Sony's Yuhara: more red ahead

by Alan Rose { Jul 28th 2006 at 6:30PM }

Following yesterday's doom and gloom from their Games division, Sony Senior VP Takao Yuhara had more bad news for investors today: the PlayStation maker expects significant losses for Q3. As manufacturing costs for the "too cheap" PS3 continue to put Sony in a financial hole, the electronics leader is becoming even more reliant on consumers' willingness to plunk down $600 for the next gen console. In order to recoup losses within an estimated five year period, the cell processor must also be successfully incorporated into other consumer devices.

Yuhara commented, "We might see valuation losses of a size that we cannot laugh away in the quarter." Think this is stopping "Crazy Ken" Kutaragi from laughing?

Tags: cell processor, ken kutaragi, playstation, playstation portable, psp, scei, sony, takao yuhara

Reader Comments (Page 1 of 1)

Darth Pixel @ Jul 28th 2006 6:36PM

I love this scary atmosphere.
I am going to watch Sony's stock like a hawk.
Load up as much as I can as soon as it reaches a 10-year low.

Will @ Jul 28th 2006 6:50PM

This site hates Sony. :] Hehe... I think this spells more doom for Sony, Joystiq, get writing more witty remarks about them! Silly Joystiq, fanboyism and hating on companies that -YOU- might not like is for kids. =D

Rask @ Jul 28th 2006 6:56PM

Ya know, I always considered Blu-Ray the huge gamble for Sony.

Anyone have any idea what type of other consumer electronics would use a Cell? TV's or Stand-Alone Blu-Rau players?

I don't think the Cell is X86 compatible so the VAIO or other computers won't be using that.

Looks like Sony sales has their work cut out for them.

supadude5000 @ Jul 28th 2006 7:20PM

I thought the point was to build investor confidence, not to have all your investor scared shitless and sell. I'm sure there was some positive spin at the end, but if the media isn't going to mention that, then what's the point?

Ubersnuber @ Jul 28th 2006 7:23PM

i like companies like sony, they've got guts!
havent seen any big company putting that much stake into one single product.

jordan @ Jul 28th 2006 7:39PM

a company should think more along the lines of spreading out their losses, not gambling, ubersnumber, i wouldnt call it guts, id call it a last resort, i dont think it will hurt them, remember it is sony, but it still is a rather large risk

Draco @ Jul 28th 2006 7:42PM

maybe its a conspiracy, maybe the big high ups at sony are planning on buying low and selling high,, little insider trading, gets stocks really low, buy them all, re-evaluate the company.. ohh look there stocks climb 200% over night.

Jeff @ Jul 28th 2006 7:44PM

"I'm sure there was some positive spin at the end, but if the media isn't going to mention that, then what's the point?"

The point is investors listen to the entire presentation, not just the part of it Joystiq cares about.

Get it through your heads, people. Games are *one* division at Sony. 3 of the other 4 are profitable right now, enough so that Sony on the whole is more profitable than it was last year at this time.

You might need to actually be an investor with an online broker to see their quarterly filings, but here's their annual balance sheet, which should tell you pretty much everything you need to know: http://finance.yahoo.com/q/bs?s=SNE&annual

I just looked at their quarterly filing on E*Trade - net sales are up 11.2% and net income went from -6.5 billion yen to +27 billion yen. So yeah, the sky is definitely falling on Sony.

Ubersnuber @ Jul 28th 2006 7:59PM

i assume ur right jordan, just my weird fanboy opinion:P
But it would rock if they hit the jackpot m/

HeadOn @ Jul 28th 2006 7:59PM

HeadOn: Apply directly to the forehead!
HeadOn: Apply directly to the forehead!
HeadOn: Apply directly to the forehead!
HeadOn: Apply directly to the forehead!
HeadOn: Apply directly to the forehead!
HeadOn: Apply directly to the forehead!

jordan @ Jul 28th 2006 8:19PM

i mean, yea, if they're right, jackpot, they're due, they haven't had a decent hit besides their games division since the original walkman, they're definitely due to have a big hit besides the playstation brand

Erkdagreat @ Jul 28th 2006 8:40PM

y dont they just take this generation off, the 360 is now the ps2 and the ps3 is the xbox. They just switched rolls

Erkdagreat @ Jul 28th 2006 8:42PM

i mean roles(my bad)

James Sorensen @ Jul 28th 2006 9:15PM

apparently you missed the point where they said even though cost would be huge they should be able to recover the loss as fast as they did on ps2

marcin @ Jul 28th 2006 9:19PM

#14, keyword "should".

meaning, won't.

