SONY

In this episode of "Acquired," hosts Ben Gilbert and David Rosenthal explore the multifaceted history of Sony, a company that rose from the ashes of post-World War II Japan to become a global powerhouse in consumer electronics, music, and gaming. They delve into Sony's innovative journey, from creating the iconic Walkman and Trinitron TV to its strategic missteps with Betamax and the Xperia mobile line. The episode also covers Sony's notable acquisitions, such as CBS Records and Columbia Pictures, and its current diversified portfolio, which includes profitable segments like gaming with the PlayStation and imaging with its leading camera sensors. Despite successes, the episode reflects on Sony's challenges in adapting to software and computing trends, contrasting its trajectory with Apple's meteoric rise. The hosts conclude with a mixed assessment of Sony's legacy, acknowledging its past triumphs while questioning its future direction in an increasingly integrated tech landscape.

• David Rosenthal and Ben Gilbert discuss the complexities of covering the extensive history of modern Japan and the desire to explore newer companies.
• They express a need for a subject that hasn't had enough time to develop a long history, jokingly referencing the cryptocurrency exchange FTX as an example.
• The episode is part of the tenth season of the Acquired podcast, focusing on technology companies and their strategies.

We keep biting off a lot in these episodes. I mean, you're telling the history of modern Japan. We need to do a, like, two year old company. We need another FTX soon where, like. Literally enough days haven't passed for us to make the episode long.

The speakers highlight the challenge of covering companies with extensive histories, such as modern Japan, and express a desire for a subject with a shorter history for easier coverage.

• Ben Gilbert introduces himself as the co-founder and managing director of Pioneer Square Labs and PSL Ventures.
• David Rosenthal introduces himself as an angel investor based in San Francisco.
• The hosts set the stage for discussing the Sony Corporation, a company that Steve Jobs idolized and modeled Apple after.

Welcome to season ten, episode three of acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert, and I am the co founder and managing director of Seattle based Pioneer Square Labs and our venture fund, PSL Ventures. And I'm David Rosenthal, and I'm an angel investor based in San Francisco.

Ben Gilbert and David Rosenthal introduce themselves and their professional backgrounds, setting up the episode's focus on the Sony Corporation.

• David Rosenthal shares an anecdote about Steve Jobs idolizing Sony and adopting the idea of a uniform from the company.
• Jobs visited Sony, learned about their employee uniforms, and attempted to introduce a similar concept at Apple, which was rejected.
• Instead, Jobs created his own personal uniform by having Issey Miyake design black turtlenecks for him.

Well, so the story goes that Steve idolized Sony. Went over to visit and saw that there was a uniform that Sony employees had, and he was like, that's a great idea. I want Apple to have a uniform. Where did you get that uniform? And so he brought it back. He made a proposal to Apple, and people are like, NFW, and didn't the.

The anecdote illustrates Steve Jobs' admiration for Sony's corporate culture and his attempt to emulate it at Apple, leading to his iconic personal uniform.

• Ben Gilbert highlights Sony's impact on their generation with products like Trinitron TVs, Discmans, and professional cameras.
• Sony is described as a broad and deep conglomerate with a range of products, including a tiny dog robot.
• The company is positioned as a major player in industries such as video games, music publishing, and film production.

But Sony goes so much deeper than that and also so much more broad than that today, expanding into a very special type of conglomerate. David, did you know that they own a division that exclusively makes a tiny dog robot?

The quote emphasizes Sony's diverse range of products and its status as a conglomerate with interests in various industries, including niche products like a tiny dog robot.

• The story begins in the summer of 1944 in Tokyo, Japan, with two engineers, Masaru Ibuka and Akio Morita, working on a military project during World War II.
• Both engineers were not supportive of the war, especially given their awareness of America's technological advancements.
• The narrative sets the stage for the post-war environment and the founding of Sony.

We're going to discuss just about, like, every industry. Oh, my. Well, first, we start back in the summer of 1944 in the Sukishima neighborhood of Tokyo in Japan, right next to Tokyo Bay. I think this is right near where the fish market is, if you've ever been there.

The context of World War II and the involvement of Ibuka and Morita in military technology projects set the stage for the eventual founding of Sony in the aftermath of the war.

• Masaru Ibuka establishes the Tokyo Telecommunications Research Institute to create a workplace for engineers to pursue technology.
• The company initially struggled to find a successful product, attempting to make rice cookers and electric heating blankets before turning to radio repair.
• Akio Morita joins Ibuka in Tokyo to help build the company, securing his family's blessing and investment.

So he creates a founding prospectus for the company, which starts out that the purpose is to, quote, establish a stable workplace where engineers could work to their heart's content in full consciousness of their joy in technology and their social obligation.

The founding of the Tokyo Telecommunications Research Institute focused on creating a stable environment for engineers to work on technology with a sense of social responsibility.

