Wall Street Journal on Kutaragi and Sony
Sony Grooms Games Maverick For Next Level of Management
Mr. Kutaragi now wants to spread the game-business model to the rest of Sony, building powerful chips for a range of appliances that would handle entertainment piped into homes over a network. The vision could turn Sony into a company that tries to earn profits the way Intel and Microsoft do -- by building products based on proprietary chips and software.
Reproduced in the "More" without permission...
November 18, 2002
PAGE ONE
Sony Grooms Games Maverick For Next Level of Management
Ken Kutaragi Is Big on Vision, Leadership,
But Has a Harder Time Playing by the Rules
By ROBERT A. GUTH
Staff Reporter of THE WALL STREET JOURNAL
TOKYO -- Ken Kutaragi, the man who built Sony Corp.'s world-beating videogame business, took to the stage at a 1999 meeting of hundreds of Sony executives and called for a shake-up. "The old guys should step aside to make way for the young," Mr. Kutaragi declared. The audience was stunned.
Now, the king of the global games industry may be getting what he asked for.
Sony's chairman, Nobuyuki Idei, thinks Mr. Kutaragi might be the catalyst Sony needs as it struggles through an era of slowing growth and bruising battles with new rivals. Mr. Kutaragi's combative ways have earned him a reputation as Sony's No. 1 problem child. But he also has created one of Sony's most lucrative businesses ever, a unit that provides the bulk of the Japanese company's profit. Now, senior executives wonder, can the 52-year-old rebel be groomed to help lead the rest of Sony?
"If his [Mr. Kutaragi's] personal ego is stronger than his will to keep Sony prosperous, then he will fail," Mr. Idei muses in an interview. The question is "whether he can change, can be a god."
Most Japanese companies treat personnel decisions with Kremlin-like secrecy. But in a series of interviews, Sony executives provided rare insight into the tension brewing over the direction and leadership of their company. The story of Mr. Kutaragi's rise and the debate on his future offer a window into the huge challenges Sony faces and the core reason it remains one of the world's most successful companies: its unusual tolerance of dreamers, rebels and heretics.
Since it was founded in 1946, Sony has grown into an electronics and entertainment conglomerate that pumps out everything from personal computers to hit movies such as this year's "Spiderman." But a host of new technologies and the rise of aggressive competitors are eroding the profitability of Sony's core consumer-electronics unit -- responsible for 70% of its sales. Its music business is in the red amid an industrywide slide in compact-disk sales, and movies are maturing and don't promise much profit growth.
The challenges are raising calls that Sony needs new direction. That puts the spotlight on Mr. Kutaragi.
"Most people think Sony in 2010 will be a continuation of today's Sony. I don't think so," Mr. Idei says. "This is the time to think about ... the whole identity of Sony."
The Sony chairman, who says he wants Mr. Kutaragi to inject lessons learned in videogames into the rest of Sony, is pushing the games guru to take on a broader role. Mr. Idei in April quietly gave Mr. Kutaragi free access to Sony executive and board meetings world-wide; a bid to widen Mr. Kutaragi's perspective and ensure he is "judged by hundreds and thousands of people" within Sony, Mr. Idei says.
Next, Mr. Idei named the videogame czar to an elite committee that is mapping the future of Sony's overall electronics business. Sony insiders say these boosts in stature make Mr. Kutaragi a candidate to join the now three-man executive suite that runs the entire company.
The matter is far from settled. Sony isn't saying when the 65-year-old Mr. Idei might step down. Mr. Idei himself says he isn't sure if Mr. Kutaragi can be both a visionary -- as he has been -- and a statesman, as a top executive at Japan's most famous company must be. For now, Mr. Kutaragi says he isn't gunning for a bigger job. At the helm of Sony, "I would need to sacrifice myself endlessly for the coming years," he says. "My health would be ruined. Some people may find it interesting. But not me."
Maverick Culture
Mr. Kutaragi, though, would fit Sony's pattern. Sony venerates its mavericks, a culture inspired by late co-founder Masaru Ibuka, a puckish inventor who bet the franchise on long shots that turned into hits, such as the transistor radio and the Trinitron television. A maverick is traditionally tapped to lead the company, with the expectation that he'll shake things up. Mr. Idei, a marketing whiz, leaped more than 10 places in the executive rankings in 1995 when he was named president by Norio Ohga, who moved up from president to chairman. Mr. Ohga himself was a former opera singer whose hard-nosed ways irked colleagues but launched him to the top ranks in the early 1980s.
