By Tim Kelly and Kenneth Li
TOKYO/NEW YORK (Reuters) - Had Sony stuck with the Airboard portable computer it launched in 2000, Satoru Maeda rather than Apple's Steve Jobs might have been feted as the creator of tablet PCs.
"I was the inventor of the Airboard," says Maeda between mouthfuls of fried prawn and dumplings at a Chinese restaurant in downtown Tokyo.
He was referring to a flat panel device that predated the iPad by a decade yet boasted video, touch screen typing and Internet access.
A hefty price tag and patchy picture quality were among the reasons the product, which in hindsight looks like it was ahead of its time, didn't initially take off. Internal politics and a series of disruptive divisional reorganizations ensured the product never got the management focus it needed to succeed, Maeda says.
Morphing it into Location Free TV -- a device through which you can watch local TV channels anywhere -- wasn't enough to convince Sony or the marketplace that it was going to work. The project once touted as being as revolutionary as the Walkman was dropped entirely in 2008.
Maeda said he knew a year earlier that Sony under Howard Stringer, who became CEO in 2005, was going to kill his invention. His boss sent him an e-mail saying he was taking it over.
Soon after, he quit the company he had joined in 1979 when Sony launched the Walkman and was one of the coolest companies around. It was a heyday Stringer pledged to restore, but Maeda, who is now at audio visual equipment maker JVC Kenwood, no longer sees returning.
"Sony old boys liked Airboard and Location Free TV because it was doing something new, which is what they did at Sony," said Maeda. "The current Sony people have no experience with such things because they haven't introduced any new products for about 10 years."
Still beset by turf wars, secrecy, complacency and a bloated innovation-killing corporate bureaucracy, Maeda and other Sony refugees insist their former employer is in dire straits and Stringer, who is 69, is running out of time to deliver on his promise of reinventing the company.
Certainly Stringer can boast of his role in developing 3D film-making and the victory of the Sony-backed Blu-ray technology in the next generation format wars. But Sony, despite its iconic brand, remains out of step with the rest of the global technology world and its talent for crowd-pleasing innovation has largely evaporated.
A hacking scandal in April that exposed more than 100 million accounts on its online gaming network to possible data theft not only hurt its image but threatens an online strategy meant to unite a disparate corporation and could upset a carefully crafted succession plan for when Stringer steps down.
It wasn't so much the security breach itself but the delays in informing customers of the problem and Sony's subsequent inability to quickly close other weak spots vulnerable to hackers that has left a stain.
"Too big to succeed comes to mind," a former senior manager involved until recently with Sony's PlayStation game console told Reuters, declining to be identified because of the sensitivity of the comments. "I was at PlayStation, considered the most flexible of the Sony units, but ironically that was crippled by over-secretive IT security, a lack of a coherent management structure and a lot of deadwood at the top. It was harder to work across Sony units than to work with outside partners," he said.
It isn't only former insiders who see the magnitude of the problems.
A procession of top executives at U.S. technology companies who spoke at a Reuters Global Technology Summit last week didn't mince their words when asked about Sony. Robert Glaser, chairman of Internet media software company RealNetworks Inc, likened Stringer's task of rehabilitating Sony to "introducing capitalism to a Soviet-bloc country after 50 years of communism."
The erosion of Sony's standing is a cautionary tale of what can happen to technology companies when innovators move on. Back when Sony, led by co-founder Akio Morita, launched the Walkman, it proved an inspiration to the founders of the then little known startup company: Apple Computers.
"Sony had the most incredibly well thought out products in the world. We wanted to be like that from day one," Steve Wozniak, Apple co-founder, told Reuters recently. At the time, "no other company in the world was the model for consumer electronics."
As Japan's seemingly unstoppable economy expanded through the 1980s, Sony remained the consumer electronics benchmark as Morita handed over the creative mantle to maverick Norio Ohga, a trained opera singer who caught the founder's attention by writing to complain about the quality of Sony's audio tapes.
