As everyone knows SNE used to be the dominant electronics company but in the past decade SNE has been left behind by Apple and newer Korean competitors like Samsung. There are signs of change with a new CEO Kaz Hirai, Kaz has set about on an aggressive turnaround with a focus on one Sony with products that incorporate both hardware and software. However after two straight profitable quarters SNE recently announced a second quarter loss dealing a massive setback to SNE's turnaround ambitions. The downgrade was so bad that Moody's warned SNE credit rating could be cut to junk.
Why SNE? Thriller content
SNE owns some of the best music content in the world, it is the second largest global music company and has full or partial rights to the catalogs of Michael Jackson and the Beatles. Michael Jackson and the Beatles alone are a gold mine but SNE also owns Usher, Eminem and even rights to One Direction. The company has over 2 million songs in its catalogue. Part of Kaz's plan is to shed more light on the music and picture segments and finally give investors access to SNE's entertainment management team on meetings and conference calls.
SNE also owns many notable movie franchises including Spider-man, the Karate kid and Men in Black. Their TV catalogue includes I Dream of Jeannie, Bewitched, All in the Family and rights to the Seinfeld library. SNE owns 124 channels in more than 159 countries the majority in Latin America and Asia. SNE monetises their film library content through iPad apps on Crackle an online ad supported viewing service and through Vevo a collaboration with Universal and Google where users can watch the latest in music videos.
Seinfeld no soup for you! Sony owns the rights
SNE is also the creator of the Playstation with the fourth version out next month. This will be SNE's first release of a console in eight years. The pricing is expected to be priced less than Microsofts XBox and include more cloud based services and sharing such as making it possible to view ingame action streamed live to friends.
Why not SNE? Electronics not so thrilling
Kaz's goals are to return the electronics business to profitability. However they are structurally challenged industries with the television business unprofitable for the last number of years. PC, TV and camera sales are all struggling from the move to tablets and smartphones. My original thought was to value these divisions at a zero valuation but some sort of negative value needs to be attributed given the large capital requirements and relatively tough workplace restructuring rules in Japan.
SNE bought out Ericsson's stake in their mobile joint venture after ten years. This made sense as SNE can now integrate its software and all devices and they could finally focus on smartphones! The agreement also gives SNE ownership of some interesting patents whose coverage and worth is hard to determine. Even though smartphone sales are off a small base they are heading in the right direction.
Abenomics
Shinzo Abe the new Japanese prime ministers attempt to revive Japan's economy should help SNE as a depreciating Yen makes SNE goods more competitive overseas. SNE also has a financial services business made up of mainly life and auto insurance SNE will benefit from the rising stockmarket with the Nikkei 225 being one of the best performers in the world.
On the downside the consumer electronics business will keep detracting from the picture, movie and gaming assets. Dan Loeb the activist hedge fund manager is a shareholder and has pushed for a partial listing of its entertainment assets. Personally we would like SNE to keep their best assets and see a spin off of their consumer electronics business as investors (including ourselves) seem to attribute a negative value to the assets.
It seems all technology companies are following Apples path of integrating hardware and software. SNE and Microsoft have always had the ability to do the same but both seem more determined this time around. There is definitely value in SNE it just needs to be unlocked, we will stay tuned!
Jason
Disclosure: Decisive has no long position in Sony (SNE) stock
The material in this article is for informational purposes only and in no way constitutes a solicitation of business or investment advice. The material has been prepared without regard to any client's or other person's investment objectives. Before making an investment decision you should consider the assistance of a financial adviser and whether any investment or service is appropriate in light of your particular investment needs.