It was Mr. Kutaragi who pushed Sony into the risky videogame business with the original PlayStation game machine in the early 1990s. Later, he made a $2.5 billion bet on the PlayStation 2 console, a gamble that initially pummeled Sony's profits. Along the way, he spurned a partnership with Bill Gates, insulted colleagues and once sought to settle a strategy dispute by offering to arm-wrestle a fellow executive.
But he delivers. The unit he created and now runs as president, Sony Computer Entertainment Inc., had sales of nearly $10 billion in the year ended March 31, second only to the electronics division and larger than Sony's movie or music units. The games business posted a huge loss in 2000 but has bounced back, contributing 60% of Sony's operating profit of 135 billion yen ($1.12 billion) in the last fiscal year.
And it keeps growing. Industry-wide sales of game hardware and software around the globe this year could surpass $25 billion and, though estimates vary, are expected to grow at least 10% a year for several years. Combined annual sales of consoles and game software in the U.S. have already eclipsed movie box-office receipts.
That growth is one reason many industry executives believe the game machine will be a key weapon in an emerging battle among technology titans to control broadband entertainment in the home. Microsoft Corp., for one, plans to invest $2 billion over the next few years to field a challenger -- the Xbox game console -- to Sony's market-leading PlayStation 2.
The games unit "has the power to lead change and stimulate Sony," Mr. Kutaragi says. "My speed is much faster than theirs," he says of his colleagues. "I lead and lead and lead -- myself and Sony."
Mr. Kutaragi joined Sony in 1975, the year the modern videogame industry got its start with Atari Corp.'s hit tennis game "Pong." In the late 1980s, Mr. Kutaragi invented an innovative sound-processing chip that Sony sold to Nintendo Co., then the lord of videogames. After Nintendo abruptly canceled a project to build a game machine with Sony, Mr. Kutaragi mapped a plan for Sony to build its own console. Most Sony executives shot down the idea as too risky; Nintendo looked unbeatable. Mr. Kutaragi got the green light by appealing to another maverick, Sony's then-president Mr. Ohga, the opera singer.
To hedge his bet on the fiery Mr. Kutaragi, Mr. Ohga in 1993 created Sony Computer, as a joint venture between Sony and its publicly listed music company. Mr. Ohga also placed two trusted lieutenants above Mr. Kutaragi to look after him. They refereed a lot of disputes. When the head of Sony's U.S. games business grew fed up with Mr. Kutaragi's micromanagement, one of the executives, Shigeo Maruyama, penned the manager a sharp letter telling him to obey Mr. Kutaragi. The unit's founder, he wrote, was a "Michael Jackson" of the game world, quirky but creative.
Among the legendary stories of Mr. Kutaragi's feistiness is the time in 1995 he offered to arm-wrestle Bernie Stolar to decide whether to bow to the then-Sony executive's demand for a new PlayStation controller that would fit Americans' large hands. Today, both men laugh about the incident, and each claims victory. Mr. Stolar initially got his controller. But Mr. Kutaragi is quick to point out that he eventually got his way: In time he phased the controller out for the original smaller design.
The PlayStation came out in December 1994 and vaulted past Nintendo's machine as the best-selling game console. Already, Mr. Kutaragi was planning bigger things. Colleagues recall a chart Mr. Kutaragi prepared in the early 1990s that named a big future competitor: Microsoft. The prediction came at least five years before Microsoft conceived its game-machine plans.
As his unit's fortunes rose, so did Mr. Kutaragi's controversial profile. After Mr. Idei became Sony president in 1995, he decided to dissolve the joint venture and make the games business a unit of Sony's main company. Mr. Kutaragi rebelled but was overruled by the then-chairman, Mr. Ohga. Still, Mr. Kutaragi lashed out. In 1999, after his unit's absorption, he made the "old guys" remark. Mr. Idei says he remembers reading a magazine interview in which Mr. Kutaragi opined that Sony's headquarters had Alzheimer's disease. Mr. Kutaragi says now: "It's natural that kids will succeed parents and the new business will succeed the old business."
