"Sony's Revitalization in the Changing CE World"
CEATEC -- Tokyo – Oct. 4, 2005

Technological and social change is most often experienced in hindsight; we don’t see it clearly while it’s happening. However, I’m sure everyone in this room has had a moment in which the enormous change of the past 15 years has quite suddenly, perhaps unexpectedly, defined itself before your eyes.

My moment occurred some time ago at a Tokyo restaurant. Four young women were seated at a nearby table having lunch. Yet despite a shared table and close proximity, they did not appear to be having lunch together. Or at least not exclusively together. Instead, each was on her cell phone, sharing conversation or text messages or photographs over a vast, wireless expanse. With just those four little devices in hand, the young women could extend their lunch table quite literally to the four corners of the earth.

The only shocking thing about it, of course, was how unshockingly routine it had become.

Dramatic change has become routine. But even by the standards of recent history, the change we are experiencing today has a momentous feel to it. Change is everywhere in Japan. There is change afoot in government. Change in industry. And certainly great change in the works at Sony.

In recent weeks, Sony’s management team has outlined a new vision of the company’s future. It is a vision that is streamlined in terms of product lines, manufacturing sites and efficiencies. But it is a vision that is otherwise far broader and deeper -- expanding Sony’s capacity for technological creativity and market leadership, while deepening our relationships with dealers, partners and customers.

The environment in which our industry operates will not grow easier. Competition in the CE industry is fierce, and is now coming from sources we never had to face in the past, including China, Korea and a full roster of IT companies. Like the price of gasoline, the price of television sets moves in only one direction. The trouble for us is, it’s the opposite direction. Each time you walk through Akihabara, the prices seem to be dropping further through the floor – with much the same effect as a wrecking ball.

This challenge is a wake-up call for all of us in the consumer electronics industry in Japan. It is also an opportunity for the entire Japanese consumer electronics industry to reclaim its leadership position. At Sony, we embrace this challenge with a firm understanding that it is at the core of our cultural heritage here in Japan.

The entire consumer electronics industry faces the same dilemma. On the one hand, there is a race to the bottom, with commoditized components, descending prices, squeezed margins and a business model that mimics the grimmest realities of the IT industry. On the other hand . . . well, what exactly is on that other hand? It’s hard to tell when it’s tied behind your back.

At Sony, we believe if we free ourselves from the old ways that bind us, we will discover a very strong hand indeed. We believe we will triumph by building into our products sustainable competitive advantages that defy the forces of commoditization.

Sony is still an innovation leader. In fact, a recent survey of senior corporate executives named Sony one of the five most innovative companies in the world. Anyone who knows our R&D knows we have genius in our ranks. However, we have fallen short in matching innovation with the expanding appetites of our customers, and execution with the rigorous demands of our marketplace.

To regain our true strength and status as a premium brand, we must deliver truly differentiated, champion products that afford our customers the unique, compelling and personalized experiences they desire.

All the news you’ve recently heard about Sony – along with many weeks of vigorous and healthy debate within Sony -- was generated in pursuit of that end. Every company must reach its own decision. We have made ours.

First, we will restructure, eliminating silos and the culture of silos to improve coordination, efficiency and operations; Second, we’ll sharpen the company’s focus -- in R&D, product development and marketing – in order to apply the resources necessary to develop and market champion products; Third, as we develop more sophisticated software capabilities, we’ll use Sony’s marriage of content and technology to create unique competitive advantages and compelling user experiences. Reorganization will lead to the revitalization of Sony Electronics. That is our number one priority.

Silo walls have been coming down at corporations throughout the world, including here in Japan, as large organizations seek to become more responsive to their markets. They are coming down at Sony, too. We need a more horizontal structure on the inside to become more customer-focused on the outside. In a digital age in which customers demand seamless integration of technology, content and services, silo walls too often lock old habits in – and keep the future out.

Instead, we have instituted centralized decision-making over consumer electronics in the hands of Sony President and Electronics CEO, Dr. Ryoji Chubachi. He, along with a team of senior executives, will coordinate product planning, technology, strategy, procurement, manufacturing, sales and marketing, and software development across Sony product lines. They have my total support as we work to revitalize our electronics business. As a result of the changes under way, you will see a more nimble, more responsive, more coordinated company with greater speed to market, and a better relationship with the customer.