• Ibuka and Morita decide to focus on creating transistor radios after obtaining a license from Bell Labs.
• The company undergoes a name change to Sony, inspired by the Latin word "sonus" and the term "Sunny boy."
• Sony's TR-55 transistor radio becomes a success, leading to the development of the even more popular TR-63 model.

Ibuka loves technology, and in particularly, he is fascinated at this point in time by radio and all of the applications of radio.

The focus on transistor radio technology marked a turning point for the company, leading to its rebranding as Sony and the success of its portable radio products.

• Motorola partnered with Apple to create the iTunes phone.
• HP branded iPod was essentially a regular iPod with HP's logo.
• The U2 iPod had a distinctive black and red color scheme.

"There was that like iTunes phone. That was actually a Motorola phone." "Yeah, the moto rocker. That's right. But the HP iPod truly was just an iPod with an HP logo on the back."

The quote discusses a collaboration between Motorola and Apple for an iTunes-compatible phone and mentions the HP-branded iPod, which was simply a regular iPod with a different logo.

• Sony established its own corporation in America in 1960.
• Akio Morita moved to New York City to set up the corporation.
• Morita's stay was cut short due to his father's passing.
• Morita's US license plate "AKM 15" reflected his status as the 15th generation of his family.
• Sony's American presence was unique among Japanese companies at the time.
• Howard Stringer, a Welshman, became CEO of Sony, highlighting the company's international leadership.

"So ultimately what that leads to is a couple years later, Marita and Sony decide we need to establish our own corporation in America so that we don't have to work with distributors." "It is interesting how I think his US license plate when he moved here was AKM, which is the sort of hint that he did always think about himself as the kaiu zeman of the family."

These quotes discuss the establishment of Sony Corporation of America and Morita's personal move to the US, which was a significant step for a Japanese CEO at the time. Morita's license plate is mentioned as a nod to his family's heritage.

• Morita's leadership at Sony had a profound impact on Japan's economy.
• The Prime Minister of Japan referred to Morita as the "engine that pulled the Japanese economy."
• Morita's success with Sony is contrasted with the influence of other well-known CEOs like Steve Jobs and Elon Musk.

"The most telling quote of all is when Akio Morita passes away many, many years later in 1999... the prime minister of Japan referred to him as the engine that pulled the Japanese economy."

The quote highlights the significant impact that Akio Morita had on Japan's economy through his leadership at Sony, to the extent that he was publicly praised by the Prime Minister.

• Sony's involvement in the music market included both devices and the recording industry.
• CBS partnered with a Japanese record company to form Nippon Columbia before WWII.
• CBS and Sony later formed a JV called CBS Sony Records, which became highly profitable.
• Norio Oga, a classically trained musician, was put in charge of CBS Sony Records.
• CBS Sony Records' success led to substantial cash reserves, leading to diverse investments like buying land.

"Marita hears about this and hears that a CBS executive named Harvey Shine is over to handle this matter for CBS. He meets him and he says, I'm in. I will do everything in my power to make this happen."

The quote explains how Akio Morita took the initiative to partner with CBS and form a joint venture, demonstrating his proactive approach to business expansion.

• Sony focused on audio and music technology before moving into television.
• Color TVs initially had poor picture quality compared to black and white TVs.
• Sony's Trinitron color TV technology led to market leadership in TVs.
• Sony introduced the Betamax video recording technology in 1975.
• Betamax's key feature was "time shifting," allowing users to record TV programs.
• MCA Universal sued Sony over copyright infringement concerns related to Betamax.

"So Sony goes to work for years trying to make a really great color tv, like a color tv that could live up to the Sony name and engineering culture. And the result of that is the Sony Trinitron."

The quote discusses Sony's dedication to developing a high-quality color TV, which resulted in the successful Trinitron technology, illustrating Sony's commitment to innovation.

• Betamax faced competition from other video recording formats.
• MCA Universal collaborated with VHS manufacturers, leading to Betamax's decline.
• MCA Universal's influence in Hollywood helped establish VHS as the dominant format.

"So MCA starts working with the VHS format, which was made... Panasonic and JVC, they had a few brands, but then, remember from our... CAA episode, who ends up buying MCA? MCA Matsushita."

The quote explains the strategic moves by MCA Universal and Panasonic that contributed to the downfall of Sony's Betamax in favor of the VHS format.

• Sony became the first Japanese company listed on the New York Stock Exchange.
• Sony experienced success with the compact disc, Walkman, and life insurance ventures.
• Akio Morita had a strong vision for the Walkman, which changed consumer behavior.
• Steve Jobs admired Sony and was influenced by its products and corporate culture.

"I remember Marita gave Steve and me one of the first Sony Walkmans. None of us had ever seen anything like it before because there had never been a product like that."

