Wiring Sony for Cyberspace : In His 15 Months as the Global Giant’s New President, Nobuyuki Idei Has Seen the Stumbling Company Recover Its Footing, Boost Profits and Regain Tight Control of Its U.S. Operations. But Can He Meet the Challenges of the Digital Age?
Nobuyuki Idei, president of Sony Corp., is in a bad mood. He is 15 minutes behind schedule, and the last place he wants to be, it seems, is in a private parlor of an elegant but charmless French restaurant in Tokyo, having to explain the future of his company. Fifty-eight years old, Idei has a boyish face that seems incapable of masking his emotions. At the moment, the muscles around his jaw are tense. The marketing man in him aims to please, but he seems acutely aware that his every utterance will be scrutinized.
When Norio Ohga, now chairman of Sony, selected Idei as his successor 15 months ago, he bypassed 14 other executives--a startling move in hierarchical Japan. Overnight, Idei went from obscure salaryman to Japan’s most watched executive. Known within Sony for his free-wheeling intelligence and unusual directness, Idei hadn’t even been viewed as a dark horse candidate. For the previous five years he was responsible for Sony’s public relations and advertising, and headed the company’s product design center, a prestigious position but not one that anyone expected would get him to the top.
To gain support for his decision, Ohga visited Akio Morita, Sony’s revered co-founder, in Hawaii, where he was recuperating from a stroke. ‘You are a journalist so it is very difficult to tell you this story,” says Ohga. “I know that I should probably say that Mr. Morita agreed, but he couldn’t speak. The truth is I couldn’t tell whether he understood me or not. I really wanted Mr. Morita’s agreement.”
Inside Sony, employees reacted to Ohga’s announcement with exclamations of “Uso,” a Japanese expression that means “You’re kidding’--said with an emphasis on the “u” and the “o” for maximum impact. When Ohga informed Sony executives about his choice, “nobody thought Idei could do the job,” he now admits. “Nobody had thought of Idei in that way before.”
The reaction of Japanese and Western business analysts, though, was more hopeful. Sony, they all agreed, needed to make a radical change. Soon after the Idei announcement, Sony reported its first loss ever, a staggering $2.8 billion for the fiscal year 1995. Sony’s purchase of Columbia Pictures and TriStar Pictures (renamed Sony Pictures Entertainment) in 1989, the company’s much-publicized foray into the movie business, had been a source of embarrassment; now it was proving to be a huge financial drain. In the fall of 1994, Sony had announced that it was taking a $2.7-billion write-down on studio assets. (Plus $510 million in operating losses.)
Even more humiliating, Sony’s competitors were beating it to market with more innovative products. Founded 50 years ago, Sony had long been the emblem of Japan’s postwar success. It was co-founder Masaru Ibuka who realized the enormous potential of the transistor, a product that had been invented at Bell Laboratories. By coming up with even smaller, sleeker and hipper products such as the pocket radio and the Walkman, Ibuka and Morita transformed Sony into the star of the analog age. But entering the digital age, Sony--like Japan itself--was now beset by problems, weighed down with bureaucratic bloat and curiously out of step with the rest of the world.
When a nervous young waiter brings gin and grapefruit juice instead of a ginger ale with grapefruit juice, Idei glares at him. Neither of his two aides dares to inform him that it was he who had given the wrong drink order. A devotee of health fads and golf, Idei is thin and fit. Since becoming president, he has made sure to set aside time for exercise and regular massages. It’s his face that has changed the most--it’s heavier. Although he rarely raises his voice, it is easy--as the waiter found out--to tell when he is angry. In meetings he makes his irritation known by sliding his chair back and forth.
The fact is, Idei’s first year has been remarkably successful. The company is profitable again. For the fiscal year that ended in March 1996, Sony’s sales increased 15% and profits were $512 million, a dramatic improvement. He ousted Michael Schulhof, head of Sony Corp. of America, giving him direct control over--among other things--Sony Pictures. And although the Hollywood operation still has a long way to go, it’s once again showing a profit. Idei, says Joseph Osha, an analyst for Merrill Lynch in Tokyo, has proved to be “very aggressive. He’s not afraid to make tough decisions.”
