New Sony CEO Discusses Future As Ratings Agencies Savage Company's Credit

Sony's new chief executive, Kazuo Hirai, has a monumental task in front of him. He's been charged with reversing Sony's years of losses, even as problems continue to pile up in the wake of ex-CEO Howard Stringer's departure. The road back to profitability got even steeper today, with news that Standard and Poor's has slashed its long-term rating on Sony's credit to BBB+ -- two steps above junk bond status. While this has no impact on the company's existing financials, it means any future loans or financial terms Sony negotiates will likely carry higher interest rates and steeper penalties for missed deadlines.

Sony's restructuring plan

Like Stringer, Hirai remains resolutely committed to Sony's television business, even though that division is a dead weight on the company's finance and responsible for a large part of the $2.9B loss it now expects to post at the end of its current fiscal year. "I view televisions as very important and an integral product category for Sony," Hirai told reporters yesterday. ""It's one device that most consumers have in their home to enjoy all their visual content, sometimes audio content as well. "And so I think it's very difficult to imagine Sony getting out of the TV business. It's basically at the centre of every entertainment experience."

Sony's TV business has been battered in recent years by aggressive pricing from its competitors and a strong yen; it's far from the only Japanese television manufacturer taking heavy losses to outside companies like Samsung. Hirai's appointment to CEO, however, is hopefully a positive sign. It's the first time a PlayStation executive has moved over to take helm of the company, and the PS3 has been one of Sony's only major success stories in the past five years.

Hirai believes that the Sony Computer Entertainment division "is a bigger concept we can grow into a bigger space. Hardware drives software and software drives hardware." Even as he espouses this view, Hirai is trying to assuage the concerns of investors and fellow executives who fear that he intends to turn Sony into a gadget company. We really need to buckle down and be realistic," he explained. "I think people are coming around to the idea that if we don't turn this around, we could be sitting in some serious trouble. We can't just continue to be a great purveyor of hardware products, even though some people expect us to do that."

Can the Vita Revitalize?

Analysts will be watching the PlayStation Vita's sales very closely in the next few months, hoping to get a sense for the company's future. This is a tricky launch for Sony; the Vita has been widely criticized for being expensive, not very competitive with cell phones, and for the high price on Sony's proprietary memory card technology. What Hirai needs to avoid, at all costs, is a slow initial launch followed by a massive price cut several months later, ala Nintendo 3DS. While that move, combined with new first-party titles, appears to have helped Nintendo, it would only add to the perception that Sony is out of sync with what gamers want.

We suspect the Vita is a poor bellwether of Sony's long-term performance regardless of its short-term sales. The better and more important question is what Sony is doing to create the sort of entertainment experiences Hirai claims make it important to hold on to TVs. Much of the discussion of returning that division to profitability has focused on cutting costs, but ultimately the company needs more products that <b>drive</b> sales, not cheaper versions of its current lineup.

Sony's best bet is to position the Vita as a device designed to access the PlayStation network that also appeals to hardcore gamers, while working on ways to bring PSN content to televisions and smart phones. Thus far, the company has taken only baby steps towards this goal. Devices like the Xperia Play saw only a modicum of success, but that doesn't mean that the idea is bad -- just that the execution and integration needs some work.