The quote from John Sculley reflects on how the Sony Walkman was a groundbreaking product that influenced Steve Jobs and others, showcasing Sony's ability to innovate and create new markets.

• Historical perspectives on company valuations and how perceptions of value change over time.
• Notions of 'value investment' and excitement around companies trading at lower multiples.
• The concept of tech value investing and how it can lead to significant long-term returns.

"the business environment of the people. Thought that five x earnings was a crazy price to pay."

This quote reflects on past attitudes towards company valuations, suggesting that what was once deemed expensive might later be considered a bargain.

"Meanwhile, you and I were just texting the other day about a company that was forex earnings and how excited we were to be doing a value investment in it."

This quote indicates a conversation about identifying a potential value investment opportunity, highlighting the evolving nature of what investors consider valuable.

• The acquisition of CBS Records was a strong financial move for Sony.
• The long-term benefits of the deal as evidenced by Sony Music's substantial operating cash flow.
• The significance of the music segment to Sony's overall revenue.

"Right. Tech value investing. This ends up being a pretty good buy for Sony. So as of recent years, Sony Music, the core of which is the CBS records business, does over $2 billion in operating cash flow every single year. And they've owned it for 30 years. So it was a pretty good pickup."

The quote highlights the success of Sony's acquisition of CBS Records, emphasizing the lucrative financial returns generated over the years.

"I mean, and Sony has a bunch of business lines now. So this stat almost isn't going to sound as impressive as it should just because of the sheer breadth of stuff that they own. But the music segment, Sony Music, which comes from CBS Records, did, I think, 1112 percent of revenue of the whole company."

This quote underscores the significant contribution of the music segment to Sony's overall revenue, despite the company's diverse range of business lines.

• The challenge of managing multiple business lines with varying strategic goals.
• The debate on the effectiveness of Sony's strategy in leveraging content ownership for electronics.
• The potential misalignment of incentives within the company.

"If you're Berkshire Hathaway and you're just going to come in and own something great like this ends up being a great financial purchase from a strategic perspective. Big open question mark, are they able to effectively manage a growing electronics business and a life insurance company and now a music label that's wholly owned while they again cast their eye where you're alluding to in buying a movie, like it starts to open this big question of not only focus, but are there synergies here?"

This quote questions Sony's ability to manage its diverse businesses effectively, including electronics, life insurance, and media, and whether true synergies exist between them.

"It sounds good on paper, but I think what ended up happening is that there was a lot of infighting between the hardware teams and the movie teams. And so you had misaligned incentives where."

This quote addresses the internal struggles within Sony, particularly between hardware and movie divisions, suggesting that differing objectives led to conflicts and inefficiencies.

• Sony's misunderstanding of the software industry and its future impact.
• The company's failure to anticipate the importance of computing in consumer devices.
• The consequences of Sony's strategic focus on hardware over software.

"Yeah, totally, totally agree. I think one other thing that is probably a bigger issue for Sony that crops up out of this. Know, you mentioned hardware there. I had to do a bunch of double takes reading Sony history stuff. They refer to hardware, of course, as the consumer devices that they were making. But then they talk a lot about software, and it was weird to me reading this as I'm reading about their software, and I'm like, that doesn't sound like software."

This quote reflects on Sony's unconventional use of the term 'software' to describe content, highlighting a potential misunderstanding of the software industry's significance.

"To my mind, this is where Sony, the seeds are sown for Sony's demise in the coming decades. After this was they just totally didn't get software. They didn't get computing."

The quote suggests that Sony's lack of understanding of software and computing was a fundamental flaw that contributed to the company's future struggles.

• The unexpected success of Sony in the video game industry with the PlayStation.
• The strategic moves that allowed Sony to dominate the console market.
• The importance of third-party developer relationships and the use of CDs over cartridges.

"So the Super Nintendo, like I said, was this amazing success. Hugely successful. Console soles 50 million units in its life worldwide. The original PlayStation sells over 100 million units and they win over all the major third party developers to come over."

This quote showcases the massive success of the original PlayStation, which outsold the Super Nintendo and secured crucial third-party developer support.

"The PlayStation two becomes the most successful console of all time. Over 150,000,000 units sold worldwide."

The quote highlights the PlayStation 2's record-breaking success, further cementing Sony's position in the video game market.

• Sony's difficulties in adapting to the evolving landscape of personal computing and smartphones.
• The decline of Sony's television market share and the eventual divestiture of the division.
• The financial losses incurred by the company in various sectors, including the mobile communications segment.

"In 2006, they lose the number one market share lead in televisions for the first time."

This quote marks a significant turning point for Sony, losing its leading position in the television market, which was once a cornerstone of its business.

"The whole Xperia thing was just a colossal failure. In fact, if you look back at the annual report in 2018, they decided for their electronic products and solutions segment to break down to subsegments in this annual report. So you can see that it's all mobile's fault."

