New Format: A Changing Sony Aims To Own the 'Software' That Its Products Need --- After Buying CBS Records, It Seeks a U.S. Movie Studio; Other Strategies Shift Too --- Approach of Post-Morita Era This article was prepared by Wall Street Journal staff reporters Elisabeth Rubinfien, Yumiko Ono And Laura Landro 30 December 1988 The Wall Street Journal (Copyright (c) 1988, Dow Jones & Co., Inc.) TOKYO -- It's a Sony, say the ads, and fans of the company's fancy electronics understand. But if the ads were for the corporation itself, the line might be different: It's a new Sony. The old Sony was strictly a maker of consumer items, however remarkable in their novelty; the new Sony serves industry as well, with products like powerful work-station computers. The old and very proud Sony wouldn't dream of selling something that didn't carry its brand; the new one is doing a thriving business selling components to other manufacturers. The old Sony would hand the world a technology -- Betamax videocassette recorders -- and wait for rival electronics makers to follow its lead; the new Sony, much chastened by that costly flop, persuaded more than 100 other concerns to join in the research before launching another VCR format, 8 millimeter. And in perhaps the biggest switch of all, the new Sony is out to sell not simply hardware but also the entertainment software that runs on it; with its CBS Records acquisition last year, Sony is already the world's largest music producer, and it now is shopping intently for a movie studio. All these changes reflect a Sony that is beginning to move beyond the era of its famous chairman, Akio Morita. Sony's image has been inextricably linked to the white-haired, extroverted Mr. Morita, who with a co-founder built a company based on the twin ideas of innovative technology and selling to the West. Mr. Morita is 67 years old, and he now spends much of his time traveling to espouse his views on trade friction and competitiveness. The post-Morita era is coming. Already vanishing is the notion that Sony can simply invent nifty products for needs people don't know they have -- then show them why they want the things. This won't do in an age of ever-toughening competition, both at home and from other Asian nations. The new, humbler Sony pays more attention to what both the public and the other companies in its industry want built. This is the approach of the man who increasingly runs the company today, Sony president Norio Ohga. The 58-year-old Mr. Ohga wasn't trained as an engineer; he was an opera singer, and he came to Sony's attention decades ago as a music student full of opinions on how to make a good tape recorder. He still looks at things from the customers' viewpoint, Sony people say. "He defines the application first, then says, 'Let the technologists get us there,'" explains Tsutomu Sugiyama, Sony's corporate communications manager. An example is the way Sony is trying to support its newest VCR technology. The company's latest small wonder is the Video Walkman, a product designed to enable people to indulge their addictions to video wherever they happen to be. A portable videocassette player and tiny television set, the Video Walkman is not much bigger than a long paperback book. Its technology, however, is 8mm -- more compact than the prevailing VHS of most VCRs, but not a format with many movies or videos available. And that presents a problem. "Unlike TV or radio, the equipment that's on the rise now is the kind that is worthless on its own without software," notes Akihiko Tsuda, senior manager of corporate planning at Toshiba Corp. This is one of the bitter lessons from the VHS- Betamax "video wars," in which Sony's Betamax lost out when software makers produced more movies for VHS, the format Sony's rivals had united behind. "We learned from Betamax about the importance of software," says Michael Schulhof, vice chairman of Sony Corp. of America. Now, if Sony had its own film library, it could control the format in which the movies were put on tape; that could give a strong edge to 8mm over the technology it competes against, a compact version of VHS called VHS- C. "To have a balanced company, the one piece we are missing is a major movie studio," Mr. Schulhof says. So last fall, Sony went after MGM/UA Communications Inc., which has a library of close to 1,000 United Artists films and a national distribution system. The choice surprised some analysts because MGM/UA is Hollywood's weakest studio, but Sony executives familiar with the talks say their company believed MGM could be rebuilt in two years with a $300 million infusion. Although the talks broke down in November, the courtship may not be over. An alternative target could be Columbia Pictures, which would also provide a good film library and national distribution system, although its management has been in disarray. Columbia, 49% owned by Coca-Cola Co., denies any interest in selling but says it would have to listen to a decent offer. Meanwhile, MCA Inc. is expected to be up for sale before long as its chairman, Lew Wasserman, nears retirement. Buying a film company should make Sony stronger in the future, industry analysts say, just as the $2 billion acquisition of CBS Records did (the records unit contributed 16% of Sony's sales in the six months ended in September). But it won't be easy. The entertainment-software business is not only risky but costly; a top-tier studio like MCA might cost $6 billion, analysts say. And Sony doesn't have a clear field because other Japanese electronics companies are moving in the same direction, notably archrival Victor Co. of Japan. "We can't say there isn't a possibility that we'd consider buying a foreign movie company," acknowledges a JVC managing director, Masanobu Ikeda. Even if Sony overpaid for a movie company, the purchase might work out, analysts in Japan say. For one thing, there may be big domestic payoffs from a video-software library after 1990, when Japan begins 24-hour satellite TV broadcasting and has to fill air time for 12 or 13 channels instead of the current seven. Meanwhile, Sony's base -- its hardware innovation -- faces increased competition. When it introduces something new, other electronics concerns catch up quickly. South Korean and Taiwanese firms are taking over bread-and-butter products like VCRs, for instance. In addition, Sony makes about 70% of its sales abroad, and though it is raising its overseas production, trade friction remains a threat. These are arguments for diversification, and that is what Sony is pursuing. Entertainment software is one example. Computers are another. Sony has been producing the office-use computers known as work stations for about two years. It claimed about 20% of the Japanese workstation market in the year ended last March 31. This year, Sony expects to almost double its sales to 6,000 units. Then there is the selling of components, a major reversal of strategy also pursued during Mr. Ohga's presidency. Sony's previous insistence on selling only under its own brand was a venerable tradition. In 1955, Mr. Morita brashly turned down a windfall order for 100,000 tape recorders and microphones from Bulova Watch Co. because Bulova wanted to market them under its name. Mr. Morita insisted Sony had to build its own name recognition. But as part of a corporate restructuring carried out by Mr. Ohga, Sony now includes a division created specifically to market components. Sony's semiconductors, once made only for its own products, now go to competitors both at home and abroad. In just four years, parts have come to claim an 11% share of Sony's sales, excluding CBS Records. "We started not from zero, but very small," says Junichi Kodera, managing director of the components marketing group. Now he predicts that Sony will soon be delivering more parts outside the company than to its own consumer-products groups. This amounts to "a more offensive approach" to Sony's technology, explains Shawn Layden, a communications officer. "We changed 180 degrees from the defensive strategy of patenting and protecting our technology to developing new market segments." Selling hardware is also one goal of Sony's push into entertainment software, of course. CBS Records' global distribution network is a springboard "to ultimately expand into a world-wide software distribution company through which we can market audio and video hardware," says Mr. Schulhof. The continuing stress Sony puts on inventive hardware is evident in the way it prepared the ground for 8mm camcorder technology, its entry in the latest round of video wars. (Its rival, the VHS-C format, has the advantage that its tapes can be played on standard VHS players with a simple adapter; 8mm tapes can't be played on either VHS or Beta, but the technology can record for up to four hours.) In the mid-1970s, when Sony introduced its pioneering Betamax video technology, it proudly presented the format to its competitors as a "fait accompli" and urged them to accept it as the standard. But that isn't the way things are done in group-oriented Japan, and to rivals it only confirmed the impression they already had that Sony was arrogant. Competitors such as Hitachi, Toshiba and Matsushita Electric Industrial (Panasonic's maker) instead banded together behind VHS. "The VHS-Beta battle was decided on some other grounds than technical advantage," concedes an executive at one Sony rival.