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Thursday, October 19, 2006

Sony: The Cost of a Damaged Reputation (SNE)(DELL)

By Willaim Trent, CFA of Stock Market Beat

It is often said that a good reputation is priceless. While this may be true, Sony (SNE) is demonstrating that the costs of a damaged reputation are quite quantifiable. In their case, about $500 million in this quarter alone, according to Yahoo! Finance:
Sony Corp. now expects group net profit of 80 billion yen ($673 million) for the fiscal year through March 2007, down 38 percent from the 130 billion yen ($1.1 billion) it had projected in July.

Sony may need to further lower its projections as losses related to the battery recall may grow, said Tatsuya Mizuno, analyst a Fitch Ratings in Tokyo. Toshiba has said it may demand damage compensation from Sony, and others may follow suit.

Given how much public perception still associates laptop fires with DELL (DELL) there may indeed be a case that damage is done to the notebook manufacturer’s brand and reputation. How much that is worth would have to be determined in court, in all likelihood. But Sony’s real problems stem from the very real possibility that it will lose its position in the videogame market - and in turn the wider video market - due to a misplaced bet on the Blu-ray flavor for high definition DVDs.

As the Yahoo! article continues:
Meanwhile, a price cut in Japan for the PlayStation 3 console, set to go on sale in November, will decrease earnings for the video game sector, it said.

The production delays for the console, which forced Sony to delay the product in Europe until March next year, will also be costly, Sony said.

Sales and profits for the handheld PlayStation Portable have also been lagging and will push down results, the statement said.

The 20 percent price cut in the PlayStation 3 in Japan announced last month is likely to reduce sales because initial shipments are expected to be limited and sell out. The machines are set to go on sale in Japan and in the U.S. in November.

That last part is nothing but more corporate spin. If the consoles were sure to sell out there would be no reason for the price cut, as prices could be reduced later when production is up to full capacity. The fact is, the price is being cut because Sony knows they are nearly out of the range consumers will be willing to pay, especially with two very strong competitors in the marketplace. And due to their reliance on Blu-ray, they can’t afford to have the PlayStation sink the rest of their video product line-up.

Disclosure: Author has a short position in DELL put options (profits if the stock price is flat or rising). The author may hold a position in the securities discussed. A current list of the author's holdings is available here.

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