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

Tuesday, 10th 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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38 Comments

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  1. tenthousandgothsonacid

    Nice piece.

    #1 2 years ago
  2. LOLshock92

    xD

    #2 2 years ago
  3. jonahfalcon

    It’s quite a disaster for the thousands of people FIRED by Sony in this economy.

    #3 2 years ago
  4. Patrick Garratt

    Yeah, that’s true. But it’s important to understand it’s not the end of Sony.

    #4 2 years ago
  5. ManuOtaku

    Well even if this money was not real money, it will meant a possible future exchangable money, which might means that it was money sony would think will have in the future as a asset, and now they dont have, therefore maybe they had already made plans for this money, making credits with banks or another financial transactions in order to have “real” money in a short term, well in reality it might be turning a lost in the mid-long term window.

    #5 2 years ago
  6. Spider Law

    good explanation.
    Its exactly what i say to people when they say “Sony is losing big time monies”…i just laugh and explain.

    But, not as detailed as you though ;)

    #6 2 years ago
  7. viralshag

    Yeah, I would hardly say a “blip” leads to 10,000 redundancies. Really, no matter how you want to explain it, a loss IS a loss. If they were doing “alright”, like I’m sure other multi-billion dollar companies are, then they wouldn’t have made as big a loss as that.

    #7 2 years ago
  8. xino

    who is Rob Fahey?
    where have you written before?

    that Steph is a nice woman don’t you agree?:P

    #8 2 years ago
  9. rezenu

    #3: People were let go. They weren’t fired. Being fired and being let go are two different things. I know you’re frothing at the mouth over a bit of bad Sony news. It makes you feel better at night that a company is laying off workers, right?

    Grow up.

    #9 2 years ago
  10. Patrick Garratt

    Rob used to edit GamesIndustry.biz. He’s written for the Times, etc.

    #10 2 years ago
  11. rezenu

    And #7, no one is denying that Sony didn’t have losses. They’re just not as terrible as people are making it out to be. Sony needs to restructure their industries and either leave the TV industry or cut the prices of their TV’s.

    #11 2 years ago
  12. Razor

    All I know is is that Sony is a seriously fucked up company that needs to start making some serious cash pretty sharpish.

    #12 2 years ago
  13. xino

    what happened to the Ripten guy? (his name flew out of my head now)
    you love firing people Pat just like how the publishers fire their employees:P

    get rid of one, hire the next.
    (i joke, I joke)

    recession loves taking over people’s business man

    #13 2 years ago
  14. DSB

    Looks like they’re down 10%. That’s not bad for the size of the “loss”. Some businesses have taken far more just by making less than expected.

    They obviously still have a lot of room to maneuver, and they’re still worth a lot of money, but 10k workers let go is an awful lot.

    @10 Get a room, srsly.

    #14 2 years ago
  15. Patrick Garratt

    Heh. Dave Oshry. We’ll be using him again, definitely. Rob and Dave are both freelancers, so we use them as needed.

    #15 2 years ago
  16. tenthousandgothsonacid

    @10 Talking of which, why is there so much turnover in games journalism generally ? I’ve often pondered this. My best guesd is that it pays peanuts and once the youthful enthudiasm has worn off people get hacked off and get better paying jobs in Burger King (for example). If it sounds like I’m taking the piss I’m not. I’m genuinely interested why no one seems to stick at it ?

    #16 2 years ago
  17. mistermogul

    @3 – Good point. 10000 people they are making redundant aren’t they?

    There are also reports from staff saying they are not going about it very fairly either…

    #17 2 years ago
  18. Prof.Dr.Moertel

    Very interesting read. In my opinion, Sony should definitely streamline its operations. Really don’t see any other option here.

    #18 2 years ago
  19. Mike

    £4 billion loss?! Sony is fucking DOOMED.

    #19 2 years ago
  20. daytripper

    I disliked them at the start of this generation for ridiculous arrogance only matched by some of their irritating fanbase but peoples jobs are at stake, talented men and women and i would rather see Sony stay in competition with Nintendo and MS than not, they have given the consumer some good products and great ips so I hope they get out of the shit.

    #20 2 years ago
  21. daytripper

    oh and nicely written article :-)

    #21 2 years ago
  22. G1GAHURTZ

    Don’t worry…

    PS4 will bankrupt save them.

    #22 2 years ago
  23. Erthazus

    This is not the end of Sony for sure, but this is a START of the End of Sony.

    Because:

    Current Gen TV’s from Sony are one of the most durable TV’s with high quality image and at the same time SUCKY TV’s that require stupid firmware updates. If you look at CES 2012 for example, SONY never won something from journalists. If you look at http://www.Gizmodo.com . Best Products in 2012 in most cases were from other electronic companies and none from Sony.

    Their LapTop’s VAIO SUCK MY HUGE BASEBALL BAT. It’s a typical PC with zero innovation and crazy price for no reason at all.
    If i want to look cool, i will buy a Mac and will look like a hipster.

    Gaming – a lot of terrible decisions in the past (since this gen) with PS3, PSP, PSN, Games and even with Playstation Vita, PSP GO, PSP Phone, PS Move. Yeah, they have great games but they are only CRITICALLY successfull. One shitty game like Halo makes more money then all games that is coming from Sony combined, except for Gran turismo of course.
    But Gran Turismo 5 came out once and that’s it. That’s it.