Idei has also begun to articulate a vision for Sony in a world where consumer electronics products are converging with computers. Sony, Idei insists, will be the brand for the digital age. He likes to refer to his staff as “digital dream kids,” spurring them on, he hopes, to create a new generation of entertainment products. Last fall, Sony announced that it was teaming up with Intel to make personal computers for the home.
“It used to be that Matsushita or Philips or Zenith was our competitor,” declares Idei. “But now the personal computer is an entertainment product. Suddenly we are finding that IBM is our competitor.”
Idei’s mood gradually brightens as he discusses Sony’s future as well as its role in the American entertainment business. Lately, he has been traveling to the United States at least once a month. He expresses fascination with American pop culture and trends, competing with his secretaries to finish the latest John Grisham novel first. On a recent trip, he brought back melatonin for his staff. When the Rolling Stones and the Eagles toured Japan, he attended their concerts. Fluent in English as well as French, he frequently speaks with Sony’s U.S. executives by phone.
“Alan Levine is always so nervous,” says Idei, deadpan. He imitates the way Levine, head of Sony Pictures Entertainment, sounds on the phone. “It is because he’s a lawyer, a born lawyer. He thinks too much. If it’s not in writing, he gets worried.” Idei scrutinizes an imaginary document. “Alan wants to be able to read between the lines and analyze the meaning behind every phrase. We talk. Then he wants to confirm the conversation with a small memo expressing our trust. And then we’ll speak by telephone to confirm again what’s been said.”
Idei pauses for a moment. He is laughing. “It is a completely different story with Tommy Mottola,” he says, referring to the president of Sony Music Entertainment. “If I write a memo to Tommy, he’s gets mad. He goes crazy. He says, ‘What’s the matter, don’t you trust me?’ Tommy believes relationships are everything.”
Sony staffers describe Idei as “dry” (the Japanese use the English word), a term applied to Western-style rational thinkers. He is somebody who likes to shake things up. Carl Yankowski, president of Sony’s electronics operations in Park Ridge, N.J., recalls getting cold feet about the timing of the Intel deal. “Do you really want to do it?” he asked Idei. “If we announce it, then you guys will have to get it nailed down,” was Idei’s blunt reply. Sony’s engineers in Tokyo tell a similar story. “Ohga-san would worry whether the product was unique or not so it was difficult to get anything in computers started,”says one. “Idei-san pulled the trigger.”
When Idei lived in Europe in the ‘60s and early ‘70s, establishing Sony’s French subsidary, he fell in love with Italian fashion. Today he is wearing a Roberta di Camerino suit, one of his favorite designers (others include Ermenegildo Zegna and Krizia). On days when he wants to play the part of the conservative Japanese businessman, he puts on what he calls his ‘Keidanren suits’--Keidanren is the name of Japan’s big business organization. Plainly tailored, this attire is typical low-key salaryman garb. And then there are days when Idei wears Sony’s official uniform, a tan jacket with red piping designed by Issey Miyake.
All three suits reflect who he is--a man of the world, of Japan, of Sony. The question, of course, is whether he is the man of the future. ‘We are in the midst of an information revolution,” Idei says. “This is the moment. It is very crucial.” He is already late for his next appointment.
On the evening of Dec. 4, 1995, Idei boarded Sony’s Falcon jet bound for New York. While Idei was in the air, Norio Ohga was in Manhattan meeting with Michael Schulhof. Ohga’s longtime protege, Schulhof bore much of the blame for Sony’s Hollywood fiasco, and Idei had decided to strip him of responsibility for Sony’s U.S. electronics operations.
Throughout the company, Schulhof had been referred to as Ohga’s “son.” Ohga, it was decided, would be the bearer of the bad news.’Morita-san really cared for Mickey Schulhof,” says Ohga. “He really wanted Mickey to be a central figure at Sony. Morita-san and I educated Mickey as a businessman. He would always say I was his teacher.”
By the time Idei’s plane had landed, Schulhof had resigned. (Contractual strictures prohibit Idei and Schulhof from commenting on his departure from the company.) Idei attended the farewell party at Sony’s executive dining room on the 35th floor of the company’s New York office, and then flew to Los Angeles. By the time he arrived back in Tokyo on the afternoon of Dec. 10, the business world viewed him differently.