Eric @ Jul 28th 2006 9:58PM

Oh no, this is so... pfffffHAHAHAHAHAHHAAHAHAHAHAHAHA!! IN YO FACE, SONY!

The only good thing Sony ever made was the Psyc CD/Radio/Alarm Clock. That approaches the Bose Wave radio in quality. I love it! Other than that, Sony sucks.

nick @ Jul 28th 2006 10:01PM

Well, there were signs this was coming. The robot division was recently closed down, after years of development and progress. We heard development of cell, the PS3, and consumer blu-ray were expensive. Not one of them has been made available for sale yet, in fact the PS3 and blu-ray have both been delayed by Sony. Sony mistakenly announced at E3 just how expensive the PS3 would be, shocking many. We know Sony borrowed about 700 million earlier this month, which could be an indicator in itself. And their recent financials showed 9 billion worth of debt. Something is clearly amiss.

[-Z-] @ Jul 28th 2006 10:06PM

Sony can't afford to lose another format war, so they bet all their gaming division on it. Kinda gutsy but like a poker game, anything can happen. so stay tuned.

arch @ Jul 28th 2006 10:27PM

#10! HAHAHA I HATE THAT FUCKING COMMERCIAL! I FUCKING HATE IT!!!!!!!!!!!!!!!!!!!!! CHEAP SO CHEAPLY MADE.

Hiro Protagonist @ Jul 28th 2006 11:32PM

Anyone looking forward to Cell powered microwaves and refrigerators?

I know I am, I can't wait till all my home appliances like my washing machine and vacuum cleaner are Cell powered.

-cough-

Freddy @ Jul 29th 2006 12:10AM

I like Sony, I have a PS2 and PSP, but in order to make up for their huge lost they will need to target and sell the PS3 to more than just gamers... kind of like what Nintendo is doing with the DS, selling it to people who do not usually play games.

LaughingTarget @ Jul 29th 2006 12:14AM

Jeff -

They may be having a banner year in consumer electronics and movies, but you have to remember, this is a long term strategy. Sony is banking on BluRay, and that means the health of 3 of the 4 divisions depends on it. Because of the astronomical cost of BluRay devices and complete absence of visual difference between a $1,000 BluRay machine and $150 upconversion progressive scan DVD player, the PS3 is their ONLY option of keeping those three divisions in the black.

The other problem Sony is facing is what to do when all those debts come due at the end of the year. Sony took a massive gamble by financing capital spending by using short term loans. That is a highly risky manuever. A more prudent approach would have been to finance the PS3 development on 5 year bonds, not on 1 year bank notes. Sony has a large loan that needs to be paid off in 6 months, and any form of loss is unacceptable.

True, this may not mean the end of Sony, but they're going to have to refinance those loans, interest and all, at a higher rate (banks tend to charge corporations higher rates when they come up short on paying back a 1 year note) to keep going in 2007. This means less money to use on other stuff, which means a lower quality of product and consumers having to wait longer for the PS3 to come down in price. If the PS3 takes too long to come down in price, the unit will ultimately fail in the face of the Wii and the 360. THIS is when Sony will take a fall. The PS3 is driving the BluRay market. If that doesn't make it, their consumer electronics division falls apart (again) and the movie division takes on excess costs of printing BluRay disks that no one will buy, but will still pull a profit. With music breaking even since the DRM fiasco, that leaves 2 of the 4 divisions pulling losses with movies having to take up the losses caused by those 2. When that happens, and they miss another deadline, you're going to see liquidation of non-profitable business divisions, which would mean consumer electronics, Sony's weakest division over the past 10 years.

