Kuchikomi Jun. 20, 2011 - 11:17PM JST ( 8 )

TOKYO —

Sony stands out as one of the icons of Japan’s postwar economic success. From transistor radios and tape recorders in the 1950s, it gained an international reputation first for quality, then for innovation and ultimately for products that generated new consumer lifestyles, through leading-edge products as its Trinitron TVs, the Betamax VCR, camcorders, the cassette and later CD Walkman personal audio players and the Mavica digital camera.

But whatever the company’s technical and business strengths, it failed to anticipate that a determined group of hackers could wreak so much damage. In addition to lost sales, outlays to bolster security—plus the providing of free game downloads to customers as compensation and apology—the company estimates it will be set back 14 billion yen.

This figure, however, fails to include additional possible damages from credit card identity theft resulting from the leaking of the personal data of some 77 million users of its PlayStation Network and 24.6 million customers of its PC network. Compensation for these damages may reach several times the losses already made public.

In March, 10 of Sony’s manufacturing plants had suffered damage from the March 11 earthquake and tsunami, casting further gloom on the bottom line.

Writing in Shukan Economist (June 21), analyst Tomomi Nagai notes that for some time Sony has failed to introduce any revolutionary or trendsetting products, a decade-long decline that largely parallels the shift of consumer products from analog to digital.

In 2005, Sony gave up its dominance in portable audio products to Apple’s iPod. Unlike domestic rivals Panasonic and Sharp, which remain hardware oriented, nearly 40% of Sony’s revenues come from games, cinema, music and financial services. The company’s strategy, increasingly, has been to eschew electronics products. In 2010, its consumer, professional & device divisions just barely earned an operating profit, but only by the thinnest (0.1%) of margins.

In both in North America and Europe, Sony’s Bravia lineup of TVs, which account for about 40% of its hardware sales, has been losing market share to Korea’s Samsung and LG. And since the subprime financial crisis, demand for its VAIO PCs and Cybershot digital cameras has also slumped.

The question now is to what degree the hacking attacks will damage customer trust. While the troubles are unlikely to alienate customers from purchasing, say, a Sony TV or digital camera, it’s not only the game machine users who will be affected by future security breaches. A whole slew of emerging products, such as tablet computers and ebooks, which also rely on networks to distribute their contents, may be vulnerable to renewed cyber attacks.

Concerns have already been raised as to whether Sony might be forced to delay the launch of its next-generation hand-held game, the PlayStation Vita, which was scheduled to be in the stores by later this year.

How on earth have things come to this? An accompanying article in Economist by Osamu Katayama sees Sony’s decline beginning from the mid-1990s under management of former CEO Nobuyuki Idei, a political economics major who lacked an engineering background.

The adoption of EVA (Economic Value Added) management philosophy shifted priorities from profit/loss accounting to cash-flow management. This also led to micromanagement of the technical staff, stifling the “playful” spirit needed to give birth to innovation and causing the company’s vaunted “venture spirit” and “pioneering spirit” to wither—stifling the company’s once-vaunted ability to achieve a synergy between hardware and software.