SONY

0:00 We keep biting off a lot in these episodes. Yeah, I mean you're telling the history of modern Japan. We need to do a like two year old company. We need another FTX soon. Where like literally enough days haven't passed for us to make the episode long. Yeah. Exactly. Who got the truth? Is it you, is it you, is it you Who got the truth now? Is it you, is it you, is it you Me down

0:28 Another story Welcome to Season 10, Episode 3 of Acquired, the podcast about great technology companies and the stories and playbooks behind them. I'm Ben Gilbert and I'm the co-founder and managing director of Seattle-based Pioneer Square Labs and our venture fund, PSL Ventures. And I'm David Rosenthal, and I'm an angel investor based. In San Francisco.

0:52 And we Are your hosts. Listeners, today we are telling the story of the company that Steve Jobs idolized modeled Apple Computer after. The Sony Corporation. literally modelled himself after you know the story, right, of the black turtlenecks and the

1:09 Sony connection. Enlighten us. Well, so the story goes That Steve.

1:16 Idolized Sony. Whenever to visit And Saw that there was a uniform. That Sony.

1:23 employees had. And he was like, That's a great idea. I want Apple to have a uniform. Where did you get that? Uniform. And so he brought it back. He like made a proposal to Apple and People are like N FW

1:36 And didn't the Sony employees have uniforms because Like clothing was scarce after World War Two. Yeah, I think that was part of the origin. So Steve decided okay, if Apple can't have a uniform I'm gonna have a uniform. And so he went to

1:50 Is A Miyaki the famous. Japan designer who had made the Sony uniform. And got him to make him. A hundred black turtlenecks. Amazing.

1:59 There's so much about our generation that we remember from Sony growing up that Trinitron TVs, disc mans with Advanced CD skip protection. Thirty seconds worth. you know, even more recently the excellent professional line of cameras that Sony makes and actually David and I are both recording on right now. As well as Sony headphones right now, right?

2:19 That's right. Yeah. But Sony goes so much deeper than that. And Also so much more broad than that today, expanding into a uh very special type of conglomerate.

2:30 David, did you know that they own a division that exclusively makes a tiny dog robot? I did know that. Do they still make that thing? Yeah, they do. You might say it's the Tesla bot of old. The precursor. You might say that, yes.

2:45 They are the second largest Japanese company by market cap behind only Toyota. They're the largest video game console company and the largest video game publisher in the world. They are the largest music publisher and the second largest record label, which for those of you who listen to the T Swift episode, you now know the difference. And they have the third largest Hollywood film studio on top of all of that.

3:10 So we have a wild story going all the way from World War Two to Spider Man to tell you here today. All right listeners. Now is a great time to talk about a new partner of ours here on Acquired, Lagora. The agentic operating system that is redefining how the world's best legal teams work. Yep. It's sort of obvious that AI is gonna completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Ligora took that insight and asked the question, What if you really built something with that power from the ground up for the legal industry?

3:47 So the founders did exactly what great founders do. operate with obsessive customer focus. They embedded inside a massive law firm. For months. They sat with the lawyers just watching how the work really gets done.

4:02 And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lagora's Bet Here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work. and do higher value work. And this means that the pie can grow even as each individual task takes less time. And they recently launched Lagora Agent, offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And Lagora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early Lagora numbers essentially speak for themselves. When they have a head to head pilot with their top competitor, they win seventy percent of the time. Lagora now has over a hundred thousand lawyers on the platform from twelve hundred legal teams in fifty countries.

5:07 And crazily, they went from one million to a hundred million in ARR. In about. Eighteen months.

5:14 Truly insane numbers. And that is the real test. Plenty of things demo well, but the question is whether a busy associate actually reach for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at Lagora.com slash acquired. And just tell'em that Ben and David sent you. Well we also want to tell you if you are new around here in these acquired parts, which many of you are, after uh a nice little uh growth spurt.

5:48 Thanks, Taylor. You should make it official and join the eleven thousand other smart folks at acquire.fm slash slack. We'll be discussing this episode, the blockbuster acquisition news of the day. Uh, and you can meet other awesome people in there. You also can get access to our second show, the Acquired LP show, by searching Acquired LP show in the podcast player of your choice.

6:12 Well David, without further ado. Take us in and listeners, please know this is not investment advice. Do your own research. David and I may or may not have investments in any of the things that we discuss, and this is for Informational and entertainment purposes only. We're gonna discuss.

6:27 Just about like every industry under the sun today. Oh my. Well First. We start. Back. In the summer of

6:38 Nineteen. Forty four. In the Tsukishima neighborhood of Tokyo. Yeah.

6:45 Japan. Right next to Toky. I think this is Right near where the fish market is, if you've ever been there. I believe.

6:54 I've never been to Japan. No way. Oh, you gotta go. We should do an acquired track. Totally should. Jenny and I went there on our honeymoon. It was so, so awesome. We did Kyoto, we did Tokyo. Oh it's wonderful. Oh, nice. So there, in the summer of nineteen forty four, obviously.

7:10 Most people are uh realizing right now there's quite a big worldwide thing happening in the summer of nineteen forty four. that Japan is intimately involved in that would be a world war. Two. There.

7:22 Two Engineers. are assigned to a military task force To create a heat seeking missile. Which is one of the desperate things that Japan is trying to do at this point.

7:35 to turn the tide of the war against the Allies, which They are losing. At that moment. Now Both of these two engineers are involved in the war effort pretty reluctantly.

7:48 Not only because they're not you know, these are not like military nationalist people. They I think Both of them probably believed it. The war was a terrible thing for everybody, and it certainly was. But they also were particularly not into the war because They're pretty certain that when uh you know

8:06 Pearl Harbor happened and Japan decided to pick a fight with America, that that was a really, really, really bad idea. Because They're technologists and they know that America has The best technology in the world at this point in time.

8:20 Yeah, listeners, David and I both read a couple books to prep for this, but one of them is The Excellent Made in Japan. co-written by Akio Marita himself, who we were about to introduce here, and he talks about this a lot, where he's really idolizing the technology and the innovation. coming out of the US and sort of knows from reading everything that he possibly can get his hands on. And I know this is a very US centric view and a very US centric thing for me to be Proud of the Mm.

8:47 For lack of a better term, but it really is like, Oh, we should not get in a fight with people that are that good and that far ahead and they're You know. Technology revolution. Yeah. I went in and looked up Population statistics from the World War Two era.

