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Lessons from Sony's Struggles

NEW YORK (TheStreet) -- Trade-Ideas LLC, a market analysis firm, calls Sony (SNE) "wet and getting wetter", meaning that based on technical factors its stock has fallen after a rise.

Our founder Jim Cramer is just as blunt. "Take a pass on this one," he said Tuesday.

The stock has been sluggish due to fundamentals and due to the fundamental mistake legendary CEO Akio Morita made a generation ago: choosing to transform Sony from a consumer-electronics company into a conglomerate. The idea was that by owning both content and the means to display content -- game software and game machines, movies, TVs, cameras, phones and PCs -- Sony could make itself immune to the business cycle.

What has been evident for many years is that rather than rising above the cycle, Sony has become a victim of it. The strength of some units has hidden the weaknesses in others. The company has hung on to lagging businesses too long, dragging the whole company's results down.

President Kazuo Hirai, who was promoted after running the games division, had to report a loss for the most recent quarter yesterday, reducing his profit forecast for the year by 40%. Sony's stock dropped 11% in response. Failures in TVs and smartphones took the blame, but Sony Pictures was also weak.

In contrast, rival Panasonic (PCRFY) is rising after getting out of displays and cutting its handset operations. Panasonic President Kazuhiro Tsuga invested in batteries and solar panels, businesses that are improving.

Hedge fund titan Dan Loeb of Third Point tried to break-up Sony earlier this year, asking it to spin out its entertainment units, but Hirai turned him down. Loeb's brash demands may have grated on Japanese sensibilities, but the point -- that Sony needs to be broken up -- remains valid.

Instead, Hirai has stubbornly hung on to Morita's vision, and Sony is paying the price. Product lines that are failing, such as TVs and phones, lack discipline, and units that require intense focus, such as games and film, are lax.

This is not a cut at the Japanese. The drift was continuous through the reign of former CEO Howard Stringer, a Welshman who formerly ran CBS (CBS) and who remains Sony's chairman.

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