If it weren't for the organization of the debt, Sony's losses in the Games division wouldn't be too bad. Unfortunatley, they foolishly chose to finance with short term loans rather than long term bonds.

Brad Lee @ Jul 29th 2006 12:48AM

"In order to recoup losses within an estimated five year period, the cell processor must also be successfully incorporated into other consumer devices."

Wow, thats really not good news for Sony. That means, if I am understanding this correctly, that even if PS3 sells well, Sony will have to find other products to use with Cell to actually earn a profit within five years. And if Sony can't find a way to use it in other products or they can't find other companies that want to adopt this technology, they're in some shit.

Then again, MS lost billions of dollars with the original XBox, only hoping now to gain some of it back with 360. Although I suppose MS can throw around billions without *too* much of a big deal. I'm not so sure Sony can throw money around as precariously as MS does.

Epitaph @ Jul 29th 2006 1:15AM

The only other logical area I can see the cell be sold is for servers. Other then that they are pretty much useless.

Ubersnuber @ Jul 29th 2006 5:20AM

LaughingTarget:
So u know bout all the Sony finances, deals made with banks nd tactics etc?
just curious

BMWM3P @ Jul 29th 2006 8:18AM

LaughingTarget

I wonder why sony doesn't listen to your advice? You being a financial wizard and all. Let's see, are you on wall street, maybe your the ceo of a large corporation, wait you're one of those enron guys. No, you're just a halo geek talking out of you're ass. Sony knows what they're doing, you don't know shit. Shut up and leave the financial analysis to people that know what they're doing.

clee @ Jul 29th 2006 8:48AM

BMWM3P: At least his post was intelligent and tried to sound impartial. If you don't like what he said then counter with your own intelligent retort, with facts to boot, or shut up.

LaughingTarget @ Jul 29th 2006 9:07AM

BMWM3P -

Lets just say I made over $100k in 2001 and 2002, when most people were losing their shirts on stupid investments. And yes, I do work in finance in a major company, so, surprise surprise, I do know what I am talking about. If you really want, go to the local college, tell a financing PhD the situation (leaving the name Sony out), and I can guarantee you every last one of them will tell you it is a crazy risky idea that leads either to huge profits or massive losses. You just don't finance capital expenditures on short term loans. The financing has to match the payback period of the investment.

So, since you're the one laying accusations, I suggest backing up with proof that I'm off.

P.S. - I don't play games.

Kamalot @ Jul 29th 2006 12:22PM

The future for Sony can be summed up in this little image...

http://photos1.blogger.com/blogger/68/411/1600/sony_iceberg.jpg

Rare Hare @ Jul 29th 2006 2:59PM

"P.S. - I don't play games."

o.O

Yet you're closing in on 200 comments on a gaming blog?

BMWM3P @ Jul 29th 2006 4:20PM

clee

It's nice to see you stand up for your man. You two must really love each other.

lord thanatos @ Jul 29th 2006 7:20PM

BMWM3PEE - U GOT SERVED!

nice one laughing target, that was hot- except the not playing games thing (hurts my feelings).

personally, i'd like to see sony take an ass beating. the company has done a lot of good for the game industry but its quite clear to those with common sense that when a company is leading they almost automatically start stalling....cmon, for all you idiot sony fanboys, and punk ass so-called game "journalists" , you are willing to acept that the master builders at sony could not come up with a brand new controller in all these years. The dual shcok f'ing sucks. the console menu for the ps3(mimicing the psp) sucks as well. thier online service hopefully wont, but most likely WILL suck. cmon dudes, the writings on the wall- sony's up for a hurting. and i can say that becasue regardless what happens, sony aint going anywhere....whether bumbling and foolish they are, they will survive this debacle.

ps- whatever you do do not go check out those "blur" ray demos.....snore....that mpeg2 is really working wonders...so much for pushing the envelope sony.

BMWM3P @ Jul 30th 2006 9:14AM

LaughingTarget

You're just reading the same news we're reading and jumping to dumb conclusions. I'm pretty sure the poeple at sony know a lot more than you about handling billions of dollars, Mr. 100k.

