Sony's multimedia strategy begins to fall apart at seams

It seems almost laughable to think that, just a decade ago, the American business community was gripped by fears that the Japanese were taking over the planet. Certainly they came, brandishing the power of the yen (another ancient memory) and their superior knowledge of electronics and hi-tech, but the Japanese invasion has been about as successful as Napoleon's advance on Moscow.

The one company still prominently on the horizon is Sony. But the news from the company which brought you PlayStation and The Fugees is grim. According to figures released after the markets closed in Tokyo yesterday, operating profits slumped a dramatic 90 per cent in the April to June quarter, down to 3bn yen (£17m) from Y30.6bn in the same period last year. That, in turn, translated into a group net loss of Y30.1bn for the quarter.

Not only was the operating profit about one-tenth of the figure most analysts had expected, it took the company by surprise too, since Sony slashed its net profit forecast for the full year from Y150bn to Y90bn and said it would cut back sharply on capital expenditure.

Sony's games and consumer electronics divisions – still the core of its business – both reported losses, as did the film division. Only music and financial services rose above the gloom. One analyst for Credit Lyonnais told Reuters in Tokyo that the figures were "beyond our imagination". The company itself admitted that the problems would get worse before they got any better, because of decreases in demand, oversupply and falling prices.

So what is the problem? In its official pronouncements, Sony sought to blame its woes on the slowing world economy, saying its major market areas – Asia, Europe and the United States – had been affected.

That argument was undermined by the buoyant results posted a few hours later by Viacom, another multimedia conglomerate that has gone from strength to strength. Viacom, which owns Paramount Pictures, MTV, CBS television and Blockbuster video, among other properties, overcame the current slump in advertising to post a $16.7m (£11.7m) profit for its second quarter.

The deeper issue is that Sony's core businesses and business practices are beginning to look dated. It has also found that synergy – the great buzzword for the multimedia behemoths – has been harder to achieve between Japan, the US and the rest of the world than it has been for rivals such as AOL Time Warner, Viacom and Vivendi Universal.

Much of the optimism surrounding Sony in recent years focused on last autumn's launch of the second-generation PlayStation, and much of the current disillusionment has to do with the fact that the video console cost too much to launch, is not selling as well as expected and is likely to face stiff competition when Microsoft launches its Xbox console.

That disappointment accounts largely for the near-halving of Sony's share price from last September to yesterday's after-hours trading price of around Y6,700. Certainly, PlayStation2's fortunes have not been helped by the slowing economy, but Sony faces a larger problem in trying to integrate its electronic games tradition into the burgeoning world of the internet.

Sony is pinning its hopes on the development of broadband internet access, but that access has yet to reach a significant consumer market.

Sony has also been plagued with problems in its mobile phone division, suffering a certain degree of bad luck but also struggling to overcome the restrictions of Japan's highly regulated telecoms market.

The company was forced to order a string of recalls of its three mobile phone models, first in May and then again in July, because of a problem with faulty battery packs and various software glitches. It has launched a digital handset venture with Ericsson, but one analyst's report from Credit Suisse First Boston estimates that this project is likely to show losses for at least a year.

When it comes to Sony's involvement in the entertainment industry, the problems are a deeper issue of clashing corporate – and perhaps national – cultures. The calamities of the 1990s, when Sony forked out billions of dollars on its movie studios before rushing to put its house in order, may be past but there are signs the company continues to be uncomfortable with the high-cost lottery nature of the movie business and has not yet learned how best to play the game.

A distribution deal struck earlier this year with the former Disney studio chief Joe Roth and his independent production company Revolution is a case in point. Sony considered the deal a major coup, but the distribution fee it agreed to – 10 per cent rather than the usual 30 per cent – was widely seen in the industry as a case of a studio selling itself too cheap.

More recently, Sony Pictures was embarrassed by the revelation that it had invented a film critic, one David Manning, whose lavish words of praise were regularly quoted on its movie posters. It also turned out that two "members of the public" filmed giving their reactions to a screening of a Sony picture were in fact members of its marketing department.

Sony is not alone in engaging in such dubious practices, but it is perhaps no coincidence that it was the one that was caught. In Hollywood its studio is still seen as the outsider, even if its recent films – including Crouching Tiger, Hidden Dragon and Final Fantasy – have done relatively well.

It is hard to know how Sony can help itself in the short term. The electronic games industry is being trumped by the internet, but the internet has not yet advanced far enough to make it an attractive proposition for commercial ventures – particularly in the current climate.

"Sony is pinning its long-term hopes on a broadband strategy that would allow people access to Sony games, movies and music over the internet using Sony hardware," an online analyst, David Kathman, wrote yesterday. "But until it can show some indication that this plan can work, we think the stock is best avoided."