Sony shows disappointing quarterly results in its Q2 report. Or, how the LCD TV turned from a solid cash cow into a dog, due to declining margins.

Today, Sony Corporation presented its quarterly results for Q2 (ending September 30, 2011) and to be frank: the data didn’t look any good.

Here are the pertinent snips of Sony’s Q2 quarterly report:

·     Consolidated sales declined year-on-year primarily due to unfavorable foreign exchange rates and lower LCD television sales.

·     Consolidated operating loss was recorded, compared to income in the same quarter of the previous fiscal year, primarily due to lower sales, asset impairment associated with the anticipated sale of the small- and medium-sized display business and impairment of LCD television assets.

·     Forecasted consolidated sales and income for the fiscal year were both revised downward, primarily due to the impact of Sony’s updated foreign exchange rate assumptions to account for the further appreciation of the yen, the impact of the floods in Thailand, and the impact of lower sales expected primarily in the Consumer Products & Services and Professional, Device & Solutions segments, mainly in Europe and the U.S.

 Q2 results for Sony Corporation (figures converted to $ mln; originally in ¥ bln)

Consolidated Results for the Second Quarter Ended September 30, 2011

Sales were 1,575.0 billion yen (20,454 million U.S. dollars), a decrease of 9.1% compared to the same quarter of the previous fiscal year (“year-on-year”) primarily due to unfavorable foreign exchange rates and a decrease in sales in the CPS segment, which was mainly affected by a decrease in sales of LCD televisions. On a local currency basis, sales decreased 4% year-on-year.

Operating loss of 1.6 billion yen (21 million U.S. dollars) was recorded, compared to operating income of 68.7 billion yen in the same quarter of the previous fiscal year. This was mainly due to a decrease in gross profit due to lower sales, an asset impairment associated with the anticipated sale of the small- and medium-sized display business, and the impairment of LCD television assets.

Restructuring charges, net, increased 12.3 billion yen year-on-year to 28.8 billion yen (374 million U.S. dollars). Excluding equity in net income of affiliated companies, restructuring charges and the LCD television asset impairment, operating income on an as adjusted basis decreased by 45.4 billion yen year-on-year to 34.7 billion yen (450 million U.S. dollars).

and an increase in net foreign exchange gains.

Sales decreased 12.3% year-on-year (a 7% decrease on a local currency basis) to 779.7 billion yen (10,126 million U.S. dollars). Sales to outside customers decreased 12.4% year-on-year. This was primarily due to a decrease in LCD television sales, reflecting price declines due mainly to deterioration in market conditions in the U.S. and Europe and unfavorable foreign exchange rates, lower PC sales reflecting price competition, a decline in sales of the game business, reflecting a strategic price reduction of PlayStation®3 hardware in advance of the year-end holiday season, as well as a decrease in sales of compact digital cameras resulting from lower unit sales due to a slowdown in market growth and unfavorable foreign exchange rates.

These figures are absolutely not good and the expected sales and profit for the whole year 2011 have been substantially downgraded.

Sony pointed to some of the ‘usual suspects’ for the disappointing figures:

·     The very strong yen, compared to the dollar and euro.

·     Natural disasters:

o  The disaster in Fukushima;

o  The flooding in Thailand;

Both causes were hardly surprising and both are (in their own right) often used by companies as (poor) excuses to cover up disappointing sales and marketing results.

However, Sony mentioned one other cause: the much lower sales and declining margins on LCD TV’s and small/medium displays, causing the brand to execute an asset impairment on both asset categories.

And this points to a very interesting and broader problem: the TV had always been a steady cash cow for ‘old’ brands like Philips, Panasonic, JVC and Sony, but it is not anymore, nowadays.

Old and strong brands like Philips, Sony and to a lesser degree Grundig (Germany), Panasonic and JVC have litterally sold hundreds of millions of television sets over the last five decades, especially after they wiped out the American competition (RCA and others). Although the margins on television sets have been steadily declining since the sixties – a color tv in the seventies was about 10-15 times as expensive (in purchasing power) as a current tv – it was a fact that the TV divisions of these brands always generated enough cash flow to maintain production. Especially when production in the eighties and nineties moved from the high labor cost areas in Europe, America and Japan to low labor cost countries, like the Philippines, Thailand and eventually China.

At the beginning of this century, TV sales got an enormous boost from the new HD Flat Panel displays that were for sale. While the old CRT technique limited the diameter of a TV to about 35 inches, the new LCD TV’s had almost unlimited sizes and a truly stunning picture quality that made these applicable as TV and Multimedia platform.

Flat panel production started  with incredibly high, but rapidly declining margins, as the fierce competition in the LCD TV industry moved the attention from the ‘old’ (Dutch and Japanese) brands Philips, Sharp, Panasonic and Sony towards the ‘new’ Korean brands Samsung and LG.

And I suspect that this will not be the end of this development; in a few years the Korean brands will also lose momentum in favor of new Chinese brands that will try to ultimately decide the ‘race to the bottom’ for the lowest priced flat panel TV.

In the meantime, the Eindhoven, The Netherlands based company Philips NV put its LCD Flat panel display division already for sale and I expect Sony and Panasonic to follow in Philips’ footsteps very soon, as the vaporized margins prevent a healthy and sustainable production of TV-sets.

As far as I’m concerned, the production of TV-sets will be a China-only party in about ten years of time, as even new techniques like LED-tv, HD-tv and 3D-tv have not been enough to create healthy margins for the Japanese and Korean brands that produce television sets nowadays.

The only chance that these brands have remaining, is looking for an Apple approach: take the TV-set as a hub for all different kinds of closed source / open source multimedia that you have control of and offer it as an integral system with ‘TV apps’. Make sure that these multimedia are connected to the hub in a ‘no wires / no frills’ kind of way that people from 6 to 96 can understand and install. ‘Plug-it-in and crank-it-up’ will be the approach for the television of the future.

But if this television of the future will wear the names Philips, Sony or Panasonic is something I seriously doubt.