9:02 And Japan had about seventy million citizens before World War Two. The US only had about a hundred and thirty million. So like yes, America was bigger, but not like Way bigger. Oh, we should not pick a fight with America'cause they just have so many more people. I mean Heck, they picked a fight with China, who has a lot more people. Uh but no, it was specifically that The technology was just

9:23 So much farther advanced in America than anywhere anywhere else in the world, especially Japan at the time. Yep. So You referenced. Akio Marita, he is.

9:32 one of the two engineers, but he's the junior engineer working on this project. The Senior. Engineer. a man who's thirteen years older than him is a man named

9:43 Masaru Ibuka. And he is a Prototypical. Engineer is engineer. Like this guy. loves technology.

9:52 I can't remember if it was Marita or somebody else in one of the Books I was reading lovingly referred to him as a dreamer. Yeah, it's so right that Marita, while he does have a physics background and he's definitely a engineer, it is right to say that Ibuka is the engineer's engineer and Akyo has much more of a sort of marketing sensibility and while he invents a lot of these technologies and sort of understands it, he's the business side. You might say that Ibuka is like the Waz.

10:20 And Accio and Marita is like the jobs. That's a great comparison. Yes. So you might. Loves technology and particularly He is fascinated at this point in time.

10:32 Bye. Radio. And all of the applications of radio. This was like one of if not the major technological paradigm of the Twenties, thirties, forties.

10:43 And Due to his proficiency In Radio. When the war started

10:49 the military and the Japanese government. made shortwave radios illegal in Japan. Now this is also paradoxical. I've learned all this. Did you know that um Short wave radios are actually long distance. Transmission. I did. When I was a kid, my dad and I used to try and pick up short wave coming over the ocean. And you could only do it I think at night because there was less electromagnetic interference from the sun or something like that. Yeah. But

11:17 Isn't the spirit here of doing this so that consumers can't listen in on I don't know if it was the Allies signals or the Japanese military plan. Exactly. I think a lot of governments did this during World War Two, but certainly The Japanese government. They didn't want their citizens listening to Propaganda from The allies are other countries, which of course, you know, the Americans and others were broadcasting all around the world. If you're gonna listen to propaganda, it has to be our propaganda.

11:44 So they literally made it illegal. Two sell, buy any shortwave capable radios that consumers had. They had to take out components that received short waves. I think a lot of it was the government officials who were coming around to modify the radios were just clipping wires. Like some of it was modifying components removing it, but other ones they just go in and be like, Oh yeah, they're just

12:06 Abuka, though. He just is like all right, sure, whatever, you can clip as many wire uh my wires as you want. I'm just gonna keep making my own shortwave radio. So he knows Through that he can listen to uh transmissions from the Allies and others and he knows that Despite what the government is saying in nineteen forty four.

12:22 The war is not going well for Japan. When we say radios, the thing to picture listeners is like Reasonably large. High power

12:31 not portable radios that use vacuum tubes. Is an appliance to have a radio at this point in history. So okay, so that's a book gun. The other engineer, of course, is Akio Marita. It's pretty amazing that he finds himself here. in this place in this moment.

12:46 Because He is The eldest son of the fifteenth generation of the Morita family Yeah.

12:58 Which is the family that controls one of the largest Saki empires in Japan. And literally for four hundred years, his family has been running this business and And is one of the most prominent families in Japan in the province of Nagoya. Like, it's not just that they run this business, they like Kind of.

13:17 Run like The area. I mean there are old companies and then there are Japanese old companies. Yes. I don't think there is a family business. in the US.

13:29 That is as old as this company either in terms of generation or years. The US isn't four hundred years old. Yes, exactly. And I mean and part of it is like, you know, there are umbrella shops in London older than our country. But Yes, the Japanese in particular Japanese sort of family businesses think on a ten X timeline to the way that we sort of think about them in the US. And the way it works is that the oldest son of each generation, they literally have to change their name to Kayu Zemon.

13:59 when they take over the business and then they become like the head of the family and the head of the business. And so Akyo Is he's destined. Like though he's born into this that he's And of course, it's always a little bit of a point of tension with the family where Akio is taking apart radios and like building stuff, and everyone's sort of looking at him like

14:21 Boy, you sure are interested in physics for someone who is one hundred percent going to take over our sake and soy paste business at some point. Yep. But at age six He starts going to business meetings with his father, and then at age ten, He starts attending all board meetings of the business.

14:38 So he gets a real business education alongside his interest in engineering and electronics and tinkering. But unlike his father, you know, it A kids growing up in the twenties and thirties. They're a wealthy family. They're getting all this American technology into the house. They're getting American radios for Marita. the big moment was when they got an American phonograph and records.

15:00 And he just like fell in love with this and listening to the music and understanding how this worked. And so when it Comes time when he reaches high school age, this is before the war. He Asks his father.

15:13 to sort of ceremoniously release him from his duty at his destiny to take over the business. Which his father does and by all accounts is very like understanding about this, shockingly so. And Marita goes off to study. Physics and engineering instead of

15:31 Going right into the family business. So There's no way I think he or anybody else could have foreseen this, but I have to imagine that like that very likely saved his life. Yeah.

15:42 Because when Pearl Harbor happens in nineteen forty one Akyo is twenty years old. So like if he hadn't gone into Engineering and studied physics.

15:53 Well what he is able to do is Is he able to join the Navy as an engineering researcher. and get assigned to work on technology weapons research projects like he ultimately does from the lab. From the lab. If he hadn't done that, he probably would have gotten Stuck on a boat and very, very high chance that he would have been killed.

16:13 I think they even say either in the Sony book by John Nathan or in Akeo Marita's book that his younger brothers were actively sort of training to be kamikaze pilots. Like that. would have been his future. Yes.

16:29 There is still quite a high price, though. That's the thing. Marita has to pay. for landing in this relatively Plum and safe assignment.

16:39 He has to sign up. for lifetime employment. With the Navy. as an engineering researcher. In order.

16:47 But A he feels like he has no choice and B he loves engineering and loves research. So okay. Yeah. That's what I want to do. Now we fast forward to

16:57 August fifteenth. Nineteen forty five. The US In the week prior has just dropped. Two atomic bombs on Hiroshima and Nagasaki.

17:07 The reaction that Merita has, he writes this, this is literally the opening paragraph to the book to Made in Japan. Quote, I was having lunch with my Navy colleagues when the incredible news of the atomic bombing of Hiroshima arrived. The information was sketchy. We were not even told what kind of bomb had been dropped. But as a technical officer just out of college with a degree in physics, I understood what the bomb was and what it meant to Japan and to me.

17:32 The future had never been more uncertain. Japan had never lost a war. And only a young man could be optimistic. Yet I had confidence in myself and my future. Even then. Wow. Wow. There's also this fascinating thing where he sort of knows a secret the next day after the bomb has been dropped when he hears about it and hears first party accounts of it.

