The Trouble with Smartphones: Headaches for Sony, Nintendo, and NTT DocomoEconomy
Sony, NTT Docomo, and Nintendo are three of Japan’s best-known companies. But with all three struggling to come to terms with the lucrative smartphone market, the consolidated financial results for the first half of fiscal 2014 (April to September) have left them in the doldrums.
Sony Under Pressure from Chinese-Manufactured Smartphones
For years, the Sony brand dominated the global marketplace thanks to strong product lines like Walkman, Handycam, and VAIO. But these days, comments bemoaning Sony’s lack of a clear direction are commonplace, even coming from within the company itself.
Sony’s recent sales figures make for uncomfortable reading. Six years have passed since the company reported record profits of ¥369.4 billion in fiscal 2007, the year ended March 31, 2008. This success was driven by strong brands––including the Bravia line of LCD televisions, VAIO computers, and Cyber-Shot digital cameras––but in fiscal 2008–11, Sony reported four consecutive years of losses. A brief return to the black came with fiscal 2012’s profits of ¥41.5 billion, but hopes of an upturn were dashed by the massive losses of ¥128.3 billion for fiscal 2013.
What are the factors behind this awful performance? Firstly, computers. For several years after its introduction in 1996, the VAIO brand was a powerhouse of the personal computer industry. But from 2011 onward, the brand’s earlier pattern of steady growth ground to a halt when factors including a particularly strong yen resulted in a drastic turn into the red. After failing to bring the brand back to profitability, Sony sold it off to an investment fund, and in its budget calculations at the end of fiscal 2013, braced itself for operating losses of ¥91.7 billion, ¥40.9 billion of which had been spent on structural reforms. The company’s television operations have bled red ink for 10 consecutive years, though performance has improved somewhat recently, but Sony’s decision in July 2014 to spin off its TV division into a separately run subsidiary indicates that this manufacturing is not foremost among the company’s concerns.
Today what continues to drag Sony down is an unexpected loss of momentum in smartphones, which the company had placed at the heart of its plans for recovery. In particular, this is due not to a failure of high-end models but to emerging cellphone markets, such as China and South America, where Sony has seen its market share stolen by Korean, Chinese, and other manufacturers. The rise of Chinese makers, including Beijing-based Xiaomi, meant that Sony’s sales figures for the first quarter of fiscal 2014 fell considerably compared to the same period for the previous year. In July, Sony revised its projected sales for fiscal 2014 downwards, from 50 million units to 43 million, an estimate that subsequently fell yet again to 41 million units.
In 2012, Sony acquired full control of Sony-Ericsson—formerly a joint enterprise with Swedish telecommunications company Ericsson—and the Japanese company set out to expand its smartphone business through this now wholly owned subsidiary. But the onslaught of Chinese-produced models meant that, according to calculations for fiscal 2014, Sony was forced to write off all of the estimated ¥176 billion in goodwill taken on in the acquisition of Ericsson. In the same fiscal year, Sony’s net losses soared from ¥50 billion to ¥230 billion, leading to the company’s first nonpayment of dividends since its listing on the Tokyo Stock Exchange in 1958.
Docomo Pays Heavy Price for New Payment Plan
At the height of its domestic dominance, NTT Docomo boasted a greater than 50% share of the Japanese mobile phone market, making the company's recent decline all the more dramatic. The contrast with domestic rivals SoftBank—whose relentless onward march has continued unabated with a series of overseas mergers and acquisitions, along with the market listing of China’s SoftBank-backed e-commerce company Alibaba Group Holdings, Ltd.—and KDDI, whose introduction of the iPhone saw it also leapfrog Docomo, is a stark one.
On October 31, Docomo announced its figures for the end of the second quarter of fiscal 2014, along with its consolidated forecast of earnings for the full fiscal year. Estimated operating profits were down 23.1%, from an initial forecast of ¥750 billion to ¥630 billion. In terms of operating profit, for the first time Docomo found itself on the bottom of the big three communications networks—a nightmare for this former colossus of the industry.
At the root of this slump is the new billing plan brought in by Docomo in June 2014, the product of a complete misreading of consumer trends. The plan offered unlimited domestic calls for a fixed monthly payment of ¥2,700, along with a menu of data transmission plans to be chosen by the customer. Heavy users who were already paying more than the fixed rate flocked to the new plan, while the majority of users opted for the lowest pay band in terms of data transmission. As a result, a move that had been expected to boost turnover by ¥20 billion is likely to lead to losses of some ¥100 billion.
The main reason that Docomo was overtaken by SoftBank and KDDI was the absence of Apple’s iPhone from the company’s roster of smartphone models. In an attempt to take back some ground, Docomo also began offering the iPhone in autumn 2013, after which it saw a net increase in smartphone contracts from just 230,000 to a much healthier 1.19 million in the first half of fiscal 2014, while the monthly drain of customers to other providers slowed from 130,000 to just 30,000. Despite such improvements, though, the losses attributed to the new payment plan caused a significant dip in Docomo’s overall performance.
