Now, it's Sony's turn to take the hit: What it means, and why

Sony was already suffering from internal issues, but now the global economy is forcing the CE giant to consider not only scaling down, but scaling back its innovations for next year.

That the global economic predicament should impact Sony, headquartered in one of the hardest hit countries, should surprise no one. This morning, the company admitted that it, too, is taking its medicine. It will cut 8,000 jobs in its electronics divisions worldwide, which is bad but not catastrophic news, and it will reduce temporary or seasonal employees as well.

For the corporation that consistently defines the state of global consumer electronics every year, the fact that the world's economy must focus its efforts away from consumer goods and toward infrastructure and durable goods, could eventually mean a long-term shift in strategy. Think of a company which two years ago touted one of its most important contributions to society as being the producer of "Wheel of Fortune," now devoting more of its efforts to helping the world to simply cope and overcome bad fortune.

To its credit, this morning's statement from Sony was without euphemism. Right up front, the company said it plans to spend 30% less on growing its electronics business than it had planned at mid-year. Every year, Sony presents investors with what it calls its "mid-term strategy," in an effort to be up-front about its goals. Last June, CEO Sir Howard Stringer announced a comprehensive effort to infuse its businesses with the stimuli they needed to become profitable again, with electronics -- including HDTV and Blu-ray Disc -- among that program's core focus.

Sony had planned to invest 1.8 trillion yen in those core businesses, and much of that investment had already begun. Now it may have cut that allocation by the end of its fiscal year -- the end of March 2009 -- by 540 billion yen, or about $5.82 billion at current exchange rates.

How much is that worth in, shall we say, "Sony dollars?" Last October at the real mid-point of its fiscal year, Sony projected it would reap about 9 trillion yen, or about $97 billion, from all of its combined divisions by the end of next March. That's just better than flat in the revenue growth department (and now, you can bet that projection is being trimmed lower). After expenses and taxes, Sony had hoped to earn 150 billion yen, or about $1.62 billion. So we're talking about trimming down expenses by a little more than three-and-a-half times the company's projected annual profit.

If you're already an extraordinarily diversified company, you start trimming expenses by getting out of businesses that simply can't grow very much more than they already have. This morning, it's made one obvious choice: It's ceasing the production of tape recording media from its Sony Dax factory in France, including VHS and (yes, you're reading this right) Betacam SP cassettes. In a bit bolder move, Sony is postponing its investment in the Nitra LCD flat-panel production facility in Slovakia, which makes HDTVs for Sony including some of its Bravia models. Sony had owned that plant outright before enabling its ownership to shift to the independent Nitra firm, which now depends mostly on Sony for its survival.

Hampering Sony's efforts at this point and likely for some time to come, ironically, is the strengthening position of the Japanese yen against the American dollar. While the value of currency everywhere is tumbling, the relative value of the dollar is historically soft. That's bad news for the Japanese economy, which depends so heavily on exports to US consumers. A recent article in The Economist explained that, for every decline in the dollar's value by as much a single yen, Toyota's annual profits alone must be adjusted lower by the equivalent of $350 million.

The cost of cost-cutting, as anyone who's reduced headcount is aware, can be painfully high. Once it's all done, Sony said this morning, its objective is to end up with an expenditure reduction by next March of 100 billion yen ($1.08 billion). To accomplish this, it says without any candy coating, it will have to adjust the prices of its products higher to compensate for the dollar's weakened purchasing power, and then reduce production levels as well as inventories. That means lower availability for some key consumer items, and this year, it's a safe bet that Bravia displays will be the prime example.

Whether the games division, which maintains the PlayStation 3 and its software, will be similarly impacted is not entirely clear, but this morning's statement implies that the electronics division will be affected more. At Sony, those two divisions are separate; while general electronics sales revenue declined 0.6% annually in the last quarter, PS3 sales rose by over 10%. Unfortunately, the two effects won't cancel each other out. Sony did not say this morning that it plans to curtail its plans to roll out its online gaming network, or its Blu-ray promotions.