17:52 He knows exactly what it is. And I think if I'm remembering right, he thought the US was working on an atomic bomb, but was sort of like years behind where they were. And once he hears this report, he sort of knows a thing that the rest of the Japanese public doesn't. And so he sort of gets to decide, well, okay, how am I going to spend my next few days

18:12 knowing what I know, even though the government isn't sharing it widely yet. Yeah, and there's a whole story That I didn't put in the notes here, but is in the book. Everybody should go read the book. It's it's really, really great. It's the shoe dog of the eighties, truly. It is, it is, in many ways. But He goes home to his family at that point in time and uh

18:32 He's worried that The military's gonna order all officers to uh Commit suicide rather than Surrender. In a part of the surrender, yeah. Yeah, and so he tells all his colleagues when he goes home, he's like, Look

18:45 What this means, this bomb, like don't don't do that. Like it's over. It's Over. Oh, and he says, depending on what the orders are, I may not come back and rejoin you. Yeah. You can see what a cowboy he is already. I mean, the classic imperial Japanese response there would be it is my duty come back and

19:04 perform whatever ritual we are all performing as ordered by the Emperor together. And what he's doing is looking around and saying Guys, I don't think there's a regime here anymore. Like I think it's everybody figure it out and go care for your families and You know, the allies are gonna be here soon and let's hope they're benevolent to us. Yeah. So

19:23 Anyway, it said August fifteenth. W that that's not when the bombs are dropped. What happens on August fifteenth? That is fine. The Emperor. Goes on the radio. in Japan and announces that Japan is surrendering and asks, you know, everybody to surrender and

19:38 This is amazing. The Emperor going on the radio. the vast, vast, vast majority of Japanese throughout all of history had never heard the emperor's voice. So the aftermath is awful. There are two and a half to three million people dead in the war, both soldiers and civilians.

19:57 By contrast, less than five hundred thousand Americans died in the war. So it's pretty bad. And outside of just Hiroshima and Nagasaki, which You know, it's just so Awful. I mean the darkest moment in human history what happened there.

20:11 Or among the darkest anyways. even in Tokyo and all these other cities, they're destroyed. I mean they got firebombed. Over and over and over again. I think it's something like half of

20:22 All Japanese urban citizens, even in Tokyo, are homeless. Yes, forty seven percent. of Tokyo's citizens are homeless at this point. the per capita income in the country the next year in nineteen forty six, the first year after the war. is seventeen dollars.

20:38 You can inflation adjust all you want. You are not going to make that a meaningful number. It's unreal. And the country is just transformed, like the Japan is banned from having a military ever again. There's occupation forces that are running the government. The imperial Dynasty is at a minimum not what it was before.

20:56 So Marita goes back home to Nagoya. Abuka? Goes right. Back to Tokyo. The research project had. been evacuated out of Tokyo before the end of the war as the bombings really started in Tokyo.

21:08 But he goes right back to Tokyo. Amidst all this. And what does he do? He found a company. He's like, and you know, I think part of his vision, Marita would contribute to this too, but I think Abuka really saw. a huge opportunity after the war in that all this technology

21:27 Yeah. Had been Focused on military and industrial use, but primarily military use. you know, around the world and in Japan. Japan doesn't have a military anymore.

21:37 Like you can't focus technology development on the military. The only thing you can do with technology, the only market you can serve. Is the consumer market. This is the moment where we realize that Ibuka is truly an irrational optimist. the national tenor couldn't be more bleak and yet

21:54 Ibuka is like, let's start a company. Yeah, let's start it here in this completely war torn, bombed out old building. Sure, let's do it and let's serve a market of people that have no disposable income. And half of them don't even have homes. Unbelievable.

22:08 So he creates a founding prospectus. For the company. Which starts out. That the purpose is to quote, Establish a stable workplace where engineers could work to their heart's content

22:19 in full consciousness of their joy in technology And their social obligation. This question well, what what is he gonna name the company? He, of course. comes up with brilliant names, don't he know. He names it. The Tokyo Telecommunications Research

22:35 Institute. Befitting of his goals. Yeah. Sounds like something founded by a former military academic. Yes.

22:43 So he's founded this company, he's assembled a few engineers, he wants it to be a haven to work on their joy in technology and social obligation. There's just one question, which is What Products are they gonna make.

22:55 Which is not a part of the founding prospectus. That's the best thing. It's like, oh no, we don't have an idea. There's nothing in it. We have a lot of engineers. We just wanna like have a place where engineers can be engineers. Yes. So the first thing they try is a rice cooker. An electric rice cooker. They can't get it to work. The next thing they try is uh Electric heating blanket? That Also doesn't work for

23:16 Various reasons. And then finally they get the brilliant idea. Obvious. If only they've been listening to our episode here, we've been alluding to it all along. That they should just fix the damn radios that everybody has in Japan. It's like sure it may be a services business, but if you can just open up for business and let people bring in their radios and you can modify'em to make'em

23:36 Unclipped at the very least for the easy low hanging fruit. That seems like a business. People want not only news that people are desperate for at this moment in time. But they also want entertainment. You know, as bad as things are, people want something to, you know, remind them of a better time and and a better future. So

23:55 They start doing this. And things go well. Go well enough, but they actually get Little write up. In a national.

24:03 Newspaper. at the time about the service that they're offering and I don't know how high quality their work is. I doubled down on service there. I think eventually they do come out with products too that people can sort of like

24:15 modify their radios by attaching this product and it turns into a shortwave. uh antenna or something like that. Yes. Who reads? This article.

24:26 But Accio Marita. Who's back home in Nagoya. He reads it and he's like Buka, he's created a company, he's created this haven for engineers. I would

24:37 Kill to work with him again. So he writes Abuka and says that he wants to Come to Tokyo. End quote, be of service.

24:45 to him in the company. What does he mean? Why does he say be of service? Well one, he sort of figured that, you know, money was tight then in the the new company might not have enough money to employ him. But the bigger problem was

24:58 It's pretty unclear what the status of uh Marita's um obligations are at this point in time. Remember he signed a lifetime employment agreement with the Imperial Navy. Which May or may not exist anymore. Probably not.

25:14 It's unclear. Not to mention so there are like twenty engineers at the company already, and even though they really can't make much money doing much of anything. So the company is like kind of established. So even though Akiya's like, Hey, remember when it was sort of you and I working on this thing together?

25:31 I'm reading between the lines a little bit, but I think he's a little bit like Searching for signal on does Ibuko want me? Like you assembled a team of twenty and reach out to me? Yeah. So It sort of never comes up again. There

25:48 Thick as Thieves, you know, forever after this, but is sort of interesting to me that Aquio Marita was not one of the first fifteen twenty people. at the company. Yeah.

