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.

Stringer and Hirai are two examples of the same mistake. Both succeeded running focused units -- TV in Stringer's case, gaming in Hirai's. But neither could translate that into conglomerate success. And I don't think it's their fault.

It's the nature of the conglomerate. Without the discipline of the market, and without a unified strategy that ties units together and makes sense, success becomes an excuse for complacency and failure just isn't punished.

The lesson was finally learned by Microsoft ( MSFT). Between the end of 2003 and the start of 2011, Microsoft and Sony shares mirrored each other, and by the end of the period, both were doing no better than they had eight years before.

The difference is that Microsoft developed a cohesive vision for its company, services and devices, while Sony didn't. Since the start of 2011, Microsoft's stock is up 35%, while Sony is down almost 50%.

A weaker yen masked Sony's lack of vision early this year -- between January and July the stock doubled in price -- but the problems are again too obvious to ignore.

Merely hiving off the movie and TV business, as Loeb suggested, may no longer be good enough to bring Sony back. The conglomerate needs a unified vision or a complete break-up. Dumping a small software unit that sells digital technology to movie theaters isn't good enough. Wholesale change is required.

Sony's units need to be forced to sink or swim on their own. Otherwise, they will continue to go down together.

At the time of publication, the author owned no shares in companies mentioned here

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Dana Blankenhorn has been a business journalist since 1978, and a tech reporter since 1982. His specialty has been getting to the future ahead of the crowd, then leaving before success arrived. That meant covering the Internet in 1985, e-commerce in 1994, the Internet of Things in 2005, open source in 2005 and, since 2010, renewable energy. He has written for every medium from newspapers and magazines to Web sites, from books to blogs. He still seeks tomorrow from his Craftsman home in Atlanta.

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