Firefighting at Sony

Sony’s ‘The Amazing Spider-Man 2’ made a cool $700m+ at the global box office for the studio and its parent company. Elsewhere, the news for Sony was less rosy.

We’ve written about Sony multiple times over the years, rarely in a good light. A parody Twitter account of the company’s CEO, Kazuo Hirai, often makes for entertaining reading. The company can’t seem to catch a break.  Its latest financial results, released today, warned of a $2.2bn loss for the financial year, the sixth loss in seven years. For the first time since 1958, the company will not pay a dividend. Much of the blame fell to the ailing smartphone division, which generates a fifth of the company’s revenue, but other businesses hurt the conglom too. The company loses $80 on every TV sold; rumours abound they will sell the Spider-Man franchise back to Marvel for a quick payday; the one bright light, Playstation, which took the company into the black in Q2, is beginning to seem risky, as customers look beyond single-use devices like games consoles, a trend we spotted back in January last year. (Earlier this week, Microsoft continued to hint that it might spin off the Xbox business). Sony recently spun off its TV division into a subsidiary and sold its PC business. These actions in turn were supposed to bear fruit, but clearly haven’t.

Much of the difficulty Sony faces was elaborated on in detail in a brilliant profile of then-CEO Sir Howard Stringer for The New Yorker, back in 2006. Little has changed since then. In today’s FT, the newspaper outlines the longevity of Sony’s heartache.

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June 1999 Nobuyuki Idei becomes chief executive. Four years later he presides over the infamous Sony “Shokku”, or shock, in which the group surprised investors with a profits warning.

June 2005 British-born Howard Stringer becomes chief executive, the first foreigner to lead Sony with a mandate to restore profitability and turn the core electronics business round.

September 2005 Sir Howard’s first major restructuring initiative outlines a plan to cut staff numbers by 10,000, or 7 per cent, and reduce costs by Y200bn. It will also close 11 manufacturing plants, streamline its number of products and generate capital from asset sales. “We must be like the Russians defending Moscow against Napoleon, ready to scorch the earth to stay ahead of the invaders. We must be Sony United and fight like the Sony warriors we are,” he says.

December 2008 A second wave of restructuring begins with plans to cut 16,000 full-time and part-time jobs in its electronics businesses around the world.

2011 Sony downgrades its net income forecasts four times.

March 2012 The group highlights its digital imaging, game and mobile units as the three core pillars of its electronics business.

April 2012 Kazuo ‘Kaz’ Hirai takes over as chief executive. Sir Howard says he will be a “tough-mind[ed]” leader. The first restructuring under Mr Hirai is outlined under the banner of “Sony will change”. Sony will shed 10,000 jobs, or about 6 per cent of its global headcount, over the next three years.

March 2013 The group reports its first full-year net income in five years.

October 2013 Sony warns on profits.

January 2014 Moody’s cuts Sony rating to junk.

February 2014 Plans to spin out the television business and sell the Vaio PC business are announced.

May 2014 Sony warns on profits for the third time in six months.

July 2014 The group surprises the market by swinging into profit for the second quarter.

September 2014 Sony warns that its expected annual net loss will be nearly five times as big as initially predicted at Y230bn.

Netflix à la française – Musings on an empire

A recent essay for Foreign Affairs, “The State of the State”, criticises Western governments for failing to innovate. The authors make an unfavourable comparison with China, which, though still autocratic in nature, has at least looked abroad for ways to make the state work better (if only in a necessarily limited scope). One doesn’t need to look much farther than France to see what happens when the state fails to innovate. President Hollande has done his very best to inculcate a backward ideology of indolence among its workers, but the negative effects of over-regulation have been present in France for some time. One major step that is in drastic need of undertaking is the simplification of France’s opaque labour laws, the code for which runs to 3,492 pages, according to a recent article in The Economist. A stark and laughable example of the limits of such a code is elaborated on below,

“[The code] impose[s] rules when a firm grows beyond a certain limit: at 50 employees, for example, it must create a works council and a separate health committee, with wide-ranging consultative rights. So France has over twice as many firms with 49 staff as with 50.”

France of course also has a strong sense of state oversight and sponsorship when it comes to the media industry. L’exception culturelle has long dominated discourse about what content is appropriate and designated to be high art. Such safeguarding of domestic product has been a thorn in the side of late of the EU / US trade partnership, threatening to derail negotiations. Some have argued that such promotion of homemade productions serves not to diminish foreign imports – a love of Americana has not subsided in France – but rather only to preserve a niche. Regardless, argues a recent editorial in one of France’s national newspapers, it has left the country’s media sector susceptible to disruption.