    Movies – Most of them SUCK or just they are critically acclaimed franchises that don’t sell very well. Let’s see how their Spiderman movie will do in the end. They should do a lot with the latest Spider-man movie.

    Software – Piece of trash. The worst software company of all technology companies. I won’t say much, because even on the Vita, interface is Bad.

    Mobile devices – SUCK Balls. The latest Xperia Play Phone was a complete disaster and i said that long time ago, i remember how CJ tried to defend it as a good alternative to iPhone or other Android smartphones. Well, he is a Sony fanboy and he is just NUTS.
    Xperia latest phone was weird PSP, camera, stuff… Whatever… it was horrible and i’m not talking about Xperia Play, i’m talking about some sexy shit… Well, Sony said that it is sexy.

    Tablets – Have you seen them? Oh damn, they are so bad.

    Sony will die if they won’t do something in the next 2-4 years.

    #23 2 years ago
  24. TD_Monstrous69

    @19 Apparently, someone didn’t read the article, just the headline.
    @18 I agree, but something I feel Sony should correct themselves on going forward, and it’s the one thing they’re notorious for in almost all of their consumer electronics divisions, and that’s pricing. Whether it’s the TV’s themselves, their Walkman MP3 players, or components for certain devices (I’m eying you, proprietary Vita memory sticks), they have the tendancy to price themselves out of the sale.

    #24 2 years ago
  25. LOLshock92

    I wonder if this will have any kind of impact on PS4 development.

    #25 2 years ago
  26. xino

    guys…$4billion lose is like £4 lost out of £10
    Sony are rich man!

    #26 2 years ago
  27. Lounds

    If I were Sony, I’d pull out of the laptop industry, there laptops suck balls, they used to look the dogs, now they look like fisherprice toy.

    #27 2 years ago
  28. sb319

    No one has suggested it is the end of Sony, Pat. But there’s no positive spin to be had here either.

    #28 2 years ago
  29. OrbitMonkey

    ^ Two important points.

    1) @19 suggested this was the end for Sony

    2) Pat hasn’t put a positive spin on this… Quite impartial tbh.

    Er… So what was your point again?

    ;-)

    #29 2 years ago
  30. OlderGamer

    Nice explaination.

    #30 2 years ago
  31. earlyrock

    I also don’t reckon its the end of Sony or even a massively bad thing. Obviously job cuts are always bad and I feel for whoever does lose a job. But this could be a new start for Sony.

    I’d feel less optimistic if Kaz wasn’t in charge. The way he’s turned around the PlayStation side of things in the last couple years is fairly remarkable. If he takes some of that into the company as a whole, I don’t see why they can’t become as strong as they were 20 years ago.

    Basically, Sony needs to do what Apple did in 1997. Think about what they do well at and focus on it, and remove every single element of what they do bad at. Get rid of the crap and bloat, and focus on quality.

    #31 2 years ago
  32. landguy

    There is one major problem with this articles premise… If Sony took the loss now, that means they had the gain at some other time. So, the reason why this is a big deal is that it is like losing a billion. If you went and bought a car today for 30,000 and tomorrow you found out it is worth 300, you have just lost a ton of money. And the bank or whoever that borrowed you the 30,000 is going to be pissed! Also, because Sony had this on their balance sheet, that means the companies value just dropped by that much overnight-now the investors are pissed at a billion worth of value disappearing due to mismanagement.

    #32 2 years ago
  33. Kuwabara

    Sony will always exist as company, and the ps4 will by far be the best next gen console, with the best exclusives, once again.

    #33 2 years ago
  34. Christopher Jack

    @23, How am I a Sony fanboy? Even sold my PS3 a few weeks ago. Also to note, the Xperia Play was never a bad device, it just had an outdated SoC but was priced just as steep as next gen SoC devices like the SGS2, the difference depends on whether or not you actually want the gamepad which I’d imagine would be a must have for all the emulator fanatics.

    I happen to own a Nexus S & I can say for certain I wouldn’t NEED anything more in terms of power from a smartphone & the Play is about the same. I never said the Play was a present from god, I just never understood all the bullshit flying from your trolling mouth aimed at it. It was charged at the same price as the Xperia Arc running the same Soc with the same price, lacking the gamepad, why not have your bitchfest at that?

    I also fail to see how you think that this is ugly http://eurodroid.com/pics2/xperia-s-white.jpg but whatever floats your boat, it is your opinion after all but because you are an extreme narcissist, you cannot possibly conceive that someone has a different opinion, your opinion is apparently law.

    Now, if you’re looking for a true Sony fanboy, rather than someone to chuck names at, look at the post prior to mine.

    #34 2 years ago
  35. Da Man

    Narcissist is a wrong word, ‘retard’ is what you’re looking for.

    #35 2 years ago
  36. Christopher Jack

    Yes but people tend to take offence to retard because of its common association with those who suffer from mental disorders. Besides, Narcissist is so much more accurate. It’s not so much that he’s incredibly dumb, just extraordinarily arrogant with a one-track mind set, either his way or no other possible way.

    #36 2 years ago
  37. Da Man

    Well, no that’s the point. He is.

    #37 2 years ago
  38. onyxbox

    Wow, is Erthazus always like this?

    (needs to get a life by the looks of things)

    #38 2 years ago