Why Sony’s £4 billion loss isn’t the disaster it seems

Tuesday, 10 April 2012 17:52 GMT By Rob Fahey

Sony announced a £4 billion annual loss today, filling the PlayStation doom-sayers’ guns with some monumental ammo. Don’t call the firing squad just yet, says Rob Fahey. The round you’re polishing is a dud.

Today’s £4 billion loss is eye-watering stuff, but don’t let it distract you from the reality – the problems at Sony run much, much deeper than its balance sheet. Hirai shouldn’t be losing much sleep over the ¥300 billion taxation charge that’s caused so many headlines; but then again, he shouldn’t be sleeping too soundly in the first place.

When former PlayStation boss Kazuo Hirai took over as head of Sony recently, journalists around the globe reached for their Big Book of Cliches. He had, apparently, a mountain to climb. He was confronted with a huge task. It would be an uphill struggle. There was a long road ahead. In summary – Sony’s a bit screwed right now, and Hirai’s going to have to make a lot of very tough and very clever decisions if he’s going to unscrew it.

Today, we discovered the real scale of the problems Sony faces – or, to continue the tortured metaphors, just how high the mountain, how long the road, and how steep the hill that Hirai faces actually is. As widely reported, Sony has just revised its forecasts for the 12 months ended March 31st 2012, and now stands to lose a whopping 520 billion Yen (about £4 billion) for the year.

That’s a lot of money. Except that I want to sound the first note of caution – it’s actually not a lot of money. Yes, £4 billion would buy you a fair few fish suppers, but I say “it’s not a lot of money” because the reality is that it never actually existed. Sony didn’t have four billion quid and then lose it. The accounting behind this figure is a bit more complex.

Sony had what are called “deferred tax assets” in the United States. These are essentially agreements with the US government which would allow the company to enjoy tax credits on its future income. Because of how corporate accounting works, they’re buried somewhere in Sony’s labyrinthine balance sheet as a great big asset – even though they don’t actually exist yet, since they’re just a promise to give the firm tax credits at some point in the future. For various reasons (largely, I believe, the fact that the company isn’t making enough money to actually use those credits), they’re no longer usable, so they have to be taken off the balance sheet – and that means the accountants have to register them as a “loss”, since they’re money (well, “not-money”) disappearing off Sony’s books.

I don’t pretend to understand the full detail of what’s happening here – if I fully understood the intricacies of multi-billion-dollar corporate tax regimes, I think I’d be in a very different career (and live in a very different house, for that matter). However, the bottom line is this – Sony never actually had the ¥300 billion it just “lost”. It looks bloody awful for the company, but it’s an accounting blip rather than a fresh indication that Sony is doomed.

Unfortunately for Kaz Hirai’s hiking boots, though, the mountain that’s left to climb is still pretty steep. The company’s ¥520 billion loss this year will be its worst ever – but even if you take out the ¥300 billion charge from this US taxation peculiarity, you’re still left with a ¥220 billion loss, or a little over £1.7 billion. That’s admittedly a little bit better than last year, when the company lost ¥260 billion – but last year, Sony actually had an operating profit (which is a better way of evaluating whether a firm’s core business is actually making money) of ¥200 billion. This year, it made an operating loss of ¥95 billion, which basically means that its actual business activities – making stuff and selling it – lost a vast amount of money in 2011.

Sony tried to soften the blow today by announcing that in the coming year, they’re going to make a ¥180 billion operating profit – although they didn’t say what would happen to the firm’s sales, which fell nearly 11% in 2011 compared with 2010. If I were to guess, though, I’d say that Hirai would probably be comfortable with a smaller, leaner Sony that can actually make a profit. He’s going to announce his plans for the company soon, but we’ve already heard that 10,000 job cuts are imminent. The rumour in Japan is that the axe will fall hardest overseas, and that’s a bit worrying, because it might suggest that Hirai doesn’t have what it takes to face down Sony’s powerful Japanese executives – the executives who have stubbornly kept the company deeply committed to areas where it can’t possibly hope to make a profit any more, like portable music players and television sets.

Squeezed between hugely powerful and successful rivals – Apple, Samsung, Microsoft and a host of others besides – and under pressure from a historically strong yen which makes it hard to turn a profit overseas, Sony’s challenges are mounting up. The company’s first foreign CEO, British-born Sir Howard Stringer, tried to bring in sweeping changes – but failed to turn the company around. Hirai is younger, deeply versed in the company’s successes with PlayStation, and his education and experience is truly international. He’ll need all of that and more if he’s going to turn Sony, the company which once inspired a young Steve Jobs to emulate it with his fledgling computer manufacturer, into a success story once again. Today’s £4 billion loss is eye-watering stuff, but don’t let it distract you from the reality – the problems at Sony run much, much deeper than its balance sheet. Hirai shouldn’t be losing much sleep over the ¥300 billion taxation charge that’s caused so many headlines; but then again, he shouldn’t be sleeping too soundly in the first place.

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