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Case 12 Teaching Note Sony Music Entertainment
444
In the mobile application download segment, the number of ratings given is a good way to assess the success
of the service. Pandora had 811,124 ratings at the Apple Store and 1,4285,724 ratings at Google Play in
2013. As of the first quarter 2014, Pandora had over 250 million registered users and had total revenue of
$194.3 million. Pandora had been downloaded more than 1 billion times and had 73.6 percent of the market
Mobile Applications
As the industry moved into 2014 and the age of data streaming and smartphones, mobile application
downloads were a good way to track service success. As a benchmark for the mobile app ratings given
Pandora had 811,124 ratings at the Apple Store and 1,4285,724 ratings at Google Play. As of the first quarter
2014, Pandora had over 250 million registered users and had total revenue of $194.3 million. Pandora had
been downloaded more than 1 billion times and had 73.6 percent of the market share of streaming internet
radio listening in 2013. Sony’s Music Unlimited cost $9.99 per month and was far less popular than Pandora.
In 2013, the largest part of a band or artist’s income was from live performances. Monetized streaming music
had a negative 3.8 percent growth from 2008–2013. Record labels had a negative 4.3 percent growth from
2009–2014. Piracy continued to be a problem in the industry. As the industry moved into 2014, the future
appeared to be interactive streaming and internet radio funded by advertisements or subscriptions. Streaming
services were growing rapidly and physical and digital CD sales were dropping. Streaming services were
Perhaps the immediate future of the music industry will mirror the recent history of the movie industry:
Netix dominated the industry, driving physical DVD stores such as Movie Gallery and Blockbuster to
3. What is Sony Corporation’s current business model and strategy? Assess the overall
attractiveness of that strategy.
In 2012, Sony Corporation hired a new CEO, Kazuo Hirai, who began a four part strategy to save Sony,
which was losing money and rapidly depleting its cash. As presented in Exhibit 3, Sony’s profit had been
negative in 2009, 2010, and 2011, and working capital was negative in each of those years. Hirai believed
Case 12 Teaching Note Sony Music Entertainment
445
Sony had formed VEVO, a music video licenser and aggregator, in a joint venture with Abu Dhabi Media
and Universal Media Group. Videos were uploaded by VEVO and users viewed and listened free as
The company’s cloud-based music streaming service, Music Unlimited, had more than 1 million active
users in 2012. Sony used its market share in consumer electronics to bundle the Music Unlimited software
with Sony-produced devices such as gaming systems, Blu-ray players, and TVs to gain an initial audience.
Sony introduced the Music Unlimited app for Android devices in 2011, and therefore, the app was compatible
with all Sony Corporation’s tablets and smartphones. Sony also partnered with Pandora, Slacker Radio and
other music services whose apps were compatible with Sony’s TVs, MP3 Players smartphones and tablets.
There were indications that Sony’s strategy was effective: Sony Corporation’s revenue from the sale of
music increased from ¥441.7 billion in 2012 to ¥503.3 billion in 2013. Operating income for the division
4. Using the information provided in case Exhibits 3 and 4, what is your assessment
of Sony’s Corporation’s financial condition in fiscal 2013? What would you report to
Sony’s Board about the company’s financial condition from information provided in the
case?
Students should recognize that Sony Corporation’s financial situation was precarious in fiscal 2013. As shown
in case Exhibit 3 and Table 1 of this note, there was a negative trend in sales and operating revenue. The
CAGR 2009–2013 was a negative 3.15%. Operating income, which was negative for two of the five periods
Case 12 Teaching Note Sony Music Entertainment
446
TABLE 1. Sony Corporation’s Revenues and Operating Income
by Division: Change and Percentage Change 2013–2014
(in millions of yen)
Sales and operating revenue % Change Change 2013 2012
Mobile Products & Communications 102% ¥634,941 ¥1,257,618 ¥622,677
Game
–
12.2
–
97,888 707,078 804,966
Imaging Products & Solutions
–
3.7
–
28,915 756,201 785,116
Home Entertainment & Sound
–
22.7
–
291,434 994,827 1,286,261
Operating income
Mobile Products & Communications 1441% ¥104,416
–
¥97,170 ¥7,246
Game
–
94.1
–
27,567 1,735 29,302
Imaging Products & Solutions
–
92.7
–
18,199 1,442 19,641
Home Entertainment & Sound 57.7
–
115,146 -84,315
–
199,461
Devices 98.4 21,769 43,895 22,126
Calculated from case Exhibit 3.