The quote discusses Sony's failure in the mobile phone market, particularly with the Xperia line, and the financial impact it had on the company's electronics division.

• Sony's dominance in the image sensor market, particularly in mobile phone cameras.
• The company's strategic decision to act as an arms dealer in the industry.
• The role of Sony's image sensors in enabling advanced smartphone photography features.

"So continuing their arms dealer strategy, I think as they realized how bad they were going to be at making cell phones, there was a thing that was happening that started 1520 years before, which was innovating on sensors, in particular camera sensors."

This quote explains how Sony shifted its focus to providing image sensors to other companies, leveraging its expertise in sensor technology as a key supplier in the industry.

"And they, I think, are now the sole supplier to the iPhone for the little sensor that enables all the cool computational photography stuff that's going on. They have something like 50% market share in the image sensor market."

The quote emphasizes Sony's leading position in the image sensor market, highlighting its critical role in the advancement of smartphone photography.

• Sony is known for its innovations in camera sensors.
• They have a strong future outlook due to advancements in sensor technology.
• Sony's sensors are expected to significantly improve image quality and pixel size.

"And so there's like, supposedly really great stuff to come over the next couple of years purely on Sony's innovations in sensors."

This quote highlights the anticipation of Sony's upcoming sensor technology that promises to enhance image quality and contribute to the company's success.

• Sony has adopted a strategy similar to an "arms dealer," especially in its Pictures division.
• Instead of competing directly in markets like smartphones and streaming, Sony focuses on excelling in component manufacturing, such as sensors, and content production for other companies.
• Sony's approach is likened to being Switzerland, providing top-quality components and content without directly competing in the end-user market.

"And it's also, it's kind of the same approach that they're taking with Sony Pictures of being this Switzerland arms dealer type thing where we're not going to be effective at creating and marketing our own phones and operating system and all that, but damned if we're not going to make the absolute best sensors in the world for this thing."

This quote explains Sony's strategic decision to excel in creating the best sensors and content rather than competing in the smartphone market or against streaming services like Netflix.

• Sony's business is highly diversified, without reliance on a single product or service.
• The company's portfolio includes games, music, pictures, electronics, imaging and sensors, and financial services.
• Sony's revenue and profits are spread across various segments, indicating a balanced and less risky business model.

"That's actually a huge playbook theme of mine is it's actually a diversified business."

The quote emphasizes the speaker's appreciation for Sony's diversified business model, which is not dependent on a single hit product but has multiple revenue streams.

• Sony's revenue primarily comes from gaming and electronics.
• The company has seen a successful turnaround in its electronics division, which now contributes significantly to profits.
• Imaging and sensors have emerged as a profitable segment for Sony, reflecting the company's strength in this area.

"Well, it's interesting when you look at it from a revenue perspective. They're a gaming and electronics company. There's like 30% of revenue that's coming from games and 23% that's coming from electronics."

This quote provides an overview of Sony's revenue sources, highlighting gaming and electronics as the main contributors.

• Sony acquired the film rights to Spider-Man from Marvel for $10 million plus a share of revenue and merchandising.
• The deal allows Sony to produce Spider-Man movies in perpetuity, as long as they release a film every five years and nine months.
• Sony and Marvel have a complex relationship regarding Spider-Man, with shared interests in the character's portrayal in the Marvel Cinematic Universe (MCU) and standalone films.

"Sony has the right to produce Spider-Man movies forever."

The quote summarizes the remarkable deal that grants Sony perpetual rights to produce Spider-Man movies, ensuring a steady presence of the character in cinemas.

• Sony's gaming revenue is mostly from digital software and add-ons, particularly from the PlayStation network.
• The company recognizes the importance of recurring digital sales and has yet to change its business model to fully capitalize on this trend.

"Within gaming, most of the sales are actually coming from digital software and add-ons, which is related to the PlayStation network."

This quote sheds light on the shift in Sony's gaming revenue towards digital sales, a trend that is increasingly important for the company's gaming division.

• Sony's bull case relies on continued success in gaming, mobile imaging, music, and leveraging its diverse portfolio.
• The bear case involves risks from potential shifts in the gaming industry and competition from companies like Microsoft.
• Sony's past as an innovator in consumer electronics contrasts with its current role as a component manufacturer and content provider.

"The console wars continue as they've been. No massive strategic or business model shift. Sony continues to execute really well."

This quote presents a positive outlook on Sony's future, assuming the company maintains its current trajectory without any major strategic changes.

• Sony's conglomerate structure does not seem to leverage overarching power to benefit its individual businesses.
• The brand power that once spanned across the conglomerate has diminished.
• The PlayStation network exemplifies network economies, creating a powerful platform for developers and consumers.

"I do think in the past there was a brand power."

This quote acknowledges the historical strength of Sony's brand, which previously commanded a premium in the market but has lost its potency over time.