25:58 You're right. Nobody really like knows why the Speculation in some of the books and things I read or just that Ibuka really is just kind of a dreamer and like he just might not have thought about Marita, but once Marita writes him, he's like, Oh yes. I definitely want you here. Yep.

26:15 The company, by the way, if you go to Sony's website, they have meticulously maintained corporate archives, and if you go and r request them, they will like I don't know if it is anyone or if it's just journalists or whoever special guests but like They have this stuff preserved and can sort of like bring it out to you with gloves and let you read the founding prospectus. They've maintained this stuff for, you know, seventy plus years. Yeah.

26:37 Oh, we should go do that someday. Yeah. Okay, so what does Marita do? He finagles an assignment. In the military quote unquote to get a teaching assignment.

26:47 at a university in Tokyo, still sort of through his original Contract employment agreement. But he knows what's about to happen. Which is that the occupation government is about to decree that Everybody who was previously in the military

27:02 needs to be purged. out of government, but also out of education. Which is totally fascinating, right? This idea that where if you're the occupation government that's sort of like Helping the country heal. You know, you're there to make sure that it doesn't break into war again and that, you know, after you drop atomic bombs on this country, that you're sort of like helping them rebuild. you sort of make this decision, which is fascinating that hey, we don't want

27:26 Soldiers. educating the next generation. We want the next generation to grow up in a completely detached way from the mindset of those who waged war. It's just so hard to imagine like what life was like and through those events. We have been very fortunate in the place or and time that we have grown up, for sure. Totally. So anyway, it it works. The strategy works for Marita. He

27:49 Gets Purged, quote unquote, uh from his job and he's uh Uh free agent again. Or Sort of a free agent. I just have Taylor Swift on my mind and her story because of our recent episode. But literally what happens next

28:02 Is like a big machine moment. Marita and Abuka, they want to join up. He wants to go work at the company, but Now that he's been released from his lifetime. Contract with the Navy.

28:13 It's unclear if he actually needs to go back to the family business or not. Like he had been released from the family business to go to the navy. But now He feels like he needs to go back to his father and get his father's Permission once again.

28:27 To leave the family. They also need some money, some capital in this uh new company that they're sort of restarting together. You can tell that this is very important to Abuka because Abuka goes to the family dinner with Akyo. Yes. So they both get on the train, they go to Nagoya, they go have you know family dinner, they ask for Akiya's father's blessing for him to become partners with Abuka in this new venture. They get the blessing.

28:56 And A hundred and ninety thousand yen investment. In The new. Startup company.

29:03 And over the next couple years the Marita family would put a little more money and eventually own Seventeen percent of the company. I don't have the exact dates here, but even by like the you know early two thousands, the Marita family

29:19 Still, I believe owned about ten percent of Sony. Yes, as of nineteen ninety nine, the family controls a ten percent share, which at the time was worth roughly five billion dollars. The question is what's worth more the Maridasaki Empire or the ten percent stake in Sony? The ten percent stake in Sony. Well it depends what years you're talking about here. That's true. That's a very good point. Ton yeah, Sony had some dark years in the future.

29:45 Okay. So they're now in business together. Poised for the races. But they're still You know, doing this radio repair and add on and modifying business. You know, that's great, but that's not like um It's a service business. Uh it's a add on business at best.

30:01 So they're looking for a real product to make. In nineteen forty nine, shortly after this, Abuka gets a chance to see. An American Tape recorder.

30:11 Machine. And he's enraptured by this. This is new technology. by the leading manufacturer. I don't know if they actually manufactured this machine that The book I got to see is the company Apex.

30:23 In the US, they make the machines. And the way the industry structure works is they obviously have a great business, but they don't make the tape. Three M? Is the leading

30:34 Manufacturer of tape for tape recorders. Which is the Minnesota Mining and Manufacturing Corporation. Yes. Both of these companies are Making. Huge amounts of profit on this.

30:47 New technology. So Ibuka comes back and is like Accio W see in the future, we gotta make this and Marita. understands a little bit about these business dynamics and he's like, Yes. We should do this. We should make these tape recorders for Japan.

31:03 And we should also make the tape. Yeah, if we're doing it, we better be doing both. The other thing to when you're picturing this, again, I'm gonna keep resetting us because everything's gotten so miniaturized and componentized over the years. When we say tape recorder

31:18 Picture something about the size of like a small table. And this is not a cassette tape recorder. This is real to real. And it is again a hefty, hefty piece of machinery primarily for recording. Also for playback, but a huge piece of the value is the recording component. Yep, and it's all audio.

31:37 At this point. Yeah. So Through some of the Family connections both from Marita and Ibuka's father in law had been a

31:47 minister and the government before the war. They start making these tape recorders. And there are all sorts of stories about how they do it because like metals are hard to come by in Japan and plastics are hard to come by in Japan at this point in time, just after the war. The legend has that literally the first tape that they were making, they were like frying metals in a frying pan in the factory. And that was to make the like magnetic coding that would go over them that you would then actually r record on. I think they were trying to use

32:16 What was the material? Like a saran wrap type material for the tape because it was hard to come by Plastic. And so it obviously would like stretch out and so the audio would get all distorted and sound terrible on the second playback. Once they get the product right. They're able to get first into the court system.

32:35 in Japan, they sort of start replacing stenographers, which were in Short labor supply after the war. At this point in time the company is known as the Tokyo Telecommunications Engineering Corporation. T T E C with their Tape recorders.

32:49 So they build a pretty sizable business in the Japanese market making these. And again this starts so counter to the lean startup methodology. There is no job to be done. when they start this, they kind of get lucky in finding their way

33:05 to the stenographers and the court reporters as A market. They initially go out to sell this thing and people are like Whoa, why would I pay so much money for that thing? No one has any money. And it's like a a little bit of an accident of history, they actually found a use case for it.

33:19 Totally. Yeah, I believe the first product cost a hundred and sixty thousand yen. Mm. recorder. You basically gotta be selling to the government at that point in time. Right. I don't know how to think about that in terms of the dollars then or dollars now, but it's thousands and thousands of dollars.

33:36 Yeah. Well the Marita family's initial investment in Sony was a hundred and ninety thousand yen. And now they're selling their first product for a hundred and sixty thousand yen. Okay. So that at least gives you some context. Yeah.

33:49 Okay. So this goes along for a couple years. They're building up the company. And then The big Big.

33:57 Okay. In nineteen fifty two. Kabuka. Here's the thing. That

34:04 The World. Famous, renowned. Institution. That everybody respects.