I'm not accussing you of anything, I'm just saying you are a liar and your answer to my post proves it. Let me guess, your name is Gordon Gecko a ruthless wall street broker, jet setting billionaire, financial genius elightening us with your financial wisdom. You're just a punk bitch that's full of shit.

PS If you don't play games what the hell are you doing posting on a gaming blog.

lord thanatos
I see Laughing Target has a lot of bitches that back him up. Too bad for you he only love clee, you're just a booty call.

mocax @ Jul 30th 2006 11:36AM

Reporting bad news means hating the company?
Those business newspapers must be really fickle-minded people who hate just about every company out there.

Brad Lee @ Jul 30th 2006 3:15PM

"I'm not accussing you of anything, I'm just saying you are a liar and your answer to my post proves it. Let me guess, your name is Gordon Gecko a ruthless wall street broker, jet setting billionaire, financial genius elightening us with your financial wisdom. You're just a punk bitch that's full of shit."

Wow, thats funny. You said you're not accusing him of anything, and then you go ahead and acuse him of being a liar and 'a punk bitch that's full of shit.'

And no I'm not one of Laughing Target's 'bitches.' The mere fact that you are insulting people just because they disagree with you and agree with Laughing Target only proves how meaningless your posts are.

LaughingTarget @ Jul 30th 2006 9:29PM

Wow, that really is a lot of misplaced anger. The reason I mentioned I don't play games anymore was me trying to show I have no allegiance to whoever "wins". I just don't care who takes the top spot and by how much. My daily life won't be affected by it much, nor will anyone else's for that matter. The success of the PS3 is about as effective for my daily life as a container of chocolate pudding. Sure, I like pudding, but that doesn't mean that if pudding were banned tomorrow that I would die. Hell, my quality of life would be exactly the same. The idea that I am out to get Sony is ludacris. I'm not even out to sway opinion on whether or not to buy a PS3. I simply don't care. What I AM here to do is provide a constructive and possible future view of what may happen to Sony as a company. That means everything from future installments of God of War to the people that are filming Spider-Man 3 and manufacturing Bravia TV sets. The PS3's R&D and finanincing decisions is a pivital part of their jobs, whether they like it or not. A part that shouldn't have even been, but a part it is.

I did play games up until about 3 months ago, which is why I know about this place, but discovered that, currently, gaming was taking away from what I wanted to do with my life. Ironically, my path in life does seem to keep me around here, but doing mostly freelance financial analysis. I may pick them back up in the future, hopefully when fresh new ideas come to play (been gaming since 1987 and originality has been sparse for some time).

I take this entirely on a shareholder perspective. To a shareholder, system popularity is only one small piece of the puzzle. While system profits are a driver for popularity, the question is whether or not Sony can actually afford to produce enough systems to drive profits.

Sony needs to pay off a massive debt by March 2007. Selling the PS3 will only make paying off that debt much more difficult. Sony made the exact same mistake PanAm did, who have been bankrupt for some time. PanAm, who were, at the time, a much older company than Sony is now, mismanaged financing decisions and charged too much for their product, expecting consumers to pay the premium because they were PanAm, the invincible airline company.

Sony made a massive mistake. You simply do not finance research and development on short term bank notes. There are two reasons why this is the case:

1. R&D generates no revenue in the near term. Because bank notes need to be paid off within a year's time, the activity being financed needs to generate enough revenue to cover those expenses with the same year. R&D projects take years before even coming to market, let alone generating income.

2. By financing with short term loans, which are much easier and cheaper to secure over long term bonds, "feature creep" becomes a huge issue, especially when there is poor project management. There is a reason Kutaragi wasn't given the CEO position, and the reason was the PS3. It was his mismanagement of the PS3 project that caused the costs to balloon. The lack of a solid budget was a major factor in this. Sure, a solid PS3 development budget that was actually followed would have cut out a lot of its current features, but that would have been a benefit to Sony since most of the PS3 features are non-revenue generating, much like how they could have really soaked up the PSP profits if they eliminated internet and PC connectivity. Lower costs and fewer people downloading emulators instead buying actual game software.