Ohga, who died in April aged 81, is best remembered for convincing the world to give up vinyl in favor of CDs and for green-lighting one young executive's ploy to beat Nintendo at its own game with the PlayStation.
The serial successes, though, bred complacency. "If you had the Sony name on the back of your shirt you were fine, so they stopped thinking," Maeda says.
In 1989, the Japanese economic juggernaut stalled and the benchmark Nikkei index topped out just shy of 39,000, marking the start of an asset value slump that continues to sap Japan's economic vitality 22 years later. That same year, amid a frenetic Japanese pursuit of landmark overseas assets, Sony made its first big mistake.
The company bought Hollywood studio Columbia Pictures for $3.9 billion from the Coca Cola Company. It was a business and culture that Sony didn't fully understand and became a big distraction for management.
Five years later as Ohga handed Sony over to Nobuyuki Idei it was forced to write off $2.7 billion from the purchase after a string of costly box-office flops.
Seven years later, Apple's Steve Jobs, inspired by Sony's Walkman, launched the iPod digital player. It was a seminal event for Apple and a huge warning for Sony.
In one move, Apple ended Sony's dominance of the music player market and left little doubt that Sony was heading for a full blown crisis.
Back in 2000, Sony's market value had been more than seven times Apple's. Today, Sony's market value is only one eleventh of Apple's, and its share price is little changed from 1995 -- the year it launched the digital camcorder.
When Stringer was appointed Sony's Chairman and CEO in 2005 he was keen to show that he could revitalize the company's reputation for creativity. As a Welshman running a Japanese company, but who understood its corporate culture, he was seen as having a better chance of shaking it up than most.
After a bruising first year of heavy losses, he was anxious to kick off the annual management meeting at Tokyo's Grand Prince Hotel New Takanawa on an optimistic note. Stringer trotted out a group of what he claimed were the 50 brightest engineers that Sony had to show the 1,200-strong crowd of managers gathered in the ballroom.
"These are our future," Stringer boasted of the group of the cleanest, most well-composed assemblage of geeks, recalls one former Sony executive in attendance that morning.
They "were the equivalent of scrubbed, West Point recruits," he said in reference to a prestigious U.S. military academy. "No tattoos, no piercings, no 14-year-olds," the former Sony manager said. "I remember saying, 'We're so screwed.' No one in that group was going to say 'Why the fuck do we need a (computer) mouse.'"
Sony's problem, offers Hironobu Yokota, a procurement manager who left Sony in 1995 because "all the misfits had left," is that it has become ordinary, a condition he says is worsening.
"I have consulted for Sony several times since I left. Looking at it from the outside, it is basically getting worse and worse," explains Yokota.
Even the engineer Sony eventually picked to do battle with Apple is now among the Sony refugees, and has become one of its fiercest critics to boot.
Koichiro Tsujino, who spearheaded the development of Sony's Vaio laptop, left the company in 2006 and later headed up Google's Japanese unit before recently establishing his own cloud computing company. His last project at Sony had been to develop a rival to the iPod.
Tsujino blames much of his former employer's problems on failures of corporate governance and petty jealousies that he says crushed what had been a creative atmosphere much like that at Google now.
"The biggest difference between Google and Sony is that Google doesn't waver," says Tsujino.
"Japanese companies, including Sony, tend to waver. Sony is typical of this. That was how it was when I left. They start working on an Internet project, but when it doesn't work out they will drop it in a year," said Tsujino at his office in Tokyo.
Sony, he insists, needs someone like Ohga -- unafraid to be "absurd, irrational and outrageous."
As more Sonyites from the golden era depart, the only traces left behind of famed innovator Morita is the air of elitism, says Osamu Katayama, a business writer who in 2010 published a book "The Stringer Revolution: What has he changed at Sony."
Morita he explains tried to become a pillar of the Japanese establishment, his ambition to head the prestigious Keidanren business lobby. As a result "Sony has a very strong sense of being elite," says the author, who also dismisses Sony under Stringer as an "ordinary company."
