Why Sony might pull out of smartphones: it’s trying to raise prices in a falling market

A message for Sony? Photo by LendingMemo on Flickr.

After my look at the first-quarter performance of various high-end handset vendors – Samsung, Sony, LG, HTC, Apple – plus Microsoft and BlackBerry, it’s time to focus more tightly. First up: Sony, which I think is most likely to pull out of the smartphone business among those presently in it.

Why not LG, HTC, Microsoft or BlackBerry? (Samsung we can be sure will stick with smartphones. Apple, ditto.)

• LG is a rarity: a company that has pulled itself out of the lossmaking mire to come back to success. In part this is because it’s a conglomerate, so it can afford to pile money into its handset division, because (like Samsung) when the handset division does well, it pulls the rest along.

• HTC somehow stutters along. It’s a minor player now, but doesn’t look imperilled as it did last year, when it was posting losses as though it enjoyed it. With cash in the bank, it looks safe for now (though we’ll have to see how the M9 and associated handsets sell).

• Microsoft can bear the losses from handsets pretty much endlessly, and they’re useful for other research.

• BlackBerry has horrendous problems with handset profitability, but handsets are essential to its existence while it doesn’t have a completely solid business in mobile device management; they also lend it a USP, so it’s likely to stick with them even though they don’t make money. Then again, let’s check back when it announces its next set of results in June.

Last man standing

Sony is the one I think is most likely to pull out of this market. It’s in the middle of a huge struggle with its identity, where the only divisions that are performing up to snuff are its image sensor manufacturing and games, while music and films tick over. The mobile side? Not so much.

Here’s how it has been doing – plus its stated ambitions for the coming financial year, outlined in red.

Sony's smartphone aims for 2016

What Sony wants from its smartphones: sell fewer at higher prices, smaller losses.

Sony is aiming to get the average selling price (ASP) of its phones to rise, according to its forecast for next year:

Sony's forecast for smartphone revenues and profits. Well, loss.

Sony’s forecast for smartphone revenues and profits. Well, loss.

Sony presentation: smartphone sales/profit

Extract from Sony’s financial review of 2014 and forecast to March 2015

Specifically, it says it’s going to sell fewer handsets but keep revenue about the same. The figures imply raising handset ASPs from around the $300 mark to over $400.

I don’t think that will work. None of Samsung, LG or HTC has an ASP over $400; for all, the figure has been generally trending down for some time. Apple has a high ASP – over $600 – but it claim all sorts of unique selling points (notably, its brand). Sony is competing with other high-end Android phone makers where it hasn’t been able to stand out.

Also, compare Sony’s ASPs and profitability with LG’s:

Comparing Sony and LG smartphone ASP and profit

Sony’s profit wobbles all over the place – but its ambitions for ASP look wild

They’re both on the same scales: ASP on the left axis, profit per handset on the right. (I ignored Sony’s intangibles writedown for the latest quarter.) LG sells on average for less, but does a lot better from it. Sony swings around wildly – a manifestation of its internal problems. Note also how both firms are seeing falling ASPs (ignoring Sony’s forecast).

The problem for Android handset makers is that the ASP is being driven down relentlessly: entrants such as Xiaomi and big players like Huawei are prepared to set low price expectations, which then make it hard for pricier offerings.

But but but! you say. Sony has a world-famous brand, and it has differentiation from Samsung and LG: its phones are waterproof, you can add SD cards (well, that differentiates them from the top-end Samsung flagship now, at least), and.. hmm.

Not so easy to think of features that really distinguish Sony phones from the others jostling for the top end, is it? Which means that in its aim to push up ASPs while selling fewer phones in turns means concentrating even more on the top-end market. There it is going to bump right into LG, Samsung, HTC and Apple, of which at least two have more powerful brands in this field. While 30m isn’t an ambitious target, the price is.

Not that Sony’s admitting that; it has “financial targets” for the fiscal year to March 2018, where it wants the mobile business to have revenues of between ¥1,000 and 1,250bn ($8.32bn and $10.40bn) with operating income margins of 3% and 5%, which translates to between $416m (lowest revenue, lowest profit) and $520m (highest).

Goals are nice, but Sony’s brand isn’t strong enough in smartphones: I think its strategy may take it in the same direction as PCs, where it fought at the high end (competing, notably, with Apple), making devices that were well-regarded critically but which didn’t sell in sufficient volume to make the business worthwhile. It then threw in the towel as losses grew.

The smartphone business is similar: once you lose scale (as has happened to HTC), it’s really hard to regain it. Sony is aiming to sell half as many phones as LG did in 2014, and only 50% more than HTC did. The incremental sales of camera sensors and phone screens will be nice, but it doesn’t have its own CPU or memory foundry as Samsung does; those factors all help drive Samsung’s profitability. I suspect this will be more like PCs than LG’s smartphone business.

How soon? That rather depends on the smartphone market, and how tolerant Sony’s management are if the strategy doesn’t go according to plan. Give it a few quarters. Then we’ll see if Sony really has the guts for this.

But it also raises a key question. What is the differentiating feature to boost sales for an Android handset today? Waterproofing? SD cards? Removable battery? Great camera? Or is it just price? Sony will have to hope it’s not that.

4 thoughts on “Why Sony might pull out of smartphones: it’s trying to raise prices in a falling market

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