ANALYSIS : Biggest Failure Pushed Sony to Latest Success

Sony Corp., the company that came so triumphantly to Hollywood on Wednesday, shelling out $3.4 billion to buy Columbia Pictures, is now a $16-billion (sales) giant in two industries, entertainment and electronics. It’s both the world’s largest record producer and the world’s leading manufacturer of compact disc players; it’s a leading maker of television sets and now the owner of a movie studio and film library.

And yet, scarcely six years ago, Sony was troubled. Its sales, then less than $5 billion, had been stagnant for years and its profits were declining. Worst of all, the Betamax videocassette recorder, a product into which it had poured 20 years of effort and research, was on the verge of commercial failure.

So how did the company go from trouble to triumph in six years?

The immediate reason for the Betamax failure was competition. Sony’s rival Matsushita had developed the VHS system and licensed it to any manufacturer or retailer who wished to slap a brand name on it--from Sears to General Electric. The result: More VHS sets sold, which led to more films being available on VHS, which led to more VHS sets selling--and to Sony recognizing Betamax’s ultimate failure (the company discontinued the product in 1988).

Changes Were Subtle

However, Sony’s real problem was not competition but overweening pride. Sony’s renowned chairman and founder, Akio Morita, had decreed that Betamax could only sell under the Sony brand name and at a higher price than VHS--because it was higher quality. It may have been, but the public didn’t care and didn’t buy.

The Betamax debacle caused Sony to take a long look at its business and to make some changes. To be sure, Sony didn’t go through a restructuring, as American corporations do; there was no manic selling of divisions at the company’s Spartan headquarters in Tokyo, where all employees, including top executives, still wear uniform jackets--a reminder of the firm’s beginnings after World War II, when Japan was devastated and poor.

The changes were subtle. Morita in 1984 began to step back from day-to-day management, and Sony President Norio Ohga emerged. Ohga, who is chairman today, is an opera singer by training who caught Sony’s attention by prodding it to make a better tape recorder. He is a self-taught engineer, according to one Sony veteran, who understood that the firm had to shift direction.

Sony began to seek industrial customers to lessen its dependence on consumer markets, which were becoming fickle as more and more companies, Korean as well as Japanese, flooded stores with electronic gadgetry. In such a market, Sony was unable to charge higher prices for its higher quality.

But quality still counted with industrial customers. So Ohga departed from tradition and began to sell Sony technologies to other companies. The company’s Trinitron TV screens now grace Apple Macintosh and some IBM computers. Sony, the first Japanese company to license Bell Labs’ transistor in the 1950s, now sells $2 billion worth of its semiconductors to other manufacturers. Result: Non-consumer business now accounts for more than 25% of Sony’s sales--and the company aims to make it 50%.

But most of all, the Betamax episode led Sony to think seriously about software, about making and selling not only the electronic gadgets but the songs and programs that play on them. Ohga and Morita and others at the firm asked themselves if Betamax might have done better if Sony had its own films to put on cassettes.

The model for much of its thinking was N. V. Philips, the giant Dutch electronics firm. “Philips is our greatest competitor,” Morita said in an interview last year. “And Philips benefited from software--it owned Polygram Records, and that helped its compact discs.”

And so Sony moved into musical software in 1987 when it agreed to buy CBS Records for $2 billion. “Having software is important,” said Michael Schulhof, who helped negotiate the CBS purchase. Schulhof, vice chairman of Sony Corp. of America, was one of the key men involved in Sony’s negotiations with Columbia.

Certainly software pays off. CBS Records now gives Sony 15% of its sales and double the operating profit of its traditional hardware business, according to analyst Thomas Chesser of the Smith Barney, Harris Upham & Co. brokerage firm.

Glowing Signpost

But quick profit is not the vision that moved Sony into records or into movies. That vision was what the software could do in combination with the hardware, especially new, advanced hardware like Sony’s digital audiotape and high-definition television, or HDTV. “Software is important because it helps boost your technology,” explains William Connolly, president of Sony Advanced Systems, a New Jersey outpost of the global firm (Sony is the most international of Japanese companies, with 20% of its production outside Japan). “If you can get the technology going, program makers are going to produce for the most advanced mode. They’ll begin shooting HDTV because they think of the rerun market, of the future value of their product.”

That’s a glowing signpost to where Sony is headed. (Connolly headed advanced technology for CBS Television before that company stopped pursuing advances in TV equipment.) Sony intends to broaden acceptance for digital audiotape--a recording product so pure that near-perfect copies are possible--by using its own CBS music. Sony, which spends $1.3 billion a year on research and development, intends to broaden acceptance of HDTV by using the 2,700 films and 23,000 episodes of television programing in the Columbia library--either directly on HDTV broadcasting or in videocassettes.

In short, Sony marches into the era of global entertainment and information industries as a potent giant, capable of pushing the envelope in both hardware and software. The only truly comparable American firm was Radio Corp. of America, RCA, the pioneer of radio and television technology as well as the developer of network radio and TV with NBC.

But RCA no longer really exists. It has been sold and resold, and its brilliant technical people have been scattered. Happily, though, they are not unemployed--many of the best of them now work for Sony.