Today’s Le Monde newspaper features a front page editorial on the arrival Monday to the country of Netflix. The company announced its plans for European expansion at the beginning of the year. It won’t have everything its own way, though. Netflix will have to adapt to a very different market environment. The Subscription Video On Demand (SVOD) market is well-established, and it will see much competition from incumbents (last year annual revenues for companies based in France providing such services exceeded EUR10m). These incumbents charge little or nothing for their services, relative to the $70-80 a month Americans pay to a cable company to watch television, according to The Economist, which states “Netflix struggled in Brazil, for example, against competition from local broadcasters’ big-budget soaps”. Moreover, current government policy dictates a 36-month long window from cinema release to SVOD. We’ve argued against the arbitrariness of such windows before, for a variety of reasons, but here such policy surely negatively impacts Netflix’s projected revenues. Such projections will be curbed further by stringent taxes and a further dictat that SVOD services based in France with annual earnings of more than EUR10m are required to hand over 15% of their revenues to the European film industry and 12% to domestic filmmakers, according to France24. As well as traditional competition, Netflix also faces threats from OTT rivals, such as FilmoTV. One possible way around such competitor obstacles is the promotion of itself as a complementary service. The New York Times earlier this spring elaborated,

“Analysts say Netflix, which has primarily focused on older content more than on recent releases, could also survive in parallel to European rivals that have invested heavily in new movies and television shows. Netflix in some ways serves as a living archive, with TV shows like “Buffy the Vampire Slayer” from the 1990s or movies like “Back to the Future” from 1985. Such fare has enabled the company in Britain, for example, to partner with the cable television operator Virgin Media, which offers new customers a six-month free subscription to Netflix when they sign up for a cable package.”

Such archive content will come in handy, particularly given that, as Le Monde points out, Netflix had previously sold the rights to its flagship series ‘House of Cards’ to premium broadcaster Canal Plus’ SVOD service Canal Play (which itself is investing in new content). The article hesitates to guess how much of a success the service will be in France – something Citi has no problem in doing, see chart below – instead looking to the music industry for an analogy, where streaming has become a dominant form of engaging with the medium. As in other markets, streaming services have met with increasing success, particularly with younger generations. For Le Monde, the arrival of Netflix will undoubtedly ruffle a few feathers, but the paper also hopes it will blow away the cobwebs of an industry that has become comfortable in its ways; it hopes the company will provide a piqûre de rappel (shot in the arm) for the culture industry. Netflix’s ingredients – by no means impossible to emulate – of tech innovation, easy access and pricing and a rich catalogue, should be a lesson to its peers. The editorial only laments that it took an American company to arrive on French shores for businesses to get the message.

Citi foresees huge takeup of Netflix in tech-savvy UK, but relative to other territories France is expected to see strong growth too in the coming years

UPDATE (16/9/14): TelecomTV reported this morning that Netflix has partnered with French telco Bouygues. The company will offer service subscriptions “through its Bbox Sensation from November and via its future Android box service. Rival operators are refusing to host Netflix on their products”.

The Leadership Legend – CEOs, David Petraeus & Marie Antoinette

Zeitgeist has found himself leading projects several times over the past year. The prospect can sometimes be a challenging one, and the received wisdom is that looking to the past can help shed light on the future. Looking at both recent and ancient history, however, says one thing more than anything else; leaders are a victim of circumstances. Any strategy must adapt to context.

As a 20-something Londoner with money to burn, Zeitgeist naturally found himself on Saturday night sitting at home, reading The New Yorker. The fascinating review by Dexter Filkins of recent biographies on David Petraeus, former CIA director and responsible for the execution of the ‘surge’ in Iraq and Afghanistan, painted an interesting portrait of what leadership is about. He recognised that the system in place in the early days of Iraq of rounding up countless civilians in order to ferret out insurgents was not an efficient one, nor was it especially effective. Rather, as Filkins points out, “I witnessed several such roundups, and could only conclude that whichever of these men did not support the uprising when the raids began would almost certainly support it by the time the raids were over”. Leadership, then, in this case, came in the ability to spot a deficiency, and then building on it by offering a better solution. Petraeus, who liked to say that “money is ammunition”, focused on the civilians they wanted to protect, rather than the enemy they wanted to kill. This was a drastically radical notion at the time in the military. True leadership narratives are often riddled with anecdotes of absolute maverick behaviour of this kind. The fallacy is that, and this is one of Taleb’s main points in his book on uncertainty, Black Swan, the stories of those whose maverick ideas did not work out rarely make for interesting books or films. Few songs will be written about those guys.

