Game On for Sony PlayStation's New Chief

Sony's new video games chief might best be described as the anti-Kutaragi. On Apr. 27, the Japanese electronics and entertainment giant tapped Kazuo "Kaz" Hirai to take over Sony Computer Entertainment after founder Ken Kutaragi says his final sayonara this summer. The promotion of Hirai, a marketing whiz who got his start in the music business, underscores how Sony (SNE) is steering the gaming unit away from its roots as a semi-independent startup run by the autocratic Kutaragi.

But when he assumes the gaming unit's top post, Hirai will have one of the hardest jobs at Sony. Since the launch of the PlayStation 3 console in November, Sony's ultra-high-tech machine has trailed the competition from Microsoft (MSFT) and Nintendo (NTDOY). Lately the gaming unit's cost overruns and ongoing technology investments have hurt Sony's bottom line. They have also caused a headache for Chairman Howard Stringer, who has spent the past two years pushing through reforms and selling off assets aimed at turning around the company's key electronics division. The game division's bigger-than-expected losses appear to be the impetus behind Stringer's reshuffling of the unit's management last November.

JPMorgan (JPM) analyst Yoshiharu Izumi reckons Sony's gaming business lost $2 billion last fiscal year (which ended in March), with operating profits expected to come in at just $635 million. Results are expected to improve this year, but to realize substantial improvement, Hirai will have to figure out how to make better use of the division's assets—and do so without the deep technological knowledge that was the key to Kutaragi's success.
Smooth Operator

No doubt, Hirai, 46, will run things far differently than his predecessor. Analysts and industry executives describe him as affable and articulate. Born in Japan, Hirai speaks English fluently, thanks to his education at the American School and the International Christian University in Tokyo. He has spent the bulk of his 23-year career at Sony in the U.S. and is widely expected to refashion Kutaragi's Japan-centric empire into a more global organization.

Analysts and former colleagues say Hirai is both a deft administrator and an expert at finessing ties with distributors, game software developers, and others. In fact, it was Hirai who signed many key U.S. developers to create games for the iconic PlayStation machines, which made them a must-have among hard-core gamers. He also led Sony's tough negotiations with Wal-Mart Stores (WMT) to sell consoles through the discount retailer's extensive network.

That ability to land deals will be crucial as he rethinks how Sony can boost the PS3's appeal with more games and other killer content. "I think he is far more in touch with the U.S. [game] publishers, and probably in a good position to enlist their support for PSP [the handheld PlayStation Portable], PS2, and PS3," says Michael Pachter, an analyst at Wedbush Morgan Securities in Los Angeles, Calif.
Tough Act to Follow

Contrast that with Kutaragi, 56, whom one industry executive described as demanding and "a very difficult person to do business with." Others say Kutaragi's need for complete control had become untenable as the division mushroomed into a $9 billion operation. "Kutaragi likes to decide everything himself," says Yuji Takahashi, a former senior Sony music executive who worked with both Kutaragi and Hirai. "That worked in the early days of the video game business. But in the next phase Sony needs someone who is a better listener."

But the biggest question facing Hirai is whether he—or anyone else—can truly fill Kutaragi's shoes. Though he's no Mr. Personality, Kutaragi has been the driving intellectual force behind Sony's gaming business.

A former engineer, Kutaragi came up with the business model of pouring billions into new hardware technology and then recouping costs through licensing deals with game creators.

He demonstrated a knack for anticipating technology trends, timing a new product rollout just as new gadgetry became available on the market. His decision to outfit the PS2 with a DVD player, for instance, made the new technology instantly affordable and helped it spread quickly.
Less Tech Expertise

Hirai isn't a techie and won't have the pull with engineers that helped make Kutaragi an effective leader. He's also a stranger to many at Sony Computer Entertainment headquarters. Until his rise to the No. 2 post in November, Hirai's dealings with Tokyo staff had been limited to a few senior executives.

That's both an opportunity and a risk. As he implements reforms to make the PS3 profitable and encourage more interaction with other Sony divisions, he will need to do so without alienating the rank and file. Over the past six months, Hirai has been easing into his role running the day-to-day operations. In late March, he oversaw the PS3 launch in Europe, approved staff cuts there, and hosted the first-ever gathering of regional heads and software studio executives.

But even those who are rooting for Hirai worry that he may be in over his head. Once Kutaragi's retirement is approved by shareholders (which is expected to happen on June 19), Hirai won't have the tech guru nearby to help with big strategic decisions, although Kutaragi will become honorary chairman of Sony Computer Entertainment and a tech consultant for Sony.
Time for a Change

"Hirai knows when to say no to development projects that he thinks aren't worth it, and he's good at explaining his rationale," says Shinichi Okamoto, the gaming division's former chief technology officer who left to start his own tech consulting firm. "But his weakness is technology. Hirai will need to learn the production supply chain and parts procurement, and he'll have to make snap strategic decisions based on five-year forecasts. Normally by now he should also start thinking about a next-generation machine."

Sony declined requests for an interview with Hirai. But in an e-mail sent to financial analysts following a Mar. 14 meeting, Hirai expressed confidence about his reforms. He noted that he had separated strategic planning from daily decision-making and had given regional heads more responsibility over console shipments, inventories, and new game titles.

Hirai's big push has been in encouraging collaboration. He has been reaching out to game creators and has devoted resources to global in-game advertising. He has also worked to tighten the bonds between headquarters and Sony Online Entertainment, the studios in charge of Net-based gaming and downloads. "Believe it or not, I never even met Kaz Hirai—which goes to show just how segmented" Sony was, says Raph Koster, former chief creative officer at Sony Online Entertainment.
Trailing the Competition

Though Sony's PSone and PS2 broke all industry sales records, the PS3 and its online service, Station.com, lack the street cred that Microsoft's popular Xbox Live site enjoys among online gaming fans. "Shattering the perception that Microsoft is the leader [in online gaming] will be very difficult without some sort of quantum leap in ease of use and capability," Koster wrote in an e-mail reply to questions.

And while the ultra-fast Cell microprocessor and high-definition Blu-ray DVD player give the PS3 a technology advantage over Nintendo's Wii, the Wii's innovative motion-sensing remote controllers have been a bigger hit with a broader audience. Marketing the PS3 as the ultimate home-entertainment hub, not just a game machine, still looks to be a tough sell.

In the U.S., as of March, Sony had sold a total of 1.2 million PS3s, vs. 2.1 million Wii machines, and 5.3 million Xbox 360 consoles, according to market researcher NPD. All of Hirai's changes won't matter unless he can narrow the gap with rival machines and restore the division's profitability.

Source : http://www.businessweek.com/