34:11 And especially nobody more Then Ibuka and Marita. In Japan. Bell Labs. that the then parent company of Bell Labs, which is a company called West Electric Electric, yeah.

34:24 Uh it went through a whole bunch of owners and it was all related to ATT and the various Entities as part of that. The day we're going to Open up.

34:34 The transistor. for international licensing. And of course they had Created the transistor in Bell Labs that they were gonna license the technology. internationally.

34:44 And we talked with the NZS guys about this, but you know, the invention of transistors and semiconductors, like this stuff is so divergent. I mean, especially then we once we get to the integrated circuit, it's so wildly different. Then the path that technology was already on. that it was kind of unlikely that like anybody else toiling in a lab was gonna independently find their way to it.

35:05 at the same time. So once this thing gets invented And All these brand new use cases sort of emerge, the opportunity to license that technology and use it to commercially make products in your country, that's huge. Keep in mind what we are saying.

35:19 for the last few minutes here about the size of these various, you know. technology quote unquote products that were being used, you know, the radios that were the size of console tables and tape recorders the size of nightstands. So The transistor is available. for license and book as like

35:36 This is it. Just like when he saw the tape recorder, just like when he got obsessed with radios before, he's like This, this, this, this, we gotta do this. And Marita's like, okay. So Marita goes off. To New York. This is I believe in nineteen fifty three.

35:51 and negotiates a deal. It ends up taking about a year to finalize this. But negotiates A license. From Western Electric Bell Labs. To use the transistor.

36:03 And Uh Bell Labs guys are like well. What what are you gonna do with it? And A book game reader, like We're gonna make

36:12 miniature radios with the transistor. And they're like no c guys, you can't do that. Like where you like Th this stuff's still done with germanium at this point. You can't get enough power in this to really power a a radio that would actually work. Like we think the market application that makes sense here is hearing aids. Oh yeah. Hearing aids, that's right. And

36:32 Ebuka and and Marita are like, uh, well, no, the hearing aid market in Japan will not be a viable one for us. In fact, I think there's a cultural issue where it's perceived as like weakness to be hard of hearing. They knew for lots of reasons that There was no chance that they could build a big company, uh, a big product, making hearing aids. So they're sort of like betting the farm here on we are going to be able to figure out how to. dope these transistors or you know use a different material or something in order to make it viable to create a radio. They're nothing if not confident. And so Bell Labs is like

37:03 All right, well good luck, guys. It takes two years, but two years later. In August of nineteen fifty five. T T E C Releases. They're first.

37:14 Transistic radio. Product. The T R Fifty five. portable radio. Now this was actually not

37:24 the first transistor radio in the world. A American company called Regency had worked with T I to make a transistor radio in the US. So like the the labs TI like the rivalry. Uh so TI and Regency Had actually come out with a portable transistor radio slightly earlier in the US, but for whatever reason

37:45 They didn't invest a lot in the product and it never like became a big. Thing for them. Sony seem to be Sony, is all in.

37:55 On this idea of like If we can shrink this down, people can take it with them. It can be portable. It's be great. So leading up to the release, they know that like this is gonna be our big consumer product. Uh Tokyo Telecommunications Engineering Corp doesn't really just like Roll off the tongue anywhere, and especially not in English or you know, other markets around the world where ultimately we want to be selling products all around the world.

38:20 Uh so like we need we need a new name. They literally start going through the dictionary looking for New names and eventually they come across The Latin word is Sonas.

38:34 And they're like Well that's interesting. That sounds interesting. It means sound. It sounds cool. Yep. What do we do? We make technology focused on sound. Well, maybe we could do something with that.

38:47 And at the same time. This is like such a funny cultural quirk. I think that this is because like after The occupation after the war. You know, there are lots of American GIs. Yeah, it was uh Sunny Boy was being used a lot. And you could sort of hear a lot of young people uh out in the streets in the neighborhood saying Sunny Boy.

39:07 And He sort of wanted something that would represent a product for young people. And so the idea of naming it something that kinda sounds like Sunny or Sunny Boy.

39:18 would sort of appeal and so wanted to merge this powerful sonus With Sunny boy. It's such a great name. And the other thing they do is uh I think from the beginning It's stylized as all capital letters.

39:31 There's one logo before that they very quickly dump, but there's then four or five iterations. It looks very much like when you know you should change your logo to update it, but you also think it's pretty much perfect. Like that is exactly what the Sony logo evolution over time represents. I love it. It's so good. It's such a Brilliant. Like it works in every language.

39:54 every culture around the world and it really becomes, you know, synonymous with Innovation for Decades. So They

40:03 Release. The T R fifty five. It goes well, but it's a first generation product. It sells well in Japan. They keep working on it, they keep refining it, they keep wanting to get it smaller. Buka has this vision of He wants to.

40:16 A truly pocketable. radio, a radio that you can fit in your shirt pocket. And take with you, walk around, have with you all the time. Very, very personal device. By the way, we should say I'm pretty sure they don't have headphones at this point. The radio is getting smaller, but still a radio with speakers. Yes, exactly. I think a lot of people do this, just walk around with like their phones playing music on speaker and Oh yes. People do do that. This is where it starts, especially on hikes in the woods. So two years later, they come out with the next version of the product, the T R sixty three.

40:49 And This thing is a monster. So Ibuka has this vision of fitting in the shirt pocket. It's just slightly larger than a standard like man's dress shirt pocket. So he and Marita really want this to be the narrative. So they outfit their sales force. They have They have the Sony Salesforce that sells the products to you know the distributors and the retailers.

41:11 They Get special custom shirts for all of them with a slightly larger than standard pocket so that they can demonstrate putting the radio in the pocket. It's amazing. Again, the Steve Jobs parallel, like the showmanship of that, you know, it's like the MacBook Air in the envelope. Totally. So consumers go

41:29 Nuts for this. First in Japan, where they launch it first. Ultimately the TR sixty three ends up selling one point five million units. Uh Twenty five dollars each.

41:41 Which is I don't actually don't have any financial data on like the scale of the Certainly not the radio repair business, but the tape recorder business, but suffice to say that this is orders of magnitude larger than the Tape recorder business. Right. They've got a real corporation on their hands now. Yep.

41:58 The company grows to twelve hundred employees, the newly named Sony Corporation. And of course like the big thing that they want to do. Four. Many reasons, not the least of which that America is

42:11 the largest consumer market in the world at this point. They want to bring the product too. America. So Marita. Comes back over to

42:18 The US and starts talking with Distributors about. Hey, we've got this amazing. Transistor radio, like We know consumers love it, we're pretty sure Americans are gonna love it too.

