Reading Sony's Game Face - TheStreet

Trying to discern the personnel maneuverings at a Japanese company can be akin to figuring out who was in favor at the Politburo. But to some, the

recent personnel moves by

Sony

(SNE) - Get Report

look momentous for its video-games division.

Prior to the announcement, rumors had been swirling that Ken Kutaragi, the driving force behind PlayStation, was next in line to be CEO. Now, Kutaragi has been demoted and Sony promoted someone -- Sir Howard Stringer -- whose background is in its media division and who has little experience with Sony's hardware side.

Meanwhile, the changes come as Sony is about to launch its new

handheld gaming system in the U.S. and as the video-game industry prepares to start the next console cycle. That timing has some fretting that the changes could hurt Sony's position and has cast some uncertainty on the industry.

"I think

the shakeup is bad for Sony in general," said Joe Spiegel, a fund manager who follows the sector at Dalek Capital. "I seriously wonder what will happen" to the company's games division, he added.

Sony has dominated the video-game industry for the last two console generations, since it released its original PlayStation in 1995. Its PlayStation 2 has dwarfed sales of consoles from

Nintendo

and

Microsoft

(MSFT) - Get Report

.

Because of this dominant position, the lion's share of revenue at most major video-game publishers tends to come from their PlayStation games. For instance, 90% of

Take-Two Interactive's

(TTWO) - Get Report

publishing revenue in its

fiscal first quarter were from games designed for the PlayStation 2 console.

The total user base for video games is expected to only get bigger as the console makers unveil their next-generation machines. All three major manufacturers are expected to show off their next-generation consoles later this year, and Microsoft is expected to begin selling its next console by the end of this year.

In the meantime, much of the industry has been focusing its efforts on new handheld game machines. Nintendo launched its DS portable system last fall, and after launching its PSP in Japan in December, Sony plans to start selling the portable device in the U.S. later this month.

The concern among some analysts and investors is that even as the industry undergoes these transitions, Sony's management might be too distracted by the recent turmoil to focus on its games division.

Sony's management appears to be in "disarray," said Norm Conley, a portfolio manager for JAG Advisors and a contributor to

TheStreet.com's

sister site,

RealMoney.com

. "I don't know how much can be extended or interpreted into the video game part of Sony, but what

the shakeup does tell me is that they have serious issues as a company." Conley's firm has no stake in Sony.

Sony representatives declined to offer comment about how the management shakeup might affect its video-game efforts.

The concerns about the company's video-game sector center in part on Stringer's background in the media industry. The expectation by some analysts is that Stringer will

promote the company's media operations to the potential detriment of its hardware side.

Some of that focus may be inevitable. Last fall, Sony

bought MGM and the company will likely need time to integrate the movie studio into its own media operations.

Meanwhile, the company has been struggling with many of its consumer electronics products, from DVD recorders to portable digital music players. Part of its strategy to revive electronics sales has been to tie closely its media content to its electronics products -- a strategy that Stringer is likely to keep pushing. A particular concern has been to counter

Apple's

(AAPL) - Get Report

iPods on the digital music front.

But this potential shift in focus to the company's media -- and related consumer electronics -- products comes as the company demotes Kutaragi. In the management shakeup, Kutaragi is giving up his seat on Sony's board and is losing control over the company's semiconductor division.

Kutaragi's demotion could mean a loss of influence for him or attention by management to the games division. But the even bigger fear for Sony watchers is that he could leave in a huff as a reaction to the demotion.

"I don't think it would be good for Sony if Kutaragi were to leave," said Michael Pachter, an analyst with Wedbush Morgan Securities, who covers the video-game industry. "It would be very good for Microsoft, because he's a visionary and they're trying to take him on."

Neither Sony nor Microsoft has been a recent investment banking client of Wedbush Morgan.

Indeed, some analysts think the main beneficiaries of the shakeup are going to be Sony's video-game rivals. At the Game Developers Conference in San Francisco last week, both Nintendo and Microsoft indicated that they will be aggressive in competing with Sony in the next generation of consoles. Microsoft, for instance, courted developers with a keynote at the conference -- and by giving away some 1,000 high-definition flat-panel televisions.

"It's a pretty critical time for Sony," said one game-industry executive, who asked not to be named. "Microsoft is not going to back off. The stakes are a lot higher."

Of course, some analysts aren't all that worried about the shake-up. Software publishers such as

Electronics Arts

(ERTS)

likely won't be hurt by the shakeup, and could actually benefit from it if it leads to some delay in the Sony's console, they say. Any delay would allow the software publishers to more gradually move from current generation games to next generation software, said Conley.

"It could be that I'm looking at this with rose-colored glasses, but to me it's a positive to have a longer transition to the next generation," he said.

And some analysts don't think the moves will affect Sony's games division. The PSP rollout is already well under way, and the planning for the next iteration of the PlayStation is probably already done.

"People may speculate that this may impact the launch of the PlayStation 3, but I doubt it," said P.J. McNealy, an analyst with American Technology Research. "There should be no change."

AmTech doesn't do investment banking and McNealy does not own shares in the companies he covers.

Indeed, some analysts think the moves could actually make Sony a stronger competitor in the video-game industry. The shakeup allows Kutaragi to focus specifically on the games business at the time that the business needs his attention, they say.

"I don't think the management changes are a negative reflection on Kutaragi-san," said the game-industry executive. "What people should take away from it is just how important the next round is to Sony."