Those inside and outside Sony still perceive the ousting of Schulhof as Idei’s most important--and most dramatic--decision. In one move, he established his authority and his willingness to break from the past. Stock analysts in Tokyo suddenly put buy recommendations on the company. “Any time someone is seen acting decisively,” says one Sony executive in the United States, “it helps galavanize an organization.”
His first few months on the job, nobody knew what to make of Idei. Many within the company had hoped that Minoru Morio, a handsome, silver-haired engineer, would be named president. Ohga, the argument went, had spent too much time on “software’--on the movies, on the music business. Morio, who was a “hardware” guy, was what Sony needed. Idei, on the other hand, had no engineering experience. Here was someone who had been plucked from the ranks and could easily be pushed around by Ohga.
Nobody disliked Idei. But Morio’s supporters suspected that Ohga was using Idei as a way to hold on to power. How Idei handled Schulhof quickly became the key measure of his independence. Ohga’s fondness for Schulhof and his tolerance of his free-spending ways irritated many executives in Tokyo. Sony Pictures, which Schulhof oversaw, had been a disaster of monumental proportions. Peter Guber and Jon Peters, hired to run the studio, had proved incompetent. Even worse, they took Sony to the cleaners before they were let go (Peters left in 1991; Guber in ‘94).
Many Sony executives felt that Schulhof was running the U.S. operations as his own company, not as the subsidiary of a large Japanese multinational. “Ohga allowed his relationship with Schulhof to take precedent over his business judgment,” says a source close to Sony. Under Ohga, says one former Sony official, “Sony went from being an electronics company that was run out of Japan to an entertainment company with its heart in the U.S.”
From the start, Idei made it clear that Sony was going to be operated from Tokyo. He faxed Schulhof several lengthy memos, but Schulhof didn’t get it. “In terms of what projects we’d go after,” says one Sony official in the U.S., “things were still getting done not so much according to what people in Tokyo had in mind but according to what Mickey wanted.” Schulhof began to consult with the Blackstone Group, an investment firm, about taking Sony’s U.S. entertainment assets public. When an article about the plan appeared in the Wall Street Journal in October, Idei was furious. Schulhof was too much of a cowboy.
Blackstone remains a sensitive point with Idei, who denies that Sony ever retained the investment firm. “Think of it from my perspective,” says Idei, his voice rising. “We had just made a huge write-off. And to make an initial public offering? Don’t you think it is a crazy idea?”
With Schulhof out of the way, all of Sony’s U.S. executives now report directly to Idei, allowing him to manage the company’s overseas activities in a way that Ohga never did. “Idei gets involved. We always know what he’s thinking,” says Yankowski.
Observes Richard Doherty, director of Envisioneering Group, a market research firm: “It’s very clear now. The buck stops in Tokyo.”
Although the United States accounts for only 30% of Sony’s sales, the U.S. market is where the action is in the entertainment, computer and communications industries. “It used to be that Japan invented, and we sold,” says Yankowski, “but now the U.S. operations” must be the driving force behind innovation.
Idei’s vision for Sony calls for a much leaner, more focused organization. In May 1995, during Japan’s Golden Week holidays, he visited Microsoft’s Bill Gates in Seattle, spoke with Michael Spindler, then CEO of Apple Computer, and for the first time met with Intel’s Andy Grove. Idei sees tremendous opportunity for Sony for creating consumer electronics products with computer capabilities, such as televisions that can cruise the Internet. In the future, many of these products can be linked in the home through digital networks. Already, 24% of Sony’s sales are from computer peripherals and components such as Trinitron computer displays, CD-ROM drives and lithium-ion batteries.
The risk: Sony will be competing for the dollars of the sofa set with the likes of Hewlett-Packard, Gateway 2000 and IBM, all of them well-established computer companies. “Motorola consolidates its sales results weekly,” says Idei. “We compute ours only once a month. They are in the digital world. We are still in the analog world. Compaq has changed from manufacturing computers by forecast to manufacturing by demand. We must adopt this system to keep our competitiveness.”