42:30 And He uh connects with the Balova watch company. Which I hadn't heard of it. The brand still exists today. Ironically, the Belova watch brand is owned

42:42 I believe by citizen watches, which I believe is a Japanese company. But at the time it was an American watch brand. And they're like Yeah, this is pretty great. We wanna place an order for a hundred thousand units. That we're gonna

42:58 Bring over to America and sell through our channels. I mean that's like huge. Marina's like, am I hu Sorry, what? How how many? We what uh uh how on earth are we gonna make that many? Yeah. That is a huge, huge order. And below it's like well. Yes, we want that many, but there's just you know, the thing is like naturally

43:20 We're gonna Be this big business for you. We We want it to be the Balova. T R sixty three. We want to put our

43:28 Brand name on it. And I think Marita would later say that this was the single like biggest and best. business decision of his career. He turns them down.

43:39 And says Nope. You can sell the Sony TR sixty three or you can sell nothing. It is Really brilliant. I mean it is a mark of what was to come and also something that

43:52 truly define the company because company culture and company values don't mean anything until they're tested. And when I I don't think he used the phrase direct to consumer, but w when they sort of decided they wanted to be a direct to consumer company That's cute and all until someone offers you a big pile of money to

44:11 you know, be a white label OEM product. But I think when you really test it and when it comes out is when he says, Nope, we refuse this order. I'm gonna keep making Apple parallels, by the way. As much as we like to hold up Steve Jobs, he did come out with the HP iPod.

44:27 Oh, that's right. Oh my goodness, I forgot about that. There was that like iTunes phone that was actually a Motorola phone that was a piece of the phone. Yeah. The Moto Rocker. That's right. But the HP iPod truly was just an iPod with an H P logo on the back. Did it have any special colors or anything? I remember I had the U two iPod that was black and red. That thing was awesome. That was cool. I had that too. Yeah. 'Cause that was I think that was pre dated product red, but would sort of become product red. Yep. I think that's right. So

44:58 Ultimately What that leads to is a couple years later Marita and Sony decide we need to establish our own corporation in America so that we don't have to work with distributors. We can just directly have

45:11 A Sony. operation in America. So they start the Sony Corporation of America in nineteen sixty and Marita actually moves to New York City. Originally the intent was he and his family were gonna be there for two years. And set up.

45:24 Sony Corporation of America. It ultimately ends up being I think about one year because his father passes away and he has to go back. to Nagoya. Uh ultimately his younger brother would take over the family and the business. It is interesting how I think his US license plate when he moved here was Was

45:41 A K M. which is the sort of hint that he did always think about himself as the Cayuseman of the family. It was AKM fifteen. Oh, the fifth right, because he's fifteenth generation. The fifteenth generation. Yep. Yep. This also, by the way, the move to the US is a thing that sets him apart versus his peers. Other Japanese CEOs were not

46:05 really willing to move to the US. And it was a very un Japanese thing to do to say, I want to do business in the US so bad that I will move my family and become a part of this culture to do that. That It just wasn't done. But it really sets up. the business relations between Sony and US corporations and and Overall like the business environment in Japan and

46:24 America. I don't think there was any other company. Maybe has never been any other company except Softbank that like Bridges. The two. Like there are

46:33 American executives. In Sony? At one point one of them becomes the CEO of Sony, Howard Stringer. I don't think that happens in any other Japanese corporations. both the American Japanese bridge and

46:45 The Sort of. pure focus on the Japanese economy. If you think about what Sony did for Japan as a nation. Were unprecedented. I think the most telling quote of all is when

46:57 Akio Marita passes away many, many years later, in nineteen ninety nine, I believe, somewhere around there, the Prime Minister of Japan referred to him as the engine that pulled the Japanese economy. That is An astonishing quote. I mean can you imagine a sitting US president referring to A US based founder CEO as the engine that pulled the US economy. It's just you can't make that big of an impact. You wouldn't even say that about Steve Jobs. No.

47:26 The state That Japan was in when they started Sony and how massive and impressive and successful they grew it to over the course of Akio's whole life. The quote is not hyperbolic. No.

47:40 No, not at all. One thing I just realized. I should correct myself. Howard Stringer was Not an American. He's not an American, of course, he was Welsh, he's British. Not Japanese, yes. A non Japanese business person. But yeah, like

47:53 You couldn't say that about anybody. Like You can't say that about Elon Musk in America. He's the engine that pulled the Martian economy. Yeah, right, exactly. Okay, so let's fast forward a little bit. So we got this Stony Corporation of America set up. Fast forward to Nineteen sixty six. This I I thought this was gonna be just like a total side note.

48:11 in the history, but it actually becomes super interesting and important. So You know Sony, what's it all about at this point? It's audio, it's Music, you know, it's first tape recorders, radio, like that's music and sound. That is what's literally Sonos. That's what it's all about. Japan.

48:30 has become a huge music market at this point in time. And You know, as we talked about on the T Swift episode, there's lots of aspects to the music market. There's obviously the devices and the consumption that Sony is in at this point with their radios. But there's also the recording industry.

48:48 So Before the war. CBS had negotiated a merger with a record company in

48:59 Japan. to create an organization called Nipon Columbia. Which was using the Columbia Records sort of label and doing distribution for Columbia Records. artists and music. In Japan.

49:13 Yeah, side note. Do you know why It was called. Columbia. Because the C in CBS stands for Columbia. Yes.

49:22 Yes. Second side note. To pull forward from later in the episode. Did you know that Columbia Pictures is not the same Columbia? I did. I looked this up'cause I wanted to bust this out for you and be like, Did you know that Sony Music and Sony Pictures were reuniting the original Columbia? And then as I was digging into it, I was like, Wait a minute. These companies

49:45 Pictures. And CBS where the C stands from Columbia. shows the word Columbia completely independently. Come on. And that is not true. They did not stem from the same company. No. They are completely different. And yet Sony ended up buying both of them in their future. Unbelievable.

50:03 They didn't reunite the Columbia as they United the Columbia for the first time. Okay, so back to nineteen sixty six. CBS. newly reinterested in Japan.

50:17 They're looking for a partner. To set up a J V. To access the Japanese. recorded music market. Marita.

50:25 Here's about this. And here's that a CBS executive named Harve Schein is over to handle this matter for CBS. He meets him and he says I'm in. We I will do everything in my power to make this happen. We want to do a fifty fifty J V between CBS and Sony.

50:43 We'll be super flexible on whatever terms you want, and we will Make this happen. As fast as humanly possible. And Shine is Legion.