The company has announced a medium-term business objective of surpassing its fiscal 2013 takings of ¥819.1 billion by March 2018. Unoura Hiroo, representative director and president of parent company NTT, commented that this “represents the bare minimum” for acceptable takings, while recognizing that it was a figure the company was certain to achieve. But prior to the introduction of the iPhone, even Docomo’s implementation in May 2013 of a new “two-top strategy” promoting the two most popular smartphones in its stable (Samsung’s Galaxy and Sony’s Experia) had not been enough to halt the steady trickle of customers to other providers. At present it seems as though the company cannot put a foot right. Parent company NTT will certainly be casting a watchful eye over future strategies.
Nintendo Sticking to Its Guns
Nintendo once sat atop the video games market thanks to the success of its affordable, innovative game consoles. But despite three consecutive fiscal years of improvement in the company’s performance as it steadily works its way out of deficit, doubts persist as to how firmly set Nintendo is on the road to recovery.
In this age of “social gaming,” where games can be downloaded onto a smartphone and played online, Nintendo, with President Iwata Satoru at the helm, is ploughing a lonely furrow by sticking firmly to its principle of marketing consoles (hardware) and games (software) as stand-alone units. It remains to be seen whether this strategy is the correct one, but even for a firm with a history as strong as Nintendo’s, it seems suicidal to neglect the online market altogether.
Ever tougher times for manufacturers of home games consoles are reflected in Nintendo’s performance. Although the company announced record high takings in fiscal 2008, from fiscal 2011 onward Nintendo saw three consecutive years of losses. Fiscal 2012 was particularly catastrophic, as fallout from sluggish sales of the Wii U home gaming console saw the company’s operating profit plummet to a ¥46.4 billion loss, compared to positive ¥36.4 billion the previous year.
But there are signs of recovery. Nintendo’s operating losses for the first half of fiscal 2014 stood at ¥200 million, a vast improvement from the ¥23.2 billion it lost over the same period in the previous year. Although the Wii U struggled following its debut due to a lack of quality titles, the release in March 2014 of popular racing game Mario Kart 8 sparked an upturn in the console’s fortunes, particularly in the United States and Europe. With the launch at the end of 2014 of the Wii U versions of both hit fighting game Super Smash Bros., and the latest instalment of the Pokémon series that has been so popular on Nintendo’s 3DS portable console, hopes are high that the full-year results in March will see the company return to the black for the first time in four years, with an expected operating profit of ¥40 billion and net profit of ¥20 billion.
It is hard, however, not to feel at least some unease at the inexorable rise of high-end smartphones. Global smartphone shipments in 2013 topped 1 billion units for the first time, a rise of 38%, and much higher than the 60 million game consoles shipped in the same period. Iwata has been bullish in his pronouncements, commenting: “no matter how popular smartphones and tablets become, as long as we can move with the times, there is no chance that dedicated games machines will disappear entirely.” Time will tell whether this assessment is correct.
A Range of Recovery Plans
From the earnings announcements of these companies, it is clear that all three have sustained losses in some way attributable to the smartphone business. But whether they decide to strengthen their own smartphone-related activities or to distance themselves from the sector altogether, it is impossible to escape the influence of these ubiquitous devices entirely.
Along with PlayStation gaming machines and a range of digital imaging devices, smartphones comprise the core of Sony’s electronics business, and as such President and CEO Hirai Kazuo has stated the company’s intention to continue operations “without withdrawing from the smartphone business.” While narrowing down potential targets in China and reassessing sales regions and methods, the company is sure to be aiming for a swift return to profitability, though the achievement of such a goal seems to hinge on Sony’s ability to trim away deadwood through broad structural reforms this term.
Docomo, meanwhile, is pinning its hopes on the affordable new combined payment package for mobile phone, fiber-optic home internet, and a fixed-line phone that it is scheduled to introduce in February 2015. Both SoftBank and KDDI already offer similar options, but it is ironic indeed that Docomo—once banned by the government from adopting such a strategy for fears it may lead to a monopoly—should now be forced by dwindling market share into following suit. The success or failure of this move is key to the company’s chances of returning to the black.
Finally, Nintendo—alone in its firm resolve to steer clear of the smartphone sector—announced plans in October for a new platform aimed not at mere entertainment, but at boosting users’ health and wellbeing. In fiscal 2015, the company will release sensors designed to measure tiredness and lack of sleep. In contrast to devices already on the market, though, these gadgets will not be wearables. When the sensors are placed next to your bedside at night, they gather and analyze the relevant data as you sleep and present it to you the next day in a fun, easy interface that the company hopes users will want to stick with. In what could be yet another piece of the kind of outside-the-box thinking we have come to expect from Nintendo, the goal is to harness the knowhow acquired by the company over its years of success in the gaming industry and apply it to services aimed at improving consumers’ quality of life.
(Banner image: Sony Chief Financial Officer Yoshida Kenichirō [center] at the September 2014 announcement of the company’s midyear earnings. © Jiji Press.)