To get products to market faster and more cheaply, Sony is abandoning its old go-it-alone arrogance and is increasingly working with U.S. partners including Intel, Microsoft and San Diego-based Qualcomm. Plasmatron, a 4-inch-thick television that can be hung on the wall like a picture, was developed with Tektronix Inc., of Wilsonville, Ore. Recently, Idei reshuffled the corporate structure in Tokyo, creating 10 semiautonomous companies to make Sony more responsive to market trends. Says Kazuhiko Nishi, president of Ascii Corp. and a longtime business associate of Idei: “What Idei is introducing to Sony is speed.”
To look for new markets, especially in television, Sony is investing in cable channels and launching entertainment channels such as HBO Ole in Latin America and VIVA in Germany. Well aware that there is a limit to the amount of U.S. product that any foreign audience can stomach, Sony is striking local production deals. In India, for example, Sony will release some 2,000 hours worth of Hindi language programming this year.
Pity the hapless employee who talks about the synergistic benefits of Sony Pictures. The “s-word,” which was bandied about the company at the beginning of the decade, brings out the rough edges of Idei’s personality. In a much-discussed incident, Idei interrupted one of his U.S. executives who used the word at a press conference. Instead, the new mantra is profits.
Last August, Sony hired Ken Ralston from George Lucas’ Industrial Light & Magic to lead its efforts to create an advanced digital studio with special effects capabilities in advance of those at competitors. And to keep costs down, Sony Pictures is placing fewer bets on blockbusters such as “Last Action Hero,” which cost an estimated $80 million, and is emphasizing moderately budgeted films such as “Sense and Sensibility” and ‘The Net.” Sony’s average cost per film is now below the industry average of $36 million. However, Sony shocked the business by paying actor Jim Carrey $20 million to star in “The Cable Guy.” Studio executives argue that the overall cost of the film isn’t high, but many in Hollywood blame them for contributing to the inflation of stars’ salaries.
True, there are some projects going on that meld Hollywood and consumer electronics. To make the company’s new computer user-friendly, Sony Pictures is designing the graphic interface. In the future, Sony is likely to bundle new on-line services that will include information on Sony-produced films and music as well as shopping with its new PC. But for now it is the five quarters of profits at Sony Pictures that are pleasing Idei.
“What we need now is a clear direction,” says Idei. “Look at DreamWorks. A lot of people invested in that company for its concept. There is no real entity. At Sony we have everything. Now we need to talk about our vision and our dream and show the results. It will take a few years.”
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They knew how to spin a great story. They knew how to convince the world that a product was special solely because of its name. Over the course of several decades, they turned Sony into the No. 1-ranked brand in the United States (according to the latest Louis Harris poll). That was the genius of the two--Morita, the living force behind the company; Ohga, an opera singer with strong aesthetic sensibilities. Both of them supreme marketers.
But by the time of Idei’s ascension, Sony had become a victim of its own success. Its executives, well versed in the Sony mystique, had grown arrogant, which blinded them to market shifts and problems in their own organization. Call it a bad case of company hubris. In 1970, anthropologist Chie Nakane noted that Sony was already developing the rigidities of older Japanese firms.
“They were able to maintain the Sony mystique on the outside but lost it on the inside,” says Vladimir Pucik, an associate professor at Cornell University.
“We didn’t think we’d have to fight,” says Teruaki Aoki, on Sony’s failed strategy for digital video disc, a potential successor to CD-ROM and the videocassette. He recalls the shock when the company suddenly found itself on the losing end of the format war. “We thought ours would be well accepted by the industry,” he says.
Indeed, in recent years Sony had been caught off guard many times as competitors raced ahead with sleeker products. Sharp introduced a camcorder with a small display screen that became wildly popular, and Casio Computer has forced Sony to play catch-up with digital still cameras. Sony also confused consumers by developing a baffling array of pricey, incompatible gizmos--the Data Disman and CD interactive.
Sony might be forgiven for its overly confident attitude toward Hollywood. To the rest of the world, the $3.4-billion price Sony paid for Columbia--a modestly successful studio that had earned $16 million the year before it was bought--seemed excessive. Still, at the time Japan’s stock market was booming. Sony was able to issue bonds with interest rates as low as 0.3%. The abundance of practically free money softened the judgment of a lot of normally hardheaded Japanese businessmen.