You’ll see something else, as well: a new generation of champion products

In the old days, when margins were healthier and the competition was slower and less aggressive, a consumer electronics company could still get by without a true champion in its corner. That’s no longer the case. Only champions -- integrated products differentiated by hardware and software and ready for entertainment -- can prevail in the fight against price erosion and commoditization. Only champions with unique attributes and identities can raise margins and defeat the downward cycle of low-cost replication.

We know something about champion products at Sony. Walkman, Trinitron, PlayStation, Handycam – these are not merely devices. They are revolutionary brands that have changed consumer experiences around the world.

To achieve a similar impact in the future, we are narrowing our focus and implementing cost restructuring initiatives. You have seen the details of our plans for restructuring in the press. But the story at Sony is not simply one of reductions. We are determined to achieve growth through expanding market leadership in key areas.

We have targeted Number One positions in: Televisions; Video recorders; Digital imaging; And Walkman mobile entertainment.

We will fight our battles not on the low road to commoditization, but on the high road of innovation.

HD will be a defining arena for Sony’s strategy – and for the entire industry. No one in the world has Sony’s depth of experience, or breadth of excellence, in high definition. And no one is better positioned throughout the value chain to benefit from the shift from standard to high definition.

I’ll discuss this critical area in more detail shortly, but first I’d like to highlight a few Sony products and a new technology that embody that fighting spirit. The following products do not represent all that Sony will become. But they do point the way to the future.

Our new Walkman is pure Sony style. But the functionality also surpasses the competition. In addition to a 20 GB hard drive that stores up to 13,000 songs, our newest Walkman has a variety of unique "intelligent" features, such as "Artist Link" and "Time Machine Shuffle" that make recommendations and allow customers to further customize their music preferences.

Our newest Walkman Phone from Sony Ericsson, available in Europe, combines the functionality of a Network Walkman with a wireless phone, a two-megapixel auto-focus camera and a built-in radio. A prominent technology columnist called it "the world’s sexiest phone".

Life on the run is considerably more enjoyable since the introduction of Sony’s PlayStation Portable this year. Only nine months after its launch, PlayStation Portable has sold six million units and is the most successful portable game console in history. With its astonishing picture quality, the PlayStation Portable has been a great success globally, playing movies as well as games in the Universal Media Disc format, and the device’s functionality is set to expand further.

Users of the current PlayStation Portable will soon be able to deploy the device’s built-in Wi-Fi to watch video from home entertainment terminals anytime, anywhere in the world. And expect to see a PlayStation Portable with a high-capacity Memory Stick, which will be able to store hours of TV and film content and also be synchronized with a digital video recorder. The PSX and Sugoroku DVRs have the capability to move content to the PlayStation Portable, and are currently available in Japan.

PlayStation is one of the rare devices to obtain the status of a popular icon. If you wonder why we speak of "PlayStation Nation," consider this: The number of PlayStations in the world now equals the combined populations of Japan, South Korea and Australia. That’s about 200 million machines – and no matter where in the world they are, they’re all speaking the same language.

The PS3, due out next spring, promises to be our biggest breakthrough yet. Words do not adequately convey the visual and emotional impact of the PS3. It plays in high definition and high drama. And it plays Blu-ray, the high-definition disc that will become the standard of excellence for a new generation of recorded media.

The CELL microprocessor, which Sony developed with IBM and Toshiba, clearly sets the PS3 apart. It is 35-times faster than the processor in the PS2 with ten times the power of the standard PC and twice the processing power of Microsoft's new Xbox-360. This technology allows for supercomputer-like performance, movie quality images and a degree of realism that is simply amazing in a home gaming device. It’s been said in the press that "no other chip in the world can touch it." And we are confident that is true.

But PS3 is only the beginning for CELL. That’s why an industry analyst called CELL "a monumental technological advance." At our new CELL Development Center, we have a team dedicated to developing new applications for CELL technology throughout our product lines, including use in a digital home server.

Currently, customers directly communicate and share images and video with each other through portable devices. In order to enhance the customer experience, we will look for ways to integrate intelligence into our devices. New, intelligent devices will be powered by smaller, but more powerful processors and will be directly connected with one another or through the Internet.

