Very few companies can claim to be globally successful, but Sony, which brought us the Walkman and co-developed the CD and the DVD, has the numbers to prove it. In 2004, the company’s $72 billion in revenues were evenly distributed across mainly three markets: Japan, the United States, and Europe.

Headquartered in Japan, Sony is best known for its high-quality consumer electronics, which account for 61 per cent of total revenues, but the firm also produces games, music, and pictures. Consumers might not own a Sony electronic system, but the movie they watched last night or the CD they listen to while jogging may be the intellectual property of a Sony company. Sony’s strategy boils down to producing electrical gadgets and controlling the content that goes through them much in the same way as its successful PlayStation2 game console provides the hardware necessary for the firm to capture the games market.

In the 1980s, Sony’s Betamax lost the VCR war to JVC’s VHS. Both systems had been developed in the mid-1970s and initially Sony’s Betamax was the clear winner. Indeed, all movies were originally released in Betamax format. General wisdom argues that Betamax lost the VCR war because it failed to license its software to rival manufacturers while Matsushita licensed to all. Today, the Betamax-VHS battle is often cited to argue the benefits of licensing new technology.

Yet, how could Sony have been so reckless as to ignore the benefits of licensing? The answer is that it did not. In 1974, a year before the Betamax release, Sony approached JVC and Matsushita seeking to reach an agreement on standards for the new product. In doing so, it freely disclosed Betamax patented specification and technology to its rivals. The VHS format developed by JVC used very similar technology, but, because of its different size, was incompatible with Betamax. Matsushita was asked to choose between Sony’s and JVC’s product. Its decision came down to cost. It was cheaper to produce the VHS format because it had fewer components. With this, the players for the market were defined. The Betamax was to be manufactured by Toshiba, Sanyo Electric, NEC, Aiwa, and Pioneer. Matsushita, Hitachi, Mitsubishi Electric, Sharp, and Akai Electric manufactured JVC’s VHS.

Perhaps more important than the size of the VCR disks of the two formats, was that the VHS format allowed recording for two hours, twice that of Betamax. This would have allowed consumers to record an entire movie while away for the night. Sony was close to integrating technology into its format that would have increased the recording time to that of the VHS. If this was what tilted the balance, then all Sony would have needed is a bit of time. Potentially, at least, it could have bought itself some time if it owned the rights of the movies and refused to release them in anything but Betamax format. And so it is that Sony’s latest technological bets, the CD and DVD, have Sony Music Entertainment Inc and Sony Pictures Entertainment to back them up.

In today’s market, however, this type of vertical integration can hamper the ability of the consumer electronics division to develop the products that consumers want. Practically every major development in the consumer’s electronic industry in recent years has been developed by, or with the help of, Sony. Yet, very recently, Apple introduced the iPod, a very small and light device that can store up to 10,000 music files. The iPod is based on a small hard drive equipped with an audio function. Since similar memory cards are available across product lines in the industry and no other firm has Sony’s reputation in the audio market, why, then, did Sony not come up with its own version? One argument is that the conglomerate must now weigh the benefits of developing a product in one division that may increase piracy of its music in another division.

If that is so, Sony is walking a fine line. Its electronics branch has ceased to produce stand-alone products and is instead integrating new products with others, which is likely to make piracy even easier than it is now. Soon, Sony hopes, your computer will be able to communicate with your television, stereo, and DVD player wirelessly creating an integrated network of consumer electronics. And, if it all goes according to plan, Sony’s media content will flow within these networks.

With PlayStation2, Sony’s dominance in the market for games was assured, at least in the short term, because it managed to capture most of the market and a game console creates a barrier to other game marketers because of lack of compatibility and intellectual property owned by the firm. Other forms of entertainment, however, are not as easily monopolized. Indeed, most new products, like the iPod, are based on technology that is standardized or can be adapted to work with that of competitors. If products do not do this, they might suffer the fate of the Betamax.

Source: A.M. Rugman, S. Collins, International Business, 4th Edition, Prentice Hall, Financial Times, 2006, pp. 59-60.

Questions:

  1. Present the most appropriate internationalization strategy for Sony in the United States and Europe and justify your choice.
  2. What was the mistake that Sony made?
  3. Is Sony a multinational company? Why or why not?
  4. If the vast majority of Sony’s consumer electronics business is based and developed in Japan and the vast majority of Sony’s music and movie business is based in the United States, does Sony make decisions that are best for the entire company regardless of location?
  5. Why does Sony need to license its technology to competitors?