The trend is most starkly evidenced by data from market researcher NPD. Out of the five largest spending categories on consumer electronics, everything is shrinking except smartphones and tablets.
| Category | 2011 Sales Growth | 2012 Sales Growth |
|---|---|---|
| Tablets | 135% | 42% |
| Smartphones | 28% | 25% |
| Flat-Panel TVs | (5%) | (7%) |
| Notebook Computers | (2%) | (9%) |
| Desktop Computers | 9% | (11%) |
Source: NPD Research. Results are for U.S. spending.
Beyond these main categories, the pain extends to other areas of spending where Sony has a big presence. Video-game sales decreased 9% to $14.8 billion. Sony’s camera sales are off 17% in the past 12 months.
The Swiss Army knife of technology
One of the great disruption points of smartphones and tablets is what Swiss Army knives they are. Take for example, calculators. With smartphones coming with built-in calculators and advanced ones available for download from Apps stores for low-fees, the market for standalone calculators still exists, but it’s been thinned down to students and more demanding professionals.
That situation is not too dissimilar from cameras, video games, or physical media. It’s not that if you go to Best Buy Co., Inc. (NYSE:BBY) that you won’t still see Sony Blu-ray players, cameras, and PlayStations moving off the shelves. Instead, it’s that a reasonable percentage of consumers are using mobile devices like smartphones and tablets instead of dedicated separate consumer electronics.
Previously, if you wanted a video camera, your only option was paying a few hundred dollars for a standalone unit. Perhaps 75% of consumers were happy happy enough to do so. However, if 25% find a smartphone’s built-in video camera capable enough to forgo a purchase of a standalone camera, that devastates the industry.
Go back and look at Sony Corporation (ADR) (NYSE:SNE)’s camera division, and you’ll find operating margins of an anemic 2.5%. For comparison, Wal-Mart Stores, Inc. (NYSE:WMT), a company synonymous with taking every measure to sell items cheaply and undercut competitors, has operating margins of 5.9%, a level double Sony’s camera division. Even its vaunted video-game division had operating margins of 3.6% last quarter, below Wal-Mart. Its sales were off 6% from last year, and research shows the U.S. gaming population dropped 5% last year. Video games aren’t dying; the economics are just being chipped away, with the minority of gamers who are content with games on their phone shifting away from console games.
The point here is that Sony Corporation (ADR) (NYSE:SNE) specializes in hardware to meet many different markets. Yet increasingly, a percentage of users is shifting from specialized hardware to handle functions like taking pictures to letting an all-in-one device like iPhones with specialized software handle their electronics needs.
Borders didn’t die because everyone stopped buying books. It died because one year 11% fewer people bought books. Then the next year 14% fewer people bought books. Then finally in its last year, 16% fewer people bought books, and it couldn’t adjust its cost structure fast enough to handle the changes.
Sony cut 10,000 jobs last year to address the changing state of consumer-electronics spending. Yet even that massive lay-off number was just 6% of its workforce.
It gets worse
The problem for Sony Corporation (ADR) (NYSE:SNE) is that so far, smartphones and tablets have merely shifted consumer spending. In the next phase, they could define it.
Take, for example, Sonos, a wireless system. It’s proved to be an extremely popular product, as different music can be streamed wirelessly and controlled to each room in the house.
Yet the beauty of Sonos is in its simplicity and software. There’s no litany of audio jacks on the back since music is streamed wirelessly. Well-developed software controls the music’s flow through the house. Finally, the software runs on either Apple Inc. (NASDAQ:AAPL)’s iOS platform or Google Inc (NASDAQ:GOOG)‘s Android.
Sonos not only kills the kind of home-theater experience that Sony is used to, but it also entrenches home electronics as vassals to platforms like Android and iOS.
Therein lies the problem for Sony. The next generation of electronics is increasingly defined by its ability to tie into a platform. Sony uses Android, but it owns no dominant platforms of its own. If next-generation home-theater systems focus on simplicity and tie-ins to great software, where does that leave Sony? In the past, the company has been crippled in the software arena. It tried to make competitive software offerings, but it has all too often been crippled by making concessions to its media divisions. Later, true disruptors like iTunes arrived.
A battle it can’t win
Sony’s other segments, like movies and music and, well, life insurance, are doing well. They’re just not doing well enough to make up for how terribly its home-electronics and other businesses are doing.
There will always be a market for high-quality video games. There will always be a market for high-end SLRs that professionals rely on. Televisions will need speakers. There will be companies that survive these shifts and manage to thrive in a smaller, more niche market of tomorrow.
Yet there may not be a need for a huge sprawling corporation like Sony, with its lack of focus on any one niche area and huge corporate expense structure to control them.
Five years ago, Sony Corporation (ADR) (NYSE:SNE) was one of the most impressive technology companies on Earth. Today, it’s a life insurance company. In five years, it could be gone.
Major technology shifts occur rapidly, and as we’ve seen in past ones, even some of the world’s largest companies on the wrong side can falter. Technology moves fast. Giant, sprawling businesses, all too often, don’t.
The article How Apple, Smartphones, and Tablets Are Killing Sony originally appeared on Fool.com and is written by Eric Bleeker, CFA.
Eric Bleeker, CFA, has no position in any stocks mentioned. The Motley Fool recommends Apple, Netflix, and Walt Disney (NYSE:DIS) and owns shares of Apple, Microsoft, Netflix, and Walt Disney.
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