Sony engineers are finding new possibilities for CELL all the time. Imagine you are a baseball fan and particularly a fan of Hideki Matsui of the New York Yankees. (That shouldn’t require too much imagination for some of you.) Now imagine you are too busy fighting commoditization to watch the Yankees play, but you are still eager to know how your favorite player is doing. Upon request, CELL will be able to search the games of the past week and compile a three-minute highlight video of Matsui’s performances for you to watch at your convenience.

And, by the way, every time Matsui-san hits a home run to right field, you can see the ball soar over the Sony BRAVIA advertisement on the Yankee fence.

As standard microprocessors have difficulty manipulating HD’s rich content; CELL will also allow for much faster editing in high definition.

Sony will continue to invest aggressively in CELL and imaging technologies like CMOS, as well as in key components and next-generation display device technologies, with particular emphasis on Organic Light Emitting Diode, or OLED, technology, which we think shows great promise for both mobile and home devices.

We invest in these technologies for the sake of our customers, for whom these innovations offer a world of exciting possibilities. And we invest in them for the sake of our products, in order to arm them with sustainable competitive advantages.

As I mentioned earlier, Sony has invested heavily in HD. In both the professional and consumer markets, Sony has been the leader in high definition from the start. It is a critical element to our strategy going forward. In Sony’s HD World, consumers can watch Sony HD movies or other content while creators can shoot, edit and view all in Sony high definition. Here, again, CELL’s unparalleled processing power will be a factor.

Adoption of HD technology will lead to enormous opportunities for sales of high-definition devices and content of all kinds. That’s why we are increasing the percentage of Sony products supporting HD from 35 percent today to 75 percent in fiscal year 2007.

High Definition will be at the center of the digital living room. So will Sony. Our new BRAVIA line of high-definition, flat-panel LCD television sets will help popularize HD in the living room for the simple reason that the BRAVIA’s picture quality is irresistibly attractive. It offers enhanced and more accurate color reproduction, faster response time and wider viewing angles. As I mentioned, BRAVIA is also the official LCD TV for the New York Yankees.

But the switch to High Definition is about more than a pretty picture. It will unleash enormous creative potential. Sony HD products are already bringing professional quality to consumers. We recently introduced the HDR-HC1, the world’s smallest and lightest HD consumer camcorder, which is on display here. It was named the number one new consumer product by the Nikkei Sangyou Shimbun, and The New York Times called this remarkable camera a "true breakthrough" that delivers a "spectacular picture."

That’s true. But this sleek little camera also represents a revolution in personalization. It means you no longer need a movie studio budget to produce, shoot and edit in high-quality, high definition. With new devices like the HDR-HC1, people all over the world will have a new forum for artistic expression.

How will consumers experience and save their high definition content? On Sony’s Blu-ray disc, of course. Blu-ray can store a full-length movie in high definition with room left over for interactive features including games, extras, and behind-the-scenes content. That’s especially significant when you own the world’s largest library of digital and HD films. We’re currently testing discs in our lab with the capacity to store 23 hours or more of high definition video. Because of its superior storage capacity, we have obtained broad support for Blu-ray from both the IT industry and the majority of major film studios. In fact, just yesterday Paramount Studios announced its endorsement of Blu-ray, joining an already strong coalition of Hollywood supporters. Thomas Lesinski, President of Paramount Pictures, Worldwide Home Entertainment, was quoted as saying: "We have been intrigued by the broad support of Blu-ray, especially the key advantage of including Blu-Ray in PlayStation 3. After more detailed assessment and new data on cost, manufacturability and copy protection solutions, we have now made the decision to move ahead with the Blu-ray format."

We think Blu-ray will have an impact very similar to that of DVD. Blu-ray will drive traffic to stores and introduce consumers to compelling new experiences.

Altogether, these advances in high definition and CELL microprocessing power represent a significant leap forward in technology. But they are an even bigger advance in the ongoing personalization of media, which allows customers to consume and create media to suit unique, highly-personalized desires.

That trend began with the Sony Walkman. The Walkman personalized music, creating a revolution in consumer experiences and expectations along the way.