Meanwhile, he was planning the next PlayStation, code-naming it "Godzilla" for its graphics-processing power and ordering up semiconductors that were taking years to develop. With so much invested and no guarantee of success, Sony executives feared Mr. Kutaragi was getting in over his head. They thought he might need a partner.
Meeting With Microsoft
So Mr. Idei pushed Mr. Kutaragi to talk to Microsoft. In 1999, teams from Microsoft and Sony Computer discussed jointly developing an online videogame business. Mr. Kutaragi secretly flew in May of that year to Boeing Field in Seattle, where he met Microsoft Chairman Bill Gates, who dropped in from vacation via helicopter. The two met again in July at Microsoft's Redmond, Wash., headquarters. Microsoft and Mr. Kutaragi won't comment, but the companies soon ended their talks. Sony's Mr. Idei says he later told Mr. Gates: "I don't control Ken Kutaragi."
Sony was hurting. Profits were down in music, movies and electronics. Mr. Idei in April 2000 became chairman, tapping Kunitake Ando, an operations specialist, to succeed him as president and focus on shoring up the electronics group.
That month, days after Mr. Kutaragi shipped the PlayStation 2, Microsoft lobbed a bombshell: It announced its own game machine, dubbed the Xbox. Although the PlayStation 2 flew off store shelves, producing its chips proved difficult. In the summer of 2000, Sony poured money into fixing the problems, raising the investment for the PlayStation 2 to at least $2.5 billion. The glitches led Sony Computer to post a loss of 51 billion yen ($423.2 million) for the year ended March 2001, nearly plunging all of Sony into the red.
To many Sony executives, the problems were a sign Mr. Kutaragi had grown too powerful. "He should remember to be humble," said one executive in mid-2000.
In late 2000, in what insiders saw as a prelude to Mr. Kutaragi's ouster, Mr. Idei planned to dispatch Masayuki Nozoe, the former head of Sony's U.S. movie business, to be an executive at Sony Computer. But on Mr. Nozoe's first visit to Mr. Kutaragi's office the two quarreled, say several people familiar with the matter.
Mr. Nozoe was soon out. "I asked Yuki Nozoe to come back to Sony" from the games unit, Mr. Idei says. Mr. Nozoe won't comment other than to say he has good rapport with Mr. Kutaragi. Mr. Kutaragi says Sony Computer doesn't need Mr. Nozoe's movie-industry experience but adds that he did welcome aboard another Sony executive with strong manufacturing experience.
Gradually, the PlayStation 2 rallied as developers pumped out games for it, enticing gamers to upgrade to the powerful machine. Mr. Kutaragi's unit climbed back into the black last year and is on track to contribute most of Sony's profit for a second consecutive year. Despite the release of Microsoft's Xbox last year, Sony is capitalizing on its lead, solidifying its dominance of the global videogame industry. The company has a roughly 70% share of the market for new consoles while Nintendo and Microsoft battle for second place.
Vindicated, Mr. Kutaragi now wants to spread the game-business model to the rest of Sony, building powerful chips for a range of appliances that would handle entertainment piped into homes over a network. The vision could turn Sony into a company that tries to earn profits the way Intel and Microsoft do -- by building products based on proprietary chips and software.
That's a different direction from today. Under Mr. Idei and Sony President Mr. Ando, Sony has depended on its design savvy, brand name and marketing power to make hit products based on technologies other companies control, such as its Vaio brand of personal computers. But by sticking to that model, Mr. Kutaragi thinks Sony risks becoming a re-packager of others' technology, doomed to compete on price.
In principle, Sony executives agree with the Kutaragi vision. But some think he is overreaching. "Kutaragi is too much make-believe. I'm more realistic," says Mr. Ando.
There are signs, though, that Mr. Kutaragi is toning down his style. At a September meeting, he surprised one board member by shaking hands and chitchatting with Sony marketing managers. It "was like a politician working the room kissing babies," says the executive. "We are collaborating much better than in the old days," Mr. Kutaragi says of his relationship with headquarters.
Meanwhile, Mr. Kutaragi's success in games has put Sony on a treadmill that it can ill afford to hop off. To keep its lead in games, Sony, along with International Business Machines Corp. and Toshiba Corp., is developing a powerful new chip for its next game console, which could cost several billion dollars to make.
At a dinner this year with Toshiba executives, say people who were there, Mr. Kutaragi put the dynamic simply. The games business, he joked, "is taking over Sony."
Write to Robert A. Guth
