Chapter15   Assisting IBM

Assisting IBM

The world's first all-transistor
consumer-use videotape recorder.

At the same time that Sony was struggling with the Chromatron project, one of Ibuka's long-cherished dreams was realized when the first VTR for home-use was completed.

"A 60kg VTR costing millions of yen just doesn't match my belief in serving the consumer," said Ibuka. He was not satisfied with the PV-100, despite its relative compactness -- one fiftieth the size of conventional VTRs. Ibuka insisted on a VTR that would be suitable for home-use both in terms of size and price.

In response, Kihara desperately worked to develop the CV-2000. Announced in October of 1964, the Videocorder 2000 was a 2-rotary head unit which used a half-inch tape. At 15kg, it was not much heavier than the average tape recorder. And the all-important price tag had dropped to 198,000 yen from the 20 million yen charged for the broadcast model and the 2.5 million yen for the institutional model. In their efforts to down-size the machine, everything from the motor to the processing techniques of mechanical parts was refined. In addition, a unique "field skip" recording system was incorporated to keep the price low.

Ibuka proudly announced, "This CV-2000 is not an imitation of some other company's product. It was born and nurtured wholly at Sony. Making products that revolutionize our lives is Sony's hallmark. Pleasure and value."

The whirlwind of events did not stop there. In January of 1965, IBM, the most respected computer company in the world with 70% of the world market, contracted Sony to provide technical assistance in the production of magnetic tape for computer use. The industrial world was astonished that IBM asked Sony for technical help.

Initially, IBM had set their sights on the Hi-D metallic magnetic tape for audio and visual recording and measurement. This tape had been jointly developed by Sony and Tohoku University. Instead of using magnetic ferrous oxide like conventional magnetic tapes, the tape used an alloy powder consisting of nickel, cobalt and iron which resulted in high magnetic flux density and high coercivity. It was called Hi-D, or high-density tape, because the packing density was extremely high.

the recording limitations of conventional tapes became apparent. IBM felt the need to produce its own tapes. At the same time, they were pressed to develop a replacement for traditional tape. At this point, IBM chirman Thomas Watson visited Sony's head office in Tokyo.

Until then, 3M, a leading American tape company, had produced all of IBM's magnetic computer tape. As preformance levels in computers improved, however,

"I've seen your tape. If we had the technology, I'm sure that we could make tape for computer use." Watson told Morita that he was interested in starting a joint project with Sony. Watson continued, "I propose we start a 50-50 joint production venture. I don't care if it's located in Japan or the U.S. IBM will buy all the tape made at the plant."

It was not a bad deal, although some Sony staff members raised objections. "It's dangerous dealing with only one customer. What would we do if they tried to push prices down?" This made sense. The joint venture proposal was called off.

IBM, however, was determined. "If you wouldn't accept a joint venture, then consider building us a plant in the U.S." Sony agreed, and in November 1965, it signed a contract with IBM in which Sony would provide the roduction technology for magnetic computer tape and undertake joint research on a new magnetic tape medium. In January 1966, Sony started provideing technical assistance to IBM with Japanese government approval.

Making Big Bucks

The Sony Building
construction site (1965)

Once they received government authorization, Sony and IBM immediately planned an exchange of technical personnel and started work on the development of a new magnetic tape.

It took a few months to complete the magnetic tape production line.
Sony dispatched about ten employees to oversee the work. The equipment was finally installed after three months. The next step was the trial test.

The trial results were not encouraging. Many people made an issue of the tape's magnetic characteristics, but the most important aspect was actually the coating itself. This was not working as planned in the trial tests. There were two reasons : the quality of raw materials and the differences between Japanese and American production methods.

Although they came under the same name, Japanese materials differed slightly from their U.S. counterparts. As for production differences, the Japanese technique for mixing and coating the base, powder, binder, lubricants and other additives relied more on the craftsman's intuition gleaned from long years of experience. Just when he felt that it had reached the right consistency, he would nimbly apply the coating. The Americans relied entirely on measurement. This made a minuscule, but significant difference. Because of this, it was over a year before Sony was able to produce tape that satisfied both companies. Afterwards IBM devised a process so that all measurements in the coating process would be controlled by measuring instruments.

The contract with IBM provided Sony with a lump sum of $100,000 and royalties of ten cents per tape. The 10 year contract proved to be a very lucrative one for Sony. From Sony's point of view, however, the very fact that they had exported their technology to IBM was far greater remuneration than the monetary compensation. Also, the fact that IBM had signed a technical assistance contract with Sony rather than 3M, previously IBM's sole supplier and known for its excellent technology and facilities, raised everyone's assessment of Sony. Japanese newspapers played up Sony's outstanding achievement: "Good news for Japanese industry, which has a reputation for importing foreign technology."