But even as Japan’s stock market began to head south in 1990 and Japan’s economy started to stagnate, Sony’s confidence didn’t wane. Akio Morita was increasingly preoccupied with U.S.-Japan trade relations. He was speaking at conferences, writing articles and spending less and less time on Sony’s affairs. “Although there is much to commend in Japan’s economic system, it is simply too far out of sync with the West on certain essential points,” fretted Morita in a lengthy 1993 Atlantic Monthly article. That year, Sony’s sales fell by more than 6% from the previous year, and the company was barely profitable. Meanwhile, spending was out of control. By the time Idei took over, total debt had ballooned to an unhealthy $15 billion.
Ohga had already been president for a decade when Sony started to go awry. He first caught Morita’s eye in 1950, when he criticized the quality of Sony’s tape recorder. By 1959, he had become a Sony general manager. Ohga was the quintessential No. 2 man. He wasn’t the sort to shake things up on his own. “Morita-san and I made so many decisions together,” says Ohga, a big, barrel-chested man with a wide nose. “If we got into a new business area we’d discuss it and work it out together. In the last five years, he would always say, ‘You are CEO. You decide by yourself.’ But being able to report to him was a habit of mine.” That all changed with Morita’s stroke in 1993.
By the early ‘90s, plenty of pundits were talking about the future convergence of computers, television and telephones. Yet Sony seemed disinterested in the possibilities. “Everybody is predicting that the multimedia computer is the next big consumer item,” Ohga told Fortune magazine in 1993. “I don’t think so because it is a product that appeals to a select group of users, not all consumers. When you want to listen to music or watch a movie, you don’t want to have to use a computer, do you?”
Instead, Ohga continued to preach the merits of traditional stand-alone products such as the MiniDisc, a product that is a modest success in Japan but has yet to take off elsewhere in the world. Susumu Furukawa, the chairman of Microsoft in Japan, puts it this way: “When Bill Gates and Morita were together they would always talk about the future, about technology. They were like two kids together. Ohga was always more quiet.”
Ohga was never a frequent visitor to Culver City. All the media hype after the purchase of the movie studios convinced Sony to take a hands-off approach to Hollywood. They entrusted Guber, Peters and Schulhof to manage their investment. Guber and Peters had come at a high price. Sony paid $200 million for the Guber-Peters Entertainment Co. The duo, however, had a contract with Warner Bros., and Sony was forced to settle with its rival for $500 million. By 1991, Peters had been forced out. Guber, though, spent more than $100 million renovating the Culver City studio. He spent millions more snapping up scripts and signing on talent with reckless abandon. Ignorant of Hollywood, Schulhof failed to stanch the excesses until it was too late.
“You have to understand that the Sony culture has always been not to fire people,” Schulhof told Vanity Fair last year, “but to accept them for their strengths.” Despite much criticism in the U.S press, Ohga never seemed to think of firing Schulhof either. “I still think he is an excellent businessman,” he says. “Whether he was the right person to handle the movie business is another matter.”
Ohga denies reports that Idei has pushed him aside. “There is nothing that he has decided on his own without me knowing,” says Ohga, pointing out that the two meet at least once a week. Yet it is clear that it is a new era at Sony, and one wonders if things aren’t a bit lonely for Ohga these days. Earlier this year, Ohga visited Schulhof at his new office in midtown Manhattan. There Schulhof sorts through various business proposals. Ohga and Schulhof still speak frequently by phone.
Seated in a meeting room at Sony headquarters in Tokyo, Idei is energized, restlessly shifting his position in a boxy chair. His entire body, especially his face, seems filled with motion. He jumps from subject to subject. Sony’s digital future. The restructuring of U.S. operations. The challenges of Hollywood. Co-founder Masaru Ibuka’s endless curiosity. Morita’s introduction of the Walkman. Ohga’s championing of the compact disc.
Idei is engineering a Japanese-style revolution--one that has as much to do with continuity as it does with change. It was Japan’s samurai themselves who put an end to feudal rule in 1868 and brought the nation into the modern era. Unlike in the United States, where entrepreneurial upstarts are reshaping the corporate landscape, in Japan it is the salarymen leaders of the country’s large corporations who are still doing most of the reinventing.
Walk from the train station down the lovely tree-lined streets of Seijo, the neighborhood where Idei grew up and where he now lives with his wife, Teruyo, and you are in a Tokyo fantasy land. The houses, a menagerie of modern architecture and traditional wooden structures, are enormous by Japanese standards. Mercedes-Benz seems to be the car of choice.
Idei’s father was a professor of economics at the prestigious Waseda University; he also worked as an economist for the League of Nations in Switzerland. Worldly, open-minded, down to earth--traits not commonly associated with Japan’s postwar hierarchy--he liked to speak about the practical aspects of economic theory and invite students out for bowls of warm noodles and beer.
The Seijo Gakuen grade school that Idei attended was unusually free. ‘It encouraged children to be themselves, to have personality,” recalls Fumio Ishida, a childhood friend. The two boys played hard together--’like Tom Sawyer and Huckleberry Finn’--sliding down muddy hills on cardboard boxes. To his parents and sisters, Idei was the little prince. At Waseda, Idei graduated from the department of politics and economics. It was there that he met his wife. The wedding reception was held at the tony Mitsui Club.
Soon after joining Sony in 1960, Idei bought golf clubs and headed off for Europe. When it was time to return to Japan, Idei balked and briefly contemplated a career in investment banking. In 1979, he became general manager of Sony’s audio division, where he marketed the Walkman and the compact disc player and then shifted to work on plans for a home computer that never went to market. In 1988, Idei was a senior general manager of the division responsible for handling Sony’s painful transition from its failed Betamax VCR standard to the VHS system. Now he is the first president at Sony to have worked his way up the ranks from the bottom.
For most of Idei’s career, Japan’s confidence was on the rise. Japanese intellectuals proudly pointed to distinctive cultural structures as the root of their nation’s phenomenal business success. “Japanese attitudes toward work seem to be critically different from American attitudes,” wrote Morita in 1986. “Japanese people tend to be much better adjusted to the notion of work, any kind of work, as honorable.” He was expressing a chauvinistic sentiment typical of the time.
That confidence has been shaken. “Japan’s lifetime employment system is only 50 or 60 years old. It is not a tradition throughout Japanese history,” Idei says. Such a remark, particularly if expressed by a top executive, would have been unheard of 10 years ago. But since the stock market plummeted in 1990 and the economy fell into a long recession, everything--from government policies to Japan’s clubby financial system--has come into question.
Sony is experimenting with new forms of employment. To lure researchers to its computer laboratory, the company is offering high salaries and yearly contracts instead of fixed wages based on seniority and lifetime job guarantees. Last September, Sony introduced an incentive pay system based on stock warrants for the company’s 37 directors. Forty-seven percent of Sony’s products are manufactured overseas, up from 42% last year, a figure that’s sure to grow again. The problem isn’t just a strong yen. Archaic Japanese regulations jack up the prices of telecommunications, energy, food--most of the staples of everyday life and business. “This is a very comfortable society for mediocre people,” said Nakane, the anthropologist. “A few people want change, but most people are happy the way things are.”
Lately, some outspoken Japanese intellectuals have decided that Japan isn’t an intrinsically group-oriented society after all. At core it is individualistic, they argue. “It was only during Japan’s wartime period that the idea that competition is bad and should be avoided became prevalent in Japan,” says Yukio Noguchi, a professor of economics at Hitotsubashi University.
For executives like Idei, this is a crucial moment to reinvent the way Japan does business--to get not just Sony but the entire economy moving. At places like the Sony Computer Entertainment offices, you get a sense that the reinventing has already begun. There, middle-aged managers wear collarless shirts, and desks of younger staff are piled with stuffed animals and comic books. Sony Computer Entertainment is responsible for PlayStation, the company’s extremely successful video game player, which was launched in the United States last year. The unit was a cultural experiment--half the staff are hip, creative types from Sony Music and the rest are straighter, corporate sorts stamped from the Sony mold.
They are, in essence, a version of Idei himself, a corporate executive who can easily switch from his Italian designer suit to a conservative salaryman suit to his tan-and-red company jacket. To lead Sony into the future, all three are going to be required.
