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Last Updated: Feb 18th, 2008 - 14:39:01 |
Sony Music – Reaction to competitive threat
In the North American market, there has been a major increase in the sales of Apple Computer Inc., iPod personal digital juke boxes and sales at its iTunes Music Store. Sony’s Walkman was the defining personal stereo product for the analog era, but in the digital age, the Walkman’s mantle appears to have been taken over by the iPod. However, Sony is well advanced in its preparations for the digital movie distribution age, and industry analysts are now seeing an increase in activity at both the company and its competitors in the industry as the full-scale adoption of digital movie distribution approaches.
The success of the iPod has led to the initiation of a digital music distribution service operated by the iTunes Music Store, Apple’s distribution operation based on Fair Play DRM (digital rights management protection) technology. Initially, use of the iTunes required payment of a one-time encoding fee, and this acted as a barrier to entry for would-be competitors.
The main competition for iTunes looks likely to come from music distribution over the cellphone network. A new ring tone service will now allow users to use cellphone handsets equipped with a Toshiba 0.85 inch HDD similar to that used in the iPod Mini to download high-quality music tracks at a speed of 10MB. Apple has already started exclusive negotiations with Motorola to develop this business, but the main stumbling block, in our view, is how to charge music distribution fees using the existing packet charge system adopted by mobile-phone operators. Unless this problem is solved, the record companies will be unable to recoup the cost of each song.
There are now a number of other DRM protection technologies besides Fair Play, and software is currently being developed to encode different DRM technologies which have been downloaded onto PCs. TV companies’ actions ahead of the full-scale adoption of digital broadcasting now hold the key to the development of movie iPods. Sony will attempt to counter this move with products like Airboard and PlayStation Portable (PSP), but there are significant barriers to diffusion such as television media and service limits.
Sony’s strategy now appears to hinge on manufacturing semiconductors for its in-house AV business on old production lines whose initial costs have already been written off against the game equipment business. Sony’s in-house semiconductor use ratio is now above 40%, and it expects the electronics segment to use more than ¥1tn worth of semiconductor devices in 2004 and ¥1.5tn by 2007. The company targets supplying 40% of this figure, or around ¥600bn, from in-house sources. If external sales remain at around the ¥200bn mark, then total semiconductor sales should approach ¥800bn, in our view.
The company is concentrating on raising operating rates in its semiconductor manufacturing operations by concentrating more on increasing its share of internal business than on expanding external sales, and this restructuring, aimed at minimizing the impact of market fluctuations, should be complete by around 2008.
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