"Somebody needs to change Sony. I thought Stringer would change things a bit more, but it seems there were limits to what he could do," says Katayama.
Sony could still find inspiration from its humble beginnings. "Nobody knows about the days when Sony was just a neighborhood workshop and nobody tries to retain that spirit as they do at Honda," Katayama says, noting that Honda, for instance, eschews memberships in the clubs of Japan's corporate elite, yet manages to retain the entrepreneurial spirit and atmosphere of a street corner workshop.
Honda still lets its engineers roam. It is renowned for giving them creative free rein to conduct fundamental research that may never end up as a product -- engineers have unraveled the genome of rice, experimented on cockroaches to see how they avoid collision and designed and built a small jet aircraft.
Google is known for having established similar creative time for its staff, while Jobs at Apple is known for keeping his core development team to a size where he can remember everyone's name.
HACKING EXPOSES WEAKNESSES
Stringer has sought to unleash creative juices by establishing partnerships between disconnected business units, a strategy he can claim has at least started to result in hybrid products such as Xperia Play -- everyone outside Sony refers to it as the PlayStation phone -- from handset operation Sony Ericcson.
The massive Internet security breach the company suffered in April is all the more difficult for the company to come to terms with because it risks hurting that strategy by damaging an online service that connected the dots.
"The PlayStation network and (entertainment platform) Qriocity were really intended to be a bridging and ecosystem approach, trying to tie together the TVs, the PlayStation, PSP, really tying in all of those devices together into a complete ecosystem," says Mark Harding, an analyst who follows Sony for U.S.-based investment company the Maxim Group.
"If people lose faith and trust in the security of a commerce platform or an ecosystem platform like that, it does do damage to the strategy," he added.
In the biggest-ever theft of data on record, hackers stole details from more than 100 million accounts of Sony's PlayStation Network and PC-based online gaming service as well as its Qriocity music service. It prompted outrage from users, 90 percent of whom are based in the United States and Europe, not just because the company closed the network down but because it waited a week to announce the breach.
Critics, including the hacker community and Wall Street analysts, laid the blame squarely on Sony, for going to war with hackers and programmers who have dared to crack the code in its systems.
In 2001, Sony threatened legal action against one owner of the Aibo, Sony's robot dog, after the owner posted software showing other owners how to make the Aibo dance. Earlier this year, it took George Hotz to court after the famed hacker, known for unlocking Apple's iPhone, cracked open the PlayStation 3 to let owners run their own software.
This contrasts with the behavior of many other major technology companies, who at least seek a partial accommodation with elements in the hacking community, and certainly don't go out of their way to make enemies.
The Internet breach sparked thousands of comments on the official PlayStation fan page on Facebook and on its blog, some of them from users who said they would switch to rival games networks, such as Xbox Live, a Microsoft Corp product.
Sony insists it wasn't too slow to admit the breach, although Sony watchers speculate that Sony may have been loath to admit it had been hit by hackers and wanted to play down the attack.
It took Stringer another two weeks before breaking his silence on the issue and then he unapologetically defended the delays, saying they weren't bad by corporate standards.
Speaking at a press roundtable last Tuesday, where he fed journalists breakfast on the 30th floor of Sony's New York headquarters to mark the sixth birthday of the PlayStation 3 games console, Stringer downplayed the breach, describing it as "hackers stealing games that were already free."
"You're telling me my week wasn't fast enough? We had to know what had been stolen rather than leaking information out piece by piece and panicking customers," he said.
The defiance didn't go down so well with some PlayStation customers. One blogger on website techdirt.com concluded: "CEO Howard Stringer apparently has come to the conclusion that there's still plenty of room for more foot in Sony's mouth."
To make matters worse, there were disclosures about three other problems with the security of Sony websites last week.
The company was forced to shut down a site it set up to help users affected by April's breach after it found what it called a "security hole."