50:54 Okay. And they do. Marita is true to his word. Within a year CBS Sony Records is created. It's a 5050 JV between the two companies. And it goes pretty well. In fact

51:08 It goes So well. Like blew my mind. I had to check this in a bunch of different places to make sure that this is accurate, but Multi sources have this. CBS Sony Records. Which is the

51:21 Japanese distribution arm of CBS's recorded music in Japan. Become such a cash cow that within just a few years. It is the Most profitable

51:35 Division. For both Sony and CBS. What it is just A geyser of cash. This is Because of the pent up demand for the Japanese public to buy American recorded records.

51:50 I would assume part of it is what you said, Ben, that there's just enormous demand for music and for American music in Japan. I think the other part of it is There probably aren't really much costs associated with this business. C V S records.

52:06 around the world is signing all these artists. And producing the music. And this is just Distributing it in Japan. So it's all just incremental revenue.

52:15 Anyway, this just blew my mind. Yeah. The other smart thing he does, which probably has a lot to do with CBS Sony Records success, is Is Marita puts his young protege in charge of running it in Japan.

52:30 The young protege with a strong musical background. Do you know who that is? Nope. Norio. Oga.

52:40 Who would succeed Marita as CEO of Sony. So Oga he was not a founder of Sony, but Abuka, Marita, and Oga were really the triumvirate for a long time. Ogo is a classically trained Musician.

52:55 He was an opera singer. And a conductor, even after he was CO and chairman of Sony, he would still like conduct the Toky Philharmonic Orchestra. Oh my God. That's wild. Unreal. Uh he was like a legitimate Musician. And

53:10 In the early days of Sony, when he was still a student, they would bring him into the factory to help test the products and get the musicians input on the quality of the products. Oh it's led to Marita. Saying like, hey, this guy is like incredibly talented at business and engineering and products. In addition to being a musician, we want to bring him into the company. Oh wow. And the first major role he gets is Running.

53:33 CBS Sony records and then turns it into this geyser of cash flow. Like literally the stories about this are ridiculous. They were because it's a J V. They both had to agree to do distributions. Both Sonian CBS. to get the cash back to the parent companies and they weren't always on the same page. So they had just tons of cash sitting at this.

53:52 subsidiary, they start buying up like citrus groves in California to buy land, like anything to just park the money coming out of this subsidiary. Okay, so they're getting into music in a big way. Right around this time too, we're now in the late sixties, early seventies. Of course.

54:09 Television. It's becoming a huge thing. Television's been around. Forever. But color television is starting. to be a thing. When we started doing this research, David, I had no appreciation for how much harder it was to do color television than black and white.

54:24 I just assumed that like, oh, when color television came out Everybody started buying color TVs and black and white T V You know, went the way of uh VHS, which we'll get to in a minute when DVDs came out. No, not the case. For many years color TBs were on the market, but people kept buying black and white T Vs'cause the color T Vs the picture quality was so crappy.

54:45 Right. Without getting too far into the details'cause we'll get way over our skis. most of the time the way that the color TVs were Happening was either

54:56 Three Electron guns. And basically there was this miracle that had to happen where they all had to be aimed properly and you had to have, you know, the three primary colors. And all of them had to show up in the right place on the screen at the same time. And when you're used to it just has to be one white light electron gun. Well

55:16 That's a much easier thing to solve. The picture's gonna be crisp. Now suddenly you're trying to line up this miracle. It's gonna be really expensive. It's gonna be really temperamental. It's gonna be blurry in most cases. So yeah, David, you're right. The invention of the color TV happened And most consumers went on buying black and white. Yeah.

55:34 So Sony. Goes to work. for years trying to make A really, really great Color TV. Like a color TV that could live up to

55:44 The stony name and Engineering culture. And the result of that is the Sony Trinitron. Which is their

55:53 electron gun system for creating a a color picture on a screen. Which this was like a BUKA thing. Yes. He sort of like parachuted in and said, I know I'm effectively the CTO of all of Sony, we've got all these product lines. It's kinda like Steve Jobs and the Mac. He's like Okay, I'm handpicking a bunch of engineers. We're gonna go start a brand new research project.

56:14 It'll eventually be called the Trinitron. They put up the pirate flag. Yeah, we will figure out how to make a color TV that is mind blowing to consumers and you know something that people want to rush out and buy. Now, of course, the first run of those that w that actually did make it. cost Sony way more to manufacture than it actually was priced at at retail because their yields were so terrible. It was like one out of a hundred or something actually.

56:39 work to specification. And so the company l lost a lot of money on that. But it was totally like Okay. Ibuka's jumping back in and rolling up his sleeves and handpicking a team. Yeah, so the net

56:50 Of this when it comes out. I actually don't have the full numbers, but for Some ungodly amount of time. Like Decades from when the Trinitron TV comes out. Sony is the number one.

57:02 By market share TV manufacturer. In the world. Well. Later in the episode we'll come back to how that kind of became an albatross for them. Yeah. But I mean I remember growing up in the nineties, it was like there were Sony TVs and there was everything else.

57:16 Exactly. And I had no idea what Trinity I was like, oh Trinity, it says Trinitron on there. I don't know what that means. Right. That was just f some random Sony brand, the same way that Brave A is today or was recently. It's like oh marketing. But no, it actually was the technology of the Electron guns that they created. So the Trinitron was a huge success. And Ibuka was Very much behind it.

57:39 Marita and Ubuka get together and they're like You know, okay, we've now got this. To hold in. uh in video with with a display that we've created the best on the market. We've got number one market share. What if we

57:53 sort of run the reverse playbook that we did with audio or go back to our You know, our our DNA is a tape recorder business. What if we created A tape recording device. That would work with our Trinitron.

58:07 T V. And would allow consumers To record Video. That would be

58:15 Pretty awesome, I bet they'd be. Demand for that. So They work. Super hard.

58:24 Sony engineering teams do for several years. And in nineteen seventy five, They introduce the greatest technology in its class. By far.

58:35 In its illustrious now. Almost three decades of existence. The Beta Max. Video recording technology. This is so great. The story behind this is not at all what I thought.

58:50 So It was really great technology. Now on a feature basis You could only record about an hour. On beta Max. We might actually have some young listeners that don't know that word, David. So let me just real quick say set the context. Anyone who grew up with a V CR

59:06 That's the thing that the betamax lost to. Yes. Uh VHS is the was the competing format. that they lost to, which we'll get to in a minute. But Beta Max. Yeah.