Another exciting topic was the opening of the Sony Building in Ginza on April 29, 1966. The building, located at the Sukiyabashi intersection of Ginza, was opened on Sony's 20th anniversary.

Sony had a long-standing interest in the area. The site was where Sony had built a neon advertisement tower in 1957, which became a big focus of interest for its use of miniature electric lightbulbs rather than conventional neon tubes. Sony had set its eye on the prime location since then, and, the company had hoped to build there. In 1959, Sony rented the first floor of this building establishing a showroom in a 66 square meter space. Soon, Sony found the showroom too cramped for its original purposes because of the increase in products to be exhibited and the prime location which drew many customers.

Land Worth Its Weight in Gold

The Sony Showroom in Sukiyabashi,
before construction of the Sony Building.

The question was what to do now that the showroom had become too cramped. Talk of expanding the showroom suddenly blossomed into talk of purchasing the site.

It was easier said than done. After all, this was Ginza, where the most expensive area in Japan. In April 1961, Sony Enterprise Co., Ltd., a property management affiliate, was formed to oversee the project. The founding president was Shozaburo Tachikawa; the man who had overseen Sony's finances from its earliest days.

Tachikawa consulted with Goro Koyama, then manager of Mitsui Bank's Sukiyabashi branch."You should know that Ginza is the underworld." Koyama hinted at the difficulties of acquiring land in Ginza. He was not kidding.

Sony began the process of purchasing the land immediately after its decision to lease a building in 1962. Initially, the building was to be completed in time for the 1964 Tokyo Olympics.

As actual negotiations began, however, Tachikawa finally understood the meaning of Koyama's remark. Ginza was a real estate agent's nightmare. During the chaotic period immediately after the war, property rights had changed hands so many times it was almost impossible to determine who held the title. In addition, Sony had to track down the underworld bosses who oversaw the "night stalls" that dotted the Ginza street corners. These people who insisted on the right to set up their tables and wares on the sidewalk were a fifth generation removed from the actual owners. Including the landowners, tenants and tenants removed, Tachikawa had to negotiate with at least one hundred people. Many of them were long-time residents who did not want to leave the area. In particular, those in business knew the prestige that the Ginza location added to their businesses, and they were against selling. Acquiring the land piece by piece was a tough struggle.

The first piece of land that Sony acquired was a small 100 square meter plot located behind the current Sony Building. Sony gradually increased its holdings. Their inability to purchase even a single tract of land would make the design of the building difficult. Susumu Yoshihara, the second president of Sony Enterprise, succeeded Tachikawa in the negotiations. Yoshihara took a steady approach, sometimes playing a waiting game while bargaining directly at other times.

While the bid to acquire land was proceeding, Ibuka and the other directors began to consider the type of building they would construct. Yoshinobu Ashihara, designer of Komazawa Stadium for the Tokyo Olympics, was a long-time friend of Kosuke Inoue, a director of Sony Enterprise. Inoue steered Ashihara one day into a meeting with Morita and Ibuka, where they showered Ashihara with questions. Both Morita and Ibuka took to him and his ideas.

Ashihara drew up dozens of blueprints, each taking into account the different amounts of land that they might finally manage to acquire. Each of these designs was reviewed by the Sony Construction Committee, which naturally included Ibuka and Morita. Top management was extremely eager to build a "magnificent building." This is not to say that they had a preconceived image of their building before they started. Ibuka and Morita had only two clear requirements:"That it be a place where people can relax and enjoy themselves," and "That it have a unique design, found nowhere else."

The Construction Committee gnawed at the question of how the building would be used. Naturally, the ground floor would be used for Sony's showroom. One committee member suggested moving the Sony head office into the building. This was rejected because the price of land made it too extravagant. Others suggested renting it as office space. But constructing a new building in Ginza just to rent it did not make good business sense. The question was what to do with the building once it was constructed.

The Birth of Another Sony

The Sony Building
in Ginza.

Good ideas often grow from brainstorming sessions. The design of the Sony Building was born from such a session. Ashihara, Morita, Inoue, Kurahashi from the general affairs section, and Kuroki from the Design Department spent an entire night discussing their dreams for the new building. The conception gradually took shape in their minds. The building would be an integrated showroom centered on Sony's own showroom. One idea grew from another.

Assuming that it would be a showroom building, it needed to be designed to keep visitors interested as they walked from one section to another. The Guggenheim Museum of Art in Manhattan designed by Frank Lloyd Wright was mentioned. Visitors go to the top floor via an elevator, then view the paintings while walking down a spiral-shaped passage.