Then, Internet security firm F-Secure disclosed that a hacked page on a Sony website in Thailand directed users to a fake site posing as an Italian credit card company. And, separately, Sony's So-Net unit that provides Internet service in Japan alerted customers that an intruder had broken into its system and stole virtual points worth $1,225 from account holders.
It all adds to the loss of appeal compared with Apple and other rivals.
Apple's suite of products -- from its iMac PCs, its iPod digital music players and content-providing iTunes stores, plus its wildly successful iPhone and iPad tablet computers -- have won legions of fans for their integration and sleek designs.
This is much less the case for Sony's Vaio computers, PlayStation games, Sony Ericsson mobile phones, MP3 players, Bravia televisions and trove of music and movies.
"The standard has to be, 'Where is the product I'm going to line up the night before to buy?'" says Steve Jacobs, a former vice president of broadband strategy and alliances at Sony Electronics in the United States, alluding to the throngs that wait hours and days ahead of Apple gadget launches.
Sony's stumbling is happening in a world where companies like Apple and Google are moving at an astonishing speed. "Sony has to change if it's to compete in that race," says Geoff Blaber, an analyst with UK-based technology research firm CCS Insight. "Sony is seeking to deliver content and services across multiple devices and platforms, but product groups and corporate structure is very, very fragmented compared to Apple."
Sony declined to make Stringer or another top executive available for interviews for this story.
Its head of corporate communications, Shiro Kambe, said in a statement the company "will continue to aim to capitalize on the unique strengths our rivals do not have - such as the broad deployment of our products globally and our diverse business line."
He said that a realignment in March and some other initiatives would "further integrate the full range of Sony's assets" and allow for the next phases of the company's growth and development.
Kambe also said that Sony's founding principles -- "creating an environment that stresses a spirit of freedom and open-mindedness, where employees could fully exercise their skills and abilities" -- was still true today. The company had unveiled numerous exciting products in the past few months, he added.
Most at risk of taking the blame for Sony's latest debacle is Stringer's right-hand man, Kazuo Hirai, who was anointed by Stringer in March to eventually carry the CEO baton.
"Since he is in charge of networks, he is the obvious candidate to take charge of sorting this out," Katayama said. "Of course, if he can't manage that the way up will be blocked."
For the moment, Hirai is getting gushing praise from Stringer. While he was being piped in through a video conferencing connection into the New York roundtable last Tuesday, Stringer described him as "very helpful and very demonstrative." Gamers, insisted Stringer, "like Kaz."
Yet it is difficult to think that Hirai won't have to take some of the blame, potentially damaging his chances of being the next CEO.
Stringer's next best choice, said an analyst who declined to be identified because of the sensitivity of the issue, could be Hiroshi Yoshioka. He is an executive, who along with Kunimasa Suzuki, Yoshihisa Ishida and Hirai, is a member of Sony's elite management team. Stringer refers to them as the four musketeers.
Yoshioka is an engineer by training and the executive who runs Sony's non-consumer businesses, including semiconductors, batteries and other key components. The analyst suggests he would have difficulty in struggling to unite Sony's non-cooperating units.
An alternative figure who may play a key role is George Bailey. Stringer hired the former IBM technology guru in 2009, for the newly created post of Chief Transformation Officer.
Bailey, who reports directly to Stringer, was brought in to help accelerate Sony's turnaround.
"While the groundbreaking iPod was only launched in October 2001, Jobs initially built a team, restructured the supply-chain and partnered with value-chain companies," CLSA analyst Atul Goyal said in a report comparing Sony and Apple. "Now, we believe it is Bailey's turn to do the same at Sony. We argue that Sony is just such a turnaround or transformation story."
Whoever follows Stringer to the top of Sony, pressure will be on the new boss to quickly exit from thin-margin or loss-making operations such as phones, televisions, and peripheral businesses, including financial services, analysts predict.
"I would be very focused on a narrow set of products," advises the CEO of web security company Symantec, Enrique Salem, also speaking at the Reuters Summit. "If you look at what happened at Sony over the last 15 years, they've diversified their portfolio and I would pick one or two things I wanted to spend all of my time on to make sure they are the very best in the market."