59:16 For many listeners listening, like it's it's like the butt of a joke. You don't want to be the next betamax. Exactly. So they introduced it in nineteen seventy five. And the killer feature that they market for this, it's the first product to market of a video uh a video

59:31 cassette recorder that consumers can use to record Television programs. So the Market the killer feature as time shifting. It's kind of amazing that the first killer feature isn't

59:44 you can take movies that you used to only be able to watch in theaters and watch them at home, and that will be a distribution channel for movies. No, it's tape stuff off your TV. No, it's it's yeah, literally you do the recording, not you buy a a movie that's pre recorded. And so they run these great ads. First big successful one is they have uh Bella Lugosi, who uh was the famous actor who played Dracula. Uh He's in character as Dracula in the ad and he says

1:00:09 Oh, in a Transylvanian accent, uh which I won't do here, but he says when you work nights as I do, you miss a lot of great TV programs. And now with the Sony beta max at Trinity Oh, it's so good. And so these commercials start going well, they start getting a bunch of sales. You know, and uh Especially in the US, but all around the world of Beta Max consumers are loving this. They got a hip product. So

1:00:34 They want to keep going with this marketing theme. They reach out to M C A Universal to do a similar ad. Would have been Lou Wasserman running it? Well yes, it was Lou Wasserman and Sid Scheinberg.

1:00:48 At that point in time Universal I forget which shows they were, but they had two of the top T V shows. That they they created the shows. They were studio behind the shows, but they were airing on different channels at the same time. And so Sony wanted to create an ad That like, hey with the beta max, you can watch both of these shows that you normally have to pick.

1:01:07 So they start talking to you, Sid Scheinberg. About this. And Sid's like You know, Lou and Sid, as we talked about with Michaelovits, they're Smart cookies. Uh and they were

1:01:19 behind aggregating all the power in Hollywood before Ovitz came along. So they're like Huh. This recording, this time shifting, this betamax thing. That's actually kind of a threat.

1:01:30 to like our right power. To how like this could be a new, you know, sort of aggregation point in the point of power in the ecosystem. We're not gonna play ball with that. We're gonna go full on scorched earth on Sony who's trying to take our power here. Huh. So they respond to the The request reaching out to do a commercial with them. With like

1:01:52 Hey guys, we think this is copyright infringement. And we're gonna hit you with a lawsuit because you're stealing our content. Henceforth there will be an FBI warning at the front of every video cassette. This isn't even about buying movies from the video store that the studios are putting out. This is like you recording at home. And so this is the beginning of this propaganda campaign, at least in America, of like, oh, recording. content, you know, is bad and you could get sued and you could lose all your money and like, you know Napster, everything else down the road all stems from this.

1:02:25 Wow. So November of nineteen seventy six. M C A. Files a lawsuit. Against the

1:02:32 Sony. For enabling copyright infringement. That's right, they're not even actually doing any infringement. They're just making a machine that enables anybody on their own to allegedly infringe. And this is a Major news story.

1:02:44 Harvey. And Sid Scheinberg, they go on Walter Cronkite to debate this issue of like, you know, is it okay for both the lawsuit and is it okay for consumers to time shift. The lawyers would never let this happen in public now. I know, I know. It's so, so great. Can you imagine if Tim Sweeney and Tim Cook went on a national television show together to just kinda have it out and figure out. Yeah. That would be Amazing. So the irony of all this

1:03:14 Is that it's great for beta max sales. Beta Max sales go through the roof'cause it's A, it's free publicity. And market education and B, you know, at least American consumers are like Well shoot. I better buy this before it goes off the market. Oh, right.

1:03:31 I mean i I went and downloaded Fortnite on all my iOS devices when I thought they were all gonna be removed. Exactly. And so Marita is he's pumped about this. He actually orders Harvey. the you know CEO of Sony America to start a twenty million dollar advertising campaign immediately in the US for beta max. And Harvey declines and uh doesn't go through with it. That creates a big rift between them. Unfortunately though

1:03:57 This was ultimately Also. The death of Beta Max. Because I actually don't know what happened with the lawsuit. I

1:04:05 Imagine it was probably settled. I mean at the end of the day, I in the nineties grew up recording television on my VHS. My my I think my Sony VHS cassette. player video, you know, V C R of course, which they made.

1:04:20 Yeah. How does this all happen? So other electronic manufacturers, even other electronic manufacturers in Japan. have been working on their own formats.

1:04:31 And Lou and Sid at MCA are so pissed it. Sony. The other, you know, soon to be arriving on the market competing formats. come to them and they're like, We'll work with you guys.

1:04:42 What do you want? Do you want to work together to build the you know, movie at home. industry, you know, we'll sell VHS tapes with, you know pre recorded Star Wars or whatever on there. Great.

1:04:56 So M C A starts working. with the VHS format. Which was made. Bye.

1:05:05 Uh oh oh it has Matsushta. Yes. Matsushta. Matsusta electricity. Which of course is Panasonic. Yes, Panasonic and JVC, they had a few brands. But then remember from our CA episode who ends up buying MCA University. Matt Sush uh It's amazing that after building this relationship that it then got so adversarial.

1:05:29 Yes. I didn't know this when we interviewed Michael through this relationship about Developing the VHS format and then offering their content exclusively in VHS.

1:05:41 That MCA Universal had a pre existing relationship. Of collaboration with Matsusta. Yeah, a super deep. relationship.

1:05:50 But suffice to say, I mean, this was enough to kill Betamax. Yeah. Well Lou and MCA had such Clout in Hollywood.

1:05:59 At that point in time I wonder if Them Essentially anointing. VHS and Matsusta. As the winners was enough to drag the whole industry.

1:06:09 Okay, so Sony lost Betamax versus VHS. That seems very clear. That story's very well told at this point. Interestingly, the 70s had a lot going on for Sony. The first of which was in 1970, they became the first Japanese company to be listed on the New York Stock Exchange. And so Americans actually could become shareholders of the Sony corporation. That's right. They did uh ADR listing. So Sony's now tradable in Tokyo in the stock exchange there, on the New York Stoch in the US.

1:06:40 Didn't go so well with the betamax, but they've got a few other pretty awesome tricks up their sleeve. Yeah. They've got Essentially three bangers in the hopper here. The first one is The compact disk.

1:06:53 So I did not realize that Work? On what would become the C D actually started like Back in the sixties. Unbelievable. And the origin of this.

1:07:04 was that Oga. See you of Sony. He in nineteen sixty six

1:07:11 had negotiated a cross licensing deal with Phillips. The Dutch company. Where the companies could share their tech. and share their patents and then collaborate on. new technologies together. And so they start working on

1:07:25 A digital Audio format. I believe it was the early 70s when they started working on this. How crazy is it that we're telling the CD story, the origin of the CD format before the Walkman? Before the Walkman. I know. Crazy. It takes many years for This technology to

1:07:43 I mean It's crazy when you think about With all the tech that goes into C Ds. Totally. I mean, The first of which being precision lasