and standalone players. But the victory meant nothing. The Xbox 360 that had beaten the PS3 was already pushing games bought and downloaded online, and even had an all-digital storefront, XBLA.

On Sony's decline, one former Sony executive who asked not to be named told the Japan Subculture Research Center that Sony always tried to force its own standard on top of the industry standard, until it pushed itself out of the market — a "passion," he said, that other electronics makers simply did not share.

The pattern ran through Sony's history from the late 1990s into the 2010s: Betamax lost to VHS; the Memory Stick lost to the SD card; the plain MP3 format killed off Sony's DRM-laden ATRAC digital music format and its physical MiniDisc medium.

Then a far more dangerous rival arrived.

In the end every consumer electronics device became a miniature computer — and power returned to the American companies that understood computers better

In 2003, Apple released the third-generation iPod. It was the turning point for the whole iPod line: the universal USB connection replaced Apple's FireWire interface, and the hardware adopted a touch-sensitive scroll wheel that every later hard-drive iPod would use. At the same time, iTunes gained Windows support, and the iTunes Music Store — with 200,000 tracks — launched alongside it.

Sony's Walkman now faced a palm-sized, stripped-down computer. Sony the hardware company now faced Apple the computer company.

In June 2004, iTunes Music Store sales passed $100 million. By 2007, iPod sales had topped 100 million units — a mark the Sony Walkman had taken 14 years to reach. The iPod had fully caught fire, and with it the consumer electronics experience was no longer dictated entirely by hardware. Software was now a key part of setting the experience apart, and good software was what kept people coming back.

Sony tried to change but was beaten back at every turn, because all it could do was make better hardware — improving, for instance, the anti-skip performance of its CD Walkman so that the jolt of walking wouldn't stop playback. Once compact, digital MP3 players and the iPod arrived in force, Sony's chosen CD successor — the MiniDisc — had no advantage left. Sony pressed on anyway, tirelessly touting the convenience and audio quality of Hi-MD. The result was a rerun of the PS3 debacle.

Sony failed faster, and more completely, in smartphones — a category whose complex operating systems sat even further from what it knew. It formed a joint venture with Ericsson in 2001, and in the partnership's first years the handset business soared; between 2006 and 2007, Sony Ericsson briefly became the third-largest brand by market share.

But the iPhone, and Android after it, turned the phone itself into a canvas that app developers painted on, and their skill — their software — set the quality of the experience. Faced with this shift, Nokia, the old giant that fully controlled its own operating system, could not adapt; Sony Ericsson, slower still, fell faster. Even in 2007 it confidently assumed the appeal of its Walkman music phones could protect its steady revenue.

The crash came. In two years Sony Ericsson went from a profit of €1.1 billion to a loss of more than €800 million. Even so, Sony didn't launch its first Android phone until 2010. By the time it committed fully to Android in 2011, Samsung and Apple each held half the market, and a wave of Chinese makers' Android phones was sweeping the low end. Sony had lost its place entirely.

Sony and the consumer electronics industry it occupied were once a symbol of Japan's postwar economic ascent. From 1960 to 1990, Japan's GDP rose 69-fold. A 1981 survey by the Japan Economic Institute found that Japanese industry wholly or partly controlled 225 American manufacturing companies, with operations in 42 U.S. states and a combined workforce of nearly 60,000.

Sony still has every resource it needs to execute a new strategy well. Its engineering is flawless, its R&D highly developed. But by refusing to change its business model, Sony has let the world leave it behind. It missed some of the biggest waves of technological change in recent decades: digitization, the shift to software, and the internet.

Japan's senior executives had known privately for years that their companies were in trouble. But the postwar economic miracle had made them arrogant, sure that the Japanese management model was simply the best. Reform, hard enough to push through already, met even stiffer resistance; unless absolutely forced to, executives wouldn't cut projects their predecessors had launched, or shut down divisions. Cross-shareholdings among the zaibatsu made potential restructuring deals harder still.

Sony's decline and Apple's rise are a microcosm of the handover in which country leads consumer electronics. The arrival of the computing era reshaped the supply chain top to bottom: the market needed software companies, entrepreneurs willing to take risks, and venture capital of real scale. Japan had none of that ecosystem.

In more than fifty years, no new large Japanese consumer electronics company or internet firm has broken into the industry's front ranks. The Economist found that between 2000 and 2012, Japan's five biggest consumer electronics companies — Sony, NEC, Panasonic, Fujitsu, and Sharp — together lost two-thirds of their market value.

When the things that decided whether a consumer electronics product was good or bad shifted from hardware to software around the turn of the millennium, Sony stayed fixed on hardware. It was trapped by its own past successes. After Kazuo Hirai took over in 2012, he led Sony's self-rescue: he sold off the unprofitable battery and VAIO laptop businesses, spun out the television business — which had lost more than 700 billion yen over eight years — ended the LCD panel joint venture with Sharp, and disbanded the optical-drive division.

Sony's consumer electronics lineup is still broad, but it has essentially retreated to a corner of each category. Whether cameras, televisions, or voice recorders, the main markets for these products have either been displaced by smartphones or are being defined by cheaper rivals. Even in the gaming market where the PS4 competes, the more important platforms are mobile games and the Switch.

These capital maneuvers revived Sony's cash flow and lifted its margins. But they are also Sony's admission that it no longer holds — and has no intention of fighting for — the commanding voice in consumer electronics.

Cover image / Still from Guardians of the Galaxy.