Another of Sony's options may be to seek closer cooperation with U.S. Internet giant Google.
Sony is already warming to Google's Android operating system -- notably partnering with the Internet search leader on Google TV. The U.S. company could help tie together the Japanese company's treasure trove of content and products with Google's software and innovation -- if that were to happen, industry watchers argue, Sony could then hope to take on Apple.
"It is now moving in the right direction but does not have the luxury of time that it had 10 years back," said CLSA's Goyal.
Whoever ends up running Japan's best known consumer electronics brand for the next 10 years should look to give its best people the space and flexibility to work and think freely, Apple co-founder Wozniak said.
"It's kind of like the liberal arts side of the company. The emotion, the heart has to be as strong as the brain and the engineering. Right now that doesn't really happen. Companies are all based on the money guys and who has done what before," he said.
For Stringer, the legacy he leaves may be that of the cost-cutter rather than the renaissance man he promised to be when he became the first foreigner to lead the Japanese company.
With Morita, Stringer shares a colorful past. Morita was the son of a soy sauce maker and a former Imperial army soldier. Stringer too served in the military, conscripted to fight in Vietnam after he arrived in the United States in 1964 with $100 he had earned as a truck driver after graduating from Oxford University.
Landing a job as a journalist at CBS after his discharge, he eventually went on to run the American broadcaster. He was knighted in 2000, an award he shares with Morita who was made an honorary knight in 1993.
Stringer, who is described on the company website as less of a numbers' guy than a creative leader, has had successes such as the Blu-ray optical discs victory over the alternative format HD-DVD. However, Sony under his watch has yet to find the game-changer able to wow consumers like an iPhone or an iPad.
Unlike Morita, remembered as the creative force behind the Walkman, Trinitron televisions and other hits that made his company a household name, or hands-on innovator Jobs, Stringer has been happy to let others show off the goods.
Jobs, a consummate salesman has personally launched Apple's most successful products over the past decade. Stringer on the other hand was not present at the launch of either of Sony's most important products of recent years, its new hand-held game device and the tablet computers it hopes can claim top spot behind Apple's iPad.
In the absence of any must-have gadget emerging from Sony's labs, Stringer has not been squeamish about cutting fat to lift the company's bottom line, a strategy that has delivered results for him throughout his career from CBS onwards.
"Stringer cut fixed costs especially for production sites, making Sony more resilient to stagnant revenue growth," said Yasuo Nakane, an analyst at Deutsche Securities in Tokyo. It has allowed him to keep pace with productivity improvements at rivals such as LG and Samsung.
Before taking over as CEO, Stringer had burnished his belt-tightening reputation by cutting $700 million in expenses at Sony's U.S. operations. More recently, in 2009, as Sony struggled during the post Lehman shock recession, he pared $3 billion more off Sony's costs by laying off 16,000 workers and halving the number of suppliers it uses to 1,200 companies.
Prudent management, however, isn't enough to lift the despair that has descended not just on Sony but on some other major companies in deflation-ravaged Japan since the bubble burst two decades ago.
In its May edition, Japan's Bungei Shunju, a widely read current affairs magazine, lamented the demise of Sony in a piece quoting an engineer who had left for a rival consumer electronics firm.
"It's obvious the days will never again come when we marveled at the quality of sound from a Sony FM radio, or the beauty of the images on a Trinitron TV, or the inspiration of the Walkman," the magazine said. "We shouldn't expect Sony to shine as it once did."
Pondering Sony's future again over his dumplings in Tokyo, Airboard creator Maeda is equally as glum. "I don't think Sony can change," he says. Not unless, he adds, "Sony has a leader like Steve Jobs."
(Additional reporting by Isabel Reynolds and Nathan Layne in Tokyo, Liana Baker in New York, Poornima Gupta in San Francisco and Jim Finkle in Boston)
(Editing by Martin Howell)