Our new digital Walkman products begin the task of reclaiming Sony’s leadership. To return to number one in this market, we are listening to our dealers, listening to customers and developing the functions to make these products great. Our Walkman flash players quickly became market leaders in Japan.

Digital Entertainment Services are a pillar of Sony’s strategy. We are integrating content, devices and services to enable customers to create unique soundtracks for their lives and to do it all on their own terms. Our successful Japanese mobile music business, Chaku-uta, includes a comprehensive music download service. And the new Walkman line works smoothly with MORA.

Obviously, we compete in the digital audio market against Apple, whose head start was aided by the tardiness of Sony silos to integrate content, technology and services in a seamless manner. However, all of Sony is now devoted to a common aim: securing a winning position in digital audio.

What the Walkman began with audio will not end there. Sony’s PlayStation Portable and Location-Free TV are already breaking new ground in personalized, mobile video. Sony Ericsson, too, is a key element of our mobile entertainment strategy, leveraging our content in music, video and games to enhance our mobile devices.

We will be a very aggressive competitor in this arena for the simple reason that no company on earth has a greater ability to combine innovative technologies with high-quality content.

Sony’s content and games provide a unique strategic asset, one that will grow more important as the digital age matures. First, Sony’s content and games companies are strong and profitable businesses in their own rights.

Our film business had the top box office receipts the past three years in a row. With MGM, we distribute the world’s largest film library, accounting for roughly half of all Hollywood color films. We have the largest digitized, HD-ready library of film and television content. Our global music assets, including our number one Sony Music Japan, comprise the world’s largest music business.

We are number one in digitized music sales.

We have the world’s number one console games business. In the digital age, content lends both brains and muscle to our electronics businesses. Let me give you an example:

Sony’s PlayStation Portable has had a blockbuster debut, especially in Europe and the U.S. It is a brilliant, stylish, cool device. But look at how much value – and sales muscle – Sony content adds to the equation.

By including a UMD of Sony’s Spiderman 2 in the original product launch, we enabled customers to experience the beauty and emotional impact of watching movies on their PSP. It’s hard to believe that a screen so small can deliver such a vibrant experience. But the customers didn’t have to take a leap of faith – they could see the quality with their own eyes. Demand for additional UMD movies grew instantly.

Sony Pictures and MGM have now been joined by all but one of the major Hollywood studios in distributing movies for the PlayStation Portable. The Chinese film “House of Flying Daggers” took only three months to ship nearly one hundred thousand UMD copies. No other format has gotten this much content support since DVD was launched eight years ago.

The PlayStation Portable doesn’t just play movies, it also plays music. And programmers, including at least one competing studio, are busy formatting short video programming specifically for the PSP, as well. The supply of content is growing rapidly. And as more content becomes available for the PSP, its value to customers increases.

Sony’s leadership in digital film production is another example of content and technology providing mutual support. The Genesis digital camera system, co-developed by Sony and Panavision, provides a familiar operational feel to the top-end cinematographers, and captures pristine quality images that exceed those of traditional 35mm film. The Genesis camera is the world's first Digital 35mm motion picture camera system, and is the leading choice for digital television and motion picture production.

And as more movie theaters switch from analog equipment to digital technology, the market grows for Sony’s digital movie content at the same time that the distribution costs for that content decrease. Digital technology and content support one another.

Sony’s growing film, television and music production around the world enables us to make use of content globally – but with distinct, local relevance. After all, there is more to entertainment than Hollywood.

I already mentioned that Sony Music Japan is number one in its market, with a roster of artists that includes Ken Hirai and Orange Range. And Sony Pictures Japan produces some of the most popular animation on Japanese television. But Sony also has successful TV channels in India. We have hit comedies on German television. We have dynamic film production in China. We have pop music stars around the world. We’re building a library of global content that adds value to every device we make and that will help generate sales in DVD, UMD and in our upcoming Blu-ray disc.

The dynamic between entertainment content and electronics is a fascinating one that can have tremendous mutual benefit. As we’ve seen with the PlayStation, the right product – one that enables truly compelling customer experiences -- can lead to vast opportunities for content creators. And as the content developers create more and better entertainment content, this further enhances the popularity and value of the device itself. This, in essence, creates a beneficial cycle between the device and its entertainment content.