Table 2 indicates that Sony had several divisions with declining sales or were not making positive
contributions to Sony Corporation’s earnings. Games (-12.2%), home entertainment (-22.7%), and devices
(-17.3) had significant reductions in sales revenue from 2012 to 2013. Games (-94.1%), imaging (-92.7%),
Case 12 Teaching Note Sony Music Entertainment
447
TABLE 2. Sony Corporation’s Operating Income (Loss) as a Percentage
of Revenue by Division, 2013–2014
2013 2012
Sales and operating revenue 100% 100%
Operating Income
Mobile Products & Communications -8% 1%
Game 3 4
Imaging Products & Solutions .2 3
Home Entertainment & Sound -9 -16
Devices 5 -2
Calculated from case Exhibit 4.
The net working capital deficit was a serious problem for Sony: this deficit in working capital, combined
with the increase in long-term debt (9.2% CAGR) between 2009 and 2013, could hamper implementation
dividends.
TABLE 3. Sony Corporation Compound Average Growth Rate (CAGR)
and Income (loss) Percentages 2009–2013
CAGR 2013 2012 2011 2010 2009
Sales and operating revenue
–
3.15% 100% 100% 100% 100% 100%
Operating income N/A 3
–
1 .3 .4
–
3
Compound Average Growth Rate (CAGR) 2009–2013
Long-term debt 9.2
Calculated from case Exhibit 3.
Sony Corporation’s negative income was serious, but equally serious was the anemic operating income that
In summary, a report to Sony’s Board should cautiously indicate a possible positive turn in the company’s
rather bleak financial condition. The magnitude of losses over the past four years (2009–2012) put the
Case 12 Teaching Note Sony Music Entertainment
448
operating income. Restructuring costs that will be an inevitable result of CEO Hirai’s realignment will
5. What are the driving forces in the digital music industry?
nTalent—the basis of the industry and the only salable aspect of the industry
6. Identify in descending priority order, the top priority issues that Sony Corporation’s
Board should address.
nImproving the at to negative trend in sales and operating revenue—revenue went down each year from
2009 to 2012. Although there was a small upturn in 2013, at this point there is no reason to believe it
nRapid restructuring of the corporate portfolio—fine-tuning/re-focusing of the corporate portfolio should
be done quickly. Ideally the company can absorb the restructuring costs and then with probable loss
carry-forwards, reap the tax benefit in future years and reestablish profitability. Two divisions—mobile
nPositioning the SBUs to be divested is the best possible way to facilitate their sale. In the case of
nCost containment—operating income has ranged from a negative three percent to a positive three
7. What can you recommend to Sony Corporation’s Board to address the priorities that
you have identified in question 6 above?
There are a large number of interrelated issues causing Sony Corporation’s financial difficulties. Students
nImmediately sell or close weak divisions (Home Entertainment and Sound would be a logical first
choice because of its large losses). Students will pick Mobile Products & Communications because of
the magnitude of loss and the increasing loss (Mobile Products and Communications lost over 13 times
Case 12 Teaching Note Sony Music Entertainment
449
nSony should focus on the core businesses and market them to increase revenues. The new CEO, Hirai,
nThe company should make an effort to cut and control costs with the goal of moving operating profits
Epilogue
There was nothing new to report about Sony Music Entertainment’s digital strategy at the time this note went
to press. Sony Corporation’s investor relations news can be found at http://www.sony.net/SonyInfo/IR/#news.