Just as Petraeus was able to leverage the time in which he happened to be serving in order to spot something that he could perceive to be at fault and have the opportunity to amend, there is then an element of luck involved too. “I have plenty of clever generals”, Napoleon once said, “Just give me a lucky one”. Petraeus’ luck began with being around at the right time in order to see how things could be different. It continued when he managed to shepherd his idea for the ‘surge’ to fruition. While at the time the idea of deploying an extra 25,000 soldiers to Iraq was greeted with some mixed reactions to the say the least, it can certainly be said to have paid off in large part. It was another example of a maverick move that panned out well. However, as Filkins points out, the timing of it all was what made it such a success. The Awakening, a phrase given to Sunni-orchestrated truces with US troops that began before the surge, was instrumental. Filkins writes, “Could the surge have worked without the Awakening? Almost certainly not”. The Awakening most assuredly featured tactically in the execution of the surge, but you can be sure it was never part of the strategy. Perhaps it was the failure to notice this, and the attractiveness of the holistic narrative – another fallacy that Taleb notes in his book – that led to a surge being attempted, with far less success, in Afghanistan. What works in one place at one time, might not work again.

Zeitgeist is also currently wading through the Marie Antoinette biography by Antonia Fraser. It is quite extraordinary to note how many times the autocratic aristocracy are a victim of circumstances, rather than being able to dictate their own fate through their own policies and leadership. In the long-term, though greeted with warmth at the start of her reign, Marie Antoinette was always treated with a modicum of suspicion by the people of France, hailing from Austria, a country of lukewarm political relations and which culturally left many an ordinary Frenchman cold. It was long-gestating prejudices such as these that helped blacken the Queen’s name. The phrase ‘Let them eat cake’ had been ascribed to various monarchs going back over a century before Marie Antoinette ascended to the throne. In the medium-term, the support France provided in the American war of independence was pivotal. The Treasury spent an enormous amount of money funding the war, which was seen as a proxy battle with England. This action alone nearly bankrupted the country. But, away from finances, there was the ideological lens to consider as well. Landed gentry like Lafayette, who left nobly at the King’s command to support the war, returned not only as lauded heroes, but as heroes who had been fighting with a group of people who yearned to be free of a suppressive, royalist regime. Such thinking proved infectious, and was not forgotten when men like Lafayette returned home. Finally, in the short-term, an absolutely ruinous stroke of weather stunted harvests, creating mass famine across the country in the lead-up to the revolution. All such things were manageable to an extent by the royalty, but truthfully the origins of such influences were out of their hands.

CEOs today are seen as less wizard-like than they were five or ten years ago, when moguls, particularly in the media industry, bestrode the globe, acquiring companies at their whim, creating ‘synergy’ where none really existed in the first place (think AOL Time Warner). The paradigm shift of course has been in the global recession that few – including many a lauded business leader – foresaw. Confidence in such people has been shaken. What these histories tells us about the ways to handle leadership then can be summarised in the following ways: 1. Know your environment. Externalities and trends are likely to influence your business, and not always in obvious ways. 2. Be mindful of context. What works somewhere might not work in the same way again elsewhere. 3. Appearance, rightly or wrongly, counts for a great deal. 4. When you choose to do something can sometimes be as important as the thing you are trying to do itself. 5. A small amount of luck can go a long way.

The Pitfalls of Brand Personification

In a quest to be all things to all people, brands can sometimes lose their way. They become lost in a miasma of dilution as they try to stretch their brand equity to appeal to every consumer, or branch out into new markets. Some, like Virgin, have managed this fairly successfully – let’s forget for the moment about Virgin Brides – while others, such as Cisco (which we wrote about recently) have fared less well. Virgin’s equity relies in part on the man behind the company, Sir Richard Branson. His affable qualities have appealed to both consumers and investors. The balance he maintains is a delicate one, driving the essence of the brand without ever overwhelming it.

In the world of luxury, companies have often used brand ambassadors. The watchmaker Breguet has long claimed that luminaries such as Napoleon, Churchill and Marie Antoinette wore their brand. Each of these characters had their flaws of course, not least the megalomaniacal Frenchman. However, when the person personifying the brand is also at the rudder of the ship, the situation can prove more complex. This was evident in March this year when master designer John Galliano was fired from his creative directorship at Dior, as well as from his role at his eponymous label.

Similarly affected by ramifications at the top has been Lagardère Group, run by Arnaud Lagardère, who inherited the company from his father. As well as owning a range of media assets, it also has a 7.5% stake in the defence contracting firm EADS. Recently the 51 year-old has taken up with a 20 year-old model by the name of Jade. A cutesy video for a glossy magazine shoot made its way online (see below). Any semblance of dignity the man maintained – already in question prior to this video – was lost. This may decide future business directions at the company. Arnaud is a keen sports enthusiast, at one point mulling a bid for the rights to the Tour de France. Any such wishful thinking must now be considered just that as shareholders are keen to refocus on existing assets. His overt publicity has cost him dear; Arnaud may now be at risk of losing some of his control over the company. Writes The Economist,

“Executives at EADS are dismayed to see their future boss behave like a nincompoop. “In Germany any manager who shot such a video would be finished in business,” says a person close to the company.”

