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Sony struggles to adapt in digital age

NEW YORK -- In a windowless room near Sony Corp.'s headquarters in Tokyo's Shinagawa district, shelves hold hundreds of versions of the Walkman -- the portable cassette player that propelled Sony to a global brand when it hit the market in 1979.

Today, the Walkman Room is a shrine to Sony's past. The world's number two consumer electronics company -- creator of the first transistor radio, the compact disc player, and the PlayStation game console -- is struggling in the digital age.

"A 20th-century business model is no guarantee of success," says Nobuyuki Idei, 66, Sony chief executive and chairman. "This is the biggest challenge, how to change."

Almost 2 years after Apple Computer Inc. unveiled its iPod music player, Sony launched its first iPod competitor, called the Vaio pocket, on May 10. The delay -- and a yearlong lag in starting the Connect online music service after Apple's iTunes Music Store set up shop -- reflects how hard it is for the 58-year-old electronics behemoth to adjust to new rivals.

Howard Stringer, 62, Sony vice chairman and head of the company's US divisions, says executives were so concerned about music piracy, they couldn't agree with designers on the kind of player to create.

"We didn't get there, and by that time, Steve Jobs was there," says Stringer, referring to Apple's chief executive. Stringer, known as Sir Howard since he was knighted by Queen Elizabeth II in 1999, is one of three non-Japanese members on Sony's board.

On April 14, Apple reported that second-quarter profit had tripled from a year earlier to $46 million, after it sold 807,000 iPods, beating sales of 749,000 Macintosh computers.

The plunge in Sony's stock price shows change is needed, says Nobuaki Murayama, who helps manage $560 million in Japanese equities at Cigna International Investment Advisors K.K. in Tokyo. "The environment has changed," he says. "It doesn't take much investment to develop products anymore, and Sony is seeing more and more competition."

Since Idei became chief executive in 1999, Sony's shares have lost almost three-quarters of their value. During that time, Sony's market value plunged to $33 billion from $138 billion.

The "Sony shock" accelerated the decline. On April 24, 2003, Sony reported a fourth-quarter loss of $970 million, triple what most analysts had expected. Sony's trouble is that it's too big and too unfocused, says Al Ries, an Atlanta-based marketing strategist. The electronics unit makes everything from image sensors for digital cameras to CD players, personal computers, and headphones. The entertainment side creates movies, music, and video games. The financial arm houses two insurance companies and an Internet bank.

"It becomes virtually unmanageable once you go into so many categories," says Ries, chairman of Ries & Ries, which advised Apple on marketing its Apple IIe computer.

Idei says his continuous preaching about all things digital is yielding results. In May, Sony said it would introduce a portable PlayStation in Japan at the end of this year and in the United States and Europe early in 2005. The console will play music, videos, and games and will compete with Nintendo Co.'s Game Boy. Also in May, Sony unveiled Net Juke, an audio system that downloads and plays music from the Internet.

Sony plans to sell the Airboard, a wireless television, in the United States this year. The 12-inch, flat-screen television uses Wi-Fi wireless technology to connect to a base station. Viewers can move the screen from room to room. Or they can take the set on vacation, plug it into a high-speed Internet connection and watch programs available back home.

To boost profit, Idei is pushing executives to deliver 10 percent operating profit margins by fiscal 2006, when Sony turns 60. Sony plans to cut its worldwide workforce by 13 percent, or 20,000 employees; reduce factory capacity 30 percent by closing plants; slash the number of different parts in inventory to 100,000 from 840,000; and trim vendors to 1,000 from more than 4,700.

To get Sony's premium back, Idei will have to convince investors he hasn't lost the formula that made the Walkman an icon for the analog age. The trick will be to fend off rivals while Sony marries its strengths in hardware and content to create new symbols for the digital world.

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