Sony Ericsson has a lot of work to do

When Sony Ericsson recently invited journalists and analysts to Lund, Sweden, to showcase its gleaming new office building there, talk turned quickly to the company's painful situation. After its rocky birth as a joint venture between Japan's Sony Electronics (SNE) and Swedish telecom equipment giant Ericsson (ERIC), the world's No. 5 handset maker soared through years of sizzling growth on the back of sexy phones and hip marketing"”only to stumble badly this year.

Now, under the leadership of a new chief executive, Sony Ericsson is trying to get its mojo back. 'We are moving forward,' promises CEO Hideki 'Dick' Komiyama, a 64-year-old Sony veteran who stepped into the top job last November (, 11/9/07). Trouble is, it's going to take some time before those efforts pay off.

Sony Ericsson's third-quarter results, announced Oct. 17, weren't as bad as many analysts feared. The company sold 1.3 million more phones than in the previous quarter and managed to avoid a widely expected quarterly loss through tough cost controls. But there's little reason to cheer. The average selling price of Sony Ericsson's phones fell 6% vs. the previous quarter, in part due to aggressive discounting. That helped knock down its gross margins from 31% a year ago to just 22%, resulting in zero profits. Results are likely to get worse before they get better. 'We are yet to see a bottom in the company's performance,' predicts a research note from UBS (UBS) Equity Research.

In a tougher spot than competitors

To be sure, it's a tough time for everyone in the mobile industry. A day earlier, Nokia (NOK) reported a 5% decline in revenues and 30% fall in net earnings (, 10/16/08). But price cutting, the global financial crisis, and increased competition from the likes of new entrants Apple (AAPL) and Google's (GOOG) Android are taking a steeper toll on Sony Ericsson than on stronger competitors.

The joint venture is more vulnerable today due to a series of missteps in the past year, including troubling lags in its product pipeline. Its sales are still too heavily concentrated in Western Europe, where a saturated market and widening economic problems are choking off demand. And it's weak at the low end of the market, where the strongest growth is happening in emerging markets.

Fixing these and other issues will take time and require significant changes in the company's structure and management, says Komiyama. 'It will take until the later part of 2009 to get better,' he said in an interview with BusinessWeek. Komiyama says parent companies Sony and Ericsson have consented to his turnaround timetable and action plan.

Trying to change the company culture

Getting there won't be easy. Sony Ericsson already is in the midst of a cost-cutting program that will see it eliminate 2,000 jobs globally in order to save €300 million ($400 million) a year by the second half of 2009. Komiyama says he also has to shake up the company's culture because even after seven years employees from the two parent companies still don't act in unison. At Sony, Komiyama says, 'people all pull together in the same direction.' He sees one of his biggest challenges at the joint venture to establish 'one brand and one team.'

Komiyama already has merged the sales and marketing divisions, fused three product groups into one, and altered priorities at Sony Ericsson's global research and development facilities to better fit the company's overall strategy.


The entry-level phone division, for example, was aiming too many of its phones at well-heeled customers, which ended up cannibalizing revenue from the company's mid-range product portfolio.

Another big challenge is making sure there are no gaps in the product pipeline"”especially so that Sony Ericsson can seize the gaping opportunity in emerging markets. But even with more focus on low-end phones, the company can't match Nokia's economies of scale and global distribution for handsets priced at $30 or less. That has hampered its growth in markets such as India and China (, 6/30/08).

'Underrepresented' in smartphones

To fix the problem faster, Sony Ericsson struck a licensing agreement last year with French electronics maker Sagem (SAF.PA) to help it produce low-end phones. But the first models won't be released until the fourth quarter of 2008, some 21 months after the deal was signed. Meanwhile, Sony Ericsson's new Microsoft (MSFT) Windows-based Xperia smartphone is the only such high-end device the company now offers (, 9/15/08).

Surprisingly, although Sony Ericsson is a shareholder in mobile software consortium Symbian and says it remains committed to the relationship, it does not have any smartphones based on Symbian's operating system in its current portfolio"”and is unlikely to for some time. This means the company is 'underrepresented in one of the few markets in the mobile sector that is growing at a healthy clip,' says Richard Windsor, a financial analyst at brokerage Nomura Securities.

Sony Ericsson also badly needs to change the perception that it is a follower rather than a leader, analysts say. The Xperia, announced in February at mobile industry trade show, generated a lot of buzz at the time because of its touchscreen, rich graphics, and ability to switch easily between different screens and menus. But in the six-month lag between announcement and launch, analysts say, the new product already has lost its edge to rivals.

London-based Sony Ericsson is relying on a third-party manufacturer, Taiwan's HTC, which has experience working with Windows. But in the meantime, HTC has come out with its own Windows-based high-end phone, the Diamond, which uses a lot of the same technology and has some of the same look and feel. Apple, meantime, has launched the iPhone, and Samsung and Nokia have introduced high-end models that compete directly with the Xperia.

Falling behind in wireless services

Nokia and Apple also have bested Sony Ericsson in wireless services. Sony Ericsson first started offering music tracks on an à la carte basis through its PlayNow service back in November, 2007. But its new PlayNow Plus service, which will be bundled with phones, will end up lagging the launch of Comes With Music, Nokia's rival bundled service (, 9/25/08). In the future, analysts say, Sony Ericsson will have to be more fleet-footed if it wants to stand out in an increasingly crowded field.

Komiyama says PlayNow Plus will be a key part of Sony Ericsson's strategy going forward, as the company more closely ties content, applications, and services into its future phones. And in contrast with Nokia, which is launching its 'Ovi' suite of services in competition with mobile service operators, Sony Ericsson is forging partnerships with carriers.

But PlayNow Plus will kick off on only one phone with one carrier in one market"”Telenor (TEL.F) in Sweden"”by yearend.


Sony Ericsson still needs to demonstrate that it can launch a global service if it wants to compete with companies that have the global scale and reach of Nokia and Apple, says Adam Leach, an analyst at technology consultancy Ovum (INF.L) in a research note.

Analysts also say Sony Ericsson needs to do far more work on the software and services side. The technology used to power PlayNow Plus is actually provided by startup Omnifone, the company that runs the MusicStation service for Vodafone (VOD). If the service 'is a runaway success, the benefits will mostly accrue to Omnifone as the technology supplier,' says Nomura's Windsor, 'leaving Sony Ericsson only benefiting from higher handset sales.'

A renewed brand focus is needed

And to help lift its profit margins, Sony Ericsson must revive its brand cachet. Perhaps the company's greatest marketing coup to date was its reinvention of the Sony Walkman brand, which it followed by adopting Sony's Cyber-shot digital camera marque for camera phones. But both lines are starting to look a big tired, analysts say. Komiyama told journalists and analysts gathered in Lund that the company will continue to use Sony's brands as a key part its strategy, but didn't disclose which of the parent's other properties might go mobile or when.

Komiyama says Sony Ericsson will have a whole new range of handsets out by the middle of next year. In the meantime, though, it is losing ground to others. UBS, for example, notes that Sony Ericsson's European portfolio performed well at the start of the third quarter but tapered off significantly in September as Nokia's new devices gained traction and Samsung continued to deliver new mid-range and high-end phones. The company also lost market share in the Americas in the third quarter.

Analysts say they remain concerned that brutal competition in all areas of the mobile market will continue to batter Sony Ericsson in the near term. Due to all of its vulnerabilities, concludes Windsor, 'this handset maker has very little wiggle room' should the global financial crisis get worse.

Schenker is a BusinessWeek correspondent in Paris.

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