If Sony issued 10 year bonds, then they would have known what their limit was. But, since a bank allowed Sony to continue to dip into more and more money, the PS3 project went out of control. To cover the $9 billion owed by the end of the fiscal year, assuming 2 million units are sold, and assuming each unit loses $200 each, Sony is going to have to generate $4,700 in royalties from each PS3 owner to cover their obligations. If Sony takes in $20 for every game sold on the PS3, that means each PS3 owner is going to have to purchase 235 games. Guess what, that simply won't happen. With PS2 software sales slowing down in anticipation of the PS3 release, Sony cannot rely on historically solid PS2 sales to carry the slack until the PS3 gets up and running.

R&D is ideally financed through equity financing due to the length of pay-back. Ideally. There are huge issues with equity financing, such as the costs, which Sony could not have possibly handled. While I do agree with the choice of using debt financing, I have to disagree with them on the short term decision. Sony made the mistake, that many corporations make, of looking at the fact that short term loans have the lowest interest. But, they failed to take into account the major penalties and refinancing costs if they are unable to pay off what is owed. Sony is going to have to boost pre-R&D income by the $9 billion. I don't have their operating margins, so I have no idea what that $9 billion will translate to in actual revenue needed. Even if another $9 billion of revenue is needed, the idea that Sony can increase their revenue by a minimum of 15% is somewhat far fetched. Large, established companies are lucky to pull the 4% that Sony did this past year, which is why a lot of stockholders were surprised.

So, what is Sony going to do about their huge debts they have to pay off? They don't have the cash reserves to handle it, which have been shrinking yearly for at least the past 5 years, probably longer. The only option is to either refinance short term loans and eat a huge penalty or bite the bullet and issue long term bonds. Sony can handle paying $720 million a year in bond interest a lot easier than they can absorb their current debt obligations.

It hardly matters if anyone thinks the PS3 will be pure awesome distilled and bottled in a platinum container, which it very well may be, Sony simply had a mis-managed project. Even with R&D, there is no way in the hoary pits of Hell that a division generating $8.7 billion in revnue should come out with a peasly $75 million in operating profits.

As a current shareholder, I would be absolutely infuriated at this. Why did Sony let the PS3 project develop huge losses, especially when Sony's business plan is to lose even more money on ever unit sold?

As a prospective shareholder, April 2007 is looking rather tasty. Sony has a good chance of having a huge dump in stock price by then. They'll get it back up, and that is the time to buy. The question is if the Sony that gets the price back up still has all of its divisions intact. No company is eternal, and Sony is no exception.

Martin @ Jul 31st 2006 7:45AM

If the Cell is anything like the Emotion engine, I have a few ideas of things it can be put into.

1. an Etch-o-scetch
2. Teddy Ruxbin (spelling)
3. Wind up toys
4. Slinky
5. Erector Set

That is just five of the many things that Sony could look into!

Gazbin @ Aug 1st 2006 7:08AM

Take a very deep breath Sony!
Sinking deeper deeper and deeper into financial oblivion as the company becomes more and more shallow.

Crown of thorns advertisement - yes how classy, then the way they handled & hyped the da Vinci Code in India (hurting peoples religous feeling through disgusting adverts is OK Sony), then the Neo Nazi white supremacist holding the face of a negro in the PSP advert - how can you give any respect to a trash company like Sony?

Now they whant us to pay for games with in-game advertisements in them? NO WAY. They want to monitor my on-line usage patterns - BUGGER OFF. They need me to support them with micro payments - FAT CHANCE. They want me to buy game broken into episodes. - BORING!

Sony have no credibility - they are already morally bankrupt. Hear the story about Andreas Pavel the true inventor of the Walkman that Sony kept gagged and tied up in court for near 30 years (again Sony finally settled with a gag disclosure attached). What about the PS2 class action settlement over faulty drives? (My god Blow-ray ahead!), What about Rootkit? It goes on and on and on because it is so easy to crap on a crap company. They deserve to sink.