Let's make it a petal-shaped, spiral building." Ashihara continued, "Each floor will be divided into four equal petal-like sections, each of which is slightly lower than the next. By walking through one floor, one will have also walked down one floor." Everyone thought it was an interesting layout and agreed to the idea.

Ashihara added, "It may be a little bit extravagant, but I'd like to design in a small open space on one corner."

Morita was very supportive. "I was thinking that we should build a place where people could really enjoy themselves, like the Rockefeller Center with its gigantic Christmas tree and skating rink." It was sounding like an expensive undertaking.

With this, the general plan was set. After sketching hundreds of designs, Ashihara came up with the final blueprint six months later. His design made the most of the limited land -- it was brilliant.

By this time, Sony had purchased approximately 730 square meters of land. In June 1964 the groundbreaking ceremony was held. Originally they had planned to finish the building by the 1964 Tokyo Olympics. The late start prevented this. In the end, the Olympic Games coincided with the laying of the foundation, delaying construction further. As they moved into the final stages of construction in 1965, work continued day and night.

Since this was to be an integrated showroom, Sony began the search for tenants. One possibility was to make it a showcase for major nations of the world. However, their contacts with various embassies were not encouraging.

Ultimately, they decided to make the building an integrated showroom for leading Japanese corporations. Inoue and his staff went from company to company looking for tenants. "Even if you set up a sales room, it would be difficult to make money here in the most expensive part of Ginza. Since this is strictly a showroom, you can deduct expenses from your advertising budgets."

Very few companies showed an interest in or an understanding of the showroom concept, which was not yet common in Japan. Although they had yet to fill the tenant vacancies, construction progressed. Simply getting one major company per industry was a struggle.

The building took two years to finish and cost 3.2 billion yen in construction and land. Such an amount was equivalent to Sony's capital at the time.

Attracting Foreing Investment

The Sony Building, which opened April 29,
1966, saw large crowds of visitors
over several days.

The Sony Building was completed in 1966. Initially, the opening was planned for May 7, Sony's 20th anniversary. Morita, however, suggested changing the opening to April 29, the Emperor's birthday, which was the first of three national holidays in what is called Golden Week.

On April 15, the building was officially turned over to Sony. There was no time for celebration -- on the 16th they had to start moving in the merchandise. On April 29 at the stroke of midnight, all the lights were switched on to herald the opening of the Sony Building throughout the Ginza skyline.

The Sony Building was opened. Morita, however, harbored secret doubts. "Perhaps an electronics firm like ours shouldn't have built this after all..." Morita's concern was rooted in Japan's overall economic situation, which was not good. Due to depressed economic conditions, people everywhere seemed apathetic. Morita wondered if anyone would visit the new building under those conditions. Luckily, his fears were unfounded. The number of visitors grew each day, and in a short time the Sony Building became one of Ginza's main attractions -- so much so that people said it helped restore some of Ginza's former vigor and life.

Japan's economic depression was rooted in the interest equalization tax instituted in July 1963 by the President of the United States John F. Kennedy. The enactment of the tax came immediately after Sony had made its second ADR issue. At the time, the American economy was in recession, resulting in a tremendous outflow of domestic capital. To slow this trend, Kennedy took strong measures -- a 16.5% interest equalization tax on all capital leaving the U.S. While this move did indeed decrease the outward flow of American capital, it also incited panic in world markets. Japan was no exception. In 1965, Japan felt the full effects of the tax -- the securities market slumped into the worst depression in its history. When the Tokyo Stock Exchange average dropped to 1,020 yen, many thought that the Japanese economy would collapse.

Sony's stock reflected the times. Issued at 600 yen, it fell to 250 yen, and remained sluggish around the 250-260 yen mark. Under these circumstances, Sony could not raise any capital. At the time, they needed capital for research and development of the Chromatron color TV and for the construction of the Sony Building. To make matters worse, an additional 100 million yen was needed to repair the Sony Research Center in Hodogaya, which was hit by a landslide in 1966.

Sony needed all the capital it could acquire, but the Japanese economy did not have the strength to raise it since Japan was in a recession. The only option left was to sell Sony stock abroad. Thus, the company began a strong campaign to attract foreign investment.

"IBM is by far the wealthiest corporation in the U.S. Even if we have to pay the 16.5% tax, in the long run we can profit if they'll buy our stock. I think we should try." Yoshii brought this drastic suggestion up before Ibuka and Morita. The question was whether IBM would deal with Yoshii or not. Yoshii, however, hoped that James Birkenstock, vice president of IBM and director of the Technical Division, whom he had met when Sony and IBM signed the technical assistance contract, would help him.

Considering the severity of their financial plight, Ibuka and Morita agreed with Yoshii that it was the only thing to do.