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Morningstar | We Cut Sony’s Fair Value Estimate to JPY 6,000 Because of the Headwind on Smartphone Business

As technologies and consumer preferences change quickly, it is generally difficult for consumer electronic companies to build up an economic moat that generates sustainable excess returns on capital. The replacement cycle of digital appliances is usually three to six years, but as most products are commoditized, it is hard for manufacturers to build an ecosystem that prevents customers from moving to different manufacturers.In fact, Sony’s profitability on electronics has been unstable over the years, while Pictures, Music, and financial services have been generating solid results. Exposed to intense competition with Asian manufacturers, Sony’s TV business generated operating losses for nine consecutive years and recorded asset impairments in fiscal 2012. The company was also forced to revise its growth strategy in smartphones and write off intangible assets in fiscal 2015 as a result. We praise Sony's recent efforts to restructure its electronics business and regain profitability, but we are still not confident that the firm as a whole qualifies for an economic moat.Meanwhile, we like Sony’s new challenges in its PlayStation business. In addition to the strong shipment momentum of the PlayStation 4, Sony is aggressively introducing various services, such as PS Plus (monthly subscription service), PS Vue (Internet television service), PS Now (cloud gaming service), and in particular, PlayStation VR (virtual reality service), which launched in October 2016. We believe these new services may deliver additional users to the PlayStation ecosystem. We are also interested in Sony’s strategy to introduce PlayStation 4 Pro, an enhanced version of the PS4. We believe this will contribute to lengthening the cycle of the current PlayStation generation and constitute an ecosystem that will help maintain existing users on the next-generation platform.