And so we turn to Apple, which has been recently hit with the news that Steve Jobs will be stepping down from his current role. He will remain at the company as chairman of the board, and his ideas and personality will affect the company’s direction for several years still, but after that the company’s direction, and its brand equity, will be at a crossroads. The company has, even relative to its own stellar performance, recently been enjoying great success, briefly becoming the world’s largest public company. In managing this feat, it overtook Exxon Mobil. As The Economist pointed out, however, “oil remains a vital raw material” (though not for a great deal longer, admittedly), whereas Apple’s appeal is in “delighting customers”. A company that serves such a fickle master so directly is in danger of losing said appeal at any given moment. Last week, an editorial in the FT pointed out that an Apple without Steve Jobs at the helm will be a less irascible but also a less happy place, and hence perhaps less appealing to customers. The New York Times echoed such sentiments that weekend, with an article headlined “For Apple fans, departure of Jobs is personal”,

“…[P]eople love Apple products in a way that they do not love other products they use every day. And Mr. Jobs as chief executive has been uniquely connected to Apple’s creations.”

The article details personal consumer reactions to the news, which range from tearful incredulity to concern over future business inspiration and product innovation.

All of which goes to show that having an impresario at the top can benefit a company hugely for decades. Could Steve Jobs have made Apple as popular, while taking a slight back seat, a la Bill Gates, Howard Stringer, Howard Schultz or Jack Welch? Probably not. If he had, Apple wouldn’t be the company it is today. But one thing’s for sure, what it is today will not be what it is in the future, when Jobs’ influence has left and the company has to decide which path to take.

The Fearful Symmetry of Tiger Woods

From the Winter 2009 Zeitgeist…

Brand ambassadors are nothing new. Napoleon (seen above in a casual pose) has long been such an ambassador for the watchmaker Breguet, having worn one during his short (for he was short) life. But what happens when the real world conflicts with the manufactured artifice? Are all of Andre Agassiʼs triumphs now overshadowed by drug addiction? What of recent rumours that Tony the Tiger is diabetic?

Tiger Woodsʼ indiscretions have highlighted such concerns; what happens when an athlete who is not only a champion in his chosen field, but also seemingly the epitome of a gentleman in his private life, turns out to be less than perfect? Tigerʼs presence – a young man of mixed ethnicity in a sport dominated by old, rotund white guys obsessed with the faux exclusivity of country clubs – was a huge statement in of itself. It was for all these reasons though that some major blue-chip brands chose to invest in his good name. Who can forget the fantastic Nike spot of yesteryear?

While his namesake currently graces the Spirit Airlines website, Tiger can unfortunately no longer be found on the Accenture homepage. For a company to so abruptly end such a sponsorship is an enormous blow to both parties and both brands. Industry Standard wrote, “Tiger has literally become the sole face, the strategic embodiment, the business essence of Accenture, the $22 billion global IT, outsourcing and business consultancy proclaim[ing]: ʻWe know what it takes to be a Tiger.ʼ Everything about that slogan has now become a PR debacle, comedian’s punch line and perplexing psychological  examination…”.

Tiger is now on an “indefinite” leave from golf and the brands that rely on the sportsman solely for his golfing prowess are sure to be affected. Electronics Arts will have a hard time selling the umpteenth version of the Tiger Woods PGA Tour franchise if the eponymous player does not compete. TV ratings for golf tournaments will similarly suffer, according to the FT and New York Times. Nike, PepsiCo and AT&T are all of a ʻwait and seeʼ mindset. Gillette will “remove its Woods-related advertising for now” in order to respect his much sought-after privacy. Gilletteʼs triumvirate has suffered of late. Thierry Henry is also mired in scandal after denying Ireland a place in the World Cup by somewhat guiding a ball with his hand at a crucial point in the game. Gillette has denied the act will affect his contract. Roger Federer seems to be the only one currently untainted, though not wishing to jinx him, Zeitgeist will move swiftly on…

Ultimately, such crises can be fleeting. Michael Phelps, pictured with a bong and promptly dropped by Kelloggʼs, will not be forgotten for winning a Fort Knox-worth of gold medals in Beijing. NFL player Michael Vick organised brutal dogfights in his free time, but returned to the game to cheers from the fickle crowd. There may be lasting impact this time, however. As the Zeitgeist team have said before, if caught, the best practice is to immediately admit culpability, express sincere contriteness and take ownership of the situation, as Accenture have done.