Content is a unique and powerful asset, one that will grow even more important with the evolution of web-based dynamic content that changes constantly. But we are determined to create other sustainable competitive advantages. As we did with the CELL chip, we will continue to invest aggressively in technologies that enable us to introduce products that are both highly desirable and extremely difficult to imitate. Constant innovation is the only way to triumph over commoditization.

Success in consumer electronics in the digital age will be achieved by companies that create compelling customer experiences that are not easily duplicated. This means brilliant devices. But it also means seamless integration with networks and other products. And it means simple and easy user interfaces, even as these user interfaces are called upon to navigate increasingly vast amounts of content. Further, it means providing customers with unique personalized experiences, and unshackling them from the constraints of location, time and memory capacity.

We understand that excellent hardware no longer guarantees success. That’s why we have elevated software design to a top priority at Sony. Through our newly established Technology Development Center, we will be aggressively building up our software capabilities, and we will establish software development centers in the U.S. and China this year.

By combining computing power, hardware technology and middleware, we will create a world of imaginative new products for the customer. Sony devices will have user-friendly interfaces and functional simplicity. We will create consistent software architecture for all our products – software as elegant and refined as Sony hardware. And Sony devices will be designed from the start to work and play well with others.

These changes recognize a fundamental reality. In the digital era, the customer is king. Customers now enjoy far greater choice, including the power to decide which companies win and which companies lose. So we must recognize who wears the crown and serve accordingly. And we must make it easier for our dealers and other partners to serve the customer-king, as well.

This demands an increased focus on quality and reliability. We built our reputation over many decades. But in a globally-connected marketplace, a reputation can shatter quickly. To better serve both our dealers and customers, we have instituted new, top-level management controls to review new product plans for quality, reliability, marketability and interoperability prior to launch. In addition, we are improving our engineering, design and manufacturing processes and strengthening our supply chains.

Improved operations will: Shorten our time to market; Speed our response to fluctuations in price and market demand; Lower inventory levels; Improve cash flow; Increase accuracy in forecasting and delivery; And provide more focused marketing support.

Successful marketing is crucial to a strong brand. Over the years, Mr. Morita built one of the strongest brands in the world. For six years running, the annual Harris Poll survey of best brands has named Sony number one. And today we are moving to revitalize our brand. Together with the many key executives already involved in this process we have added a Chief Marketing Officer, tasked with capturing and presenting a brand personality unique to Sony, one that reflects all aspects of our business. We are coordinating marketing across divisions and strategically targeting our marketing resources with a single goal: transforming the great products that we create into the champion products that our dealers sell. And we are supporting our brand with a host of ambitious new efforts, including our sponsorship of World Cup Soccer starting in 2007.

Only a few companies have the strength and depth and breadth to be leaders in multiple realms of the emerging digital world. Sony is surely one. Sony’s diverse and complementary strengths, including content, devices and gaming, combined with our traditional leadership positions in the living room and mobile environments, make us ideally suited to prosper.

But only if we make the changes necessary to ensure our growth. That is what this moment in Sony’s history is all about: Building a future in which: We possess the software expertise and new technologies that lead to champion products and sustainable competitive advantages; Sony’s champion products deliver the unique, compelling and personalized experiences that customers desire; We are streamlined and united across divisions and across the world to deliver value and efficiency to our dealers and other partners; And we reclaim the primacy of our brand and the fighting Sony Spirit of Ibuka-san and Morita-san. The digital world is still new, still a work in progress. The greatest opportunity lies ahead. We are restructuring our organization and refocusing our operations in order to seize that opportunity – in order to stay on the high road of innovation.

Oh Sadaharu was one of the greatest athletes of the past century. But at the start of his professional baseball career, he was often frustrated in the batter’s box. It wasn’t until Oh changed his batting stance that he became the greatest home run king in the world.

Sony, too, is changing its stance at the plate. We are becoming more focused and efficient, more innovative and competitive. We are changing in order to create more sustainable competitive advantages for our products and our partners.

When our changes are complete, you will see a new Sony. And like Oh after he adopted his singular stance, Sony, too, will be newly positioned to begin a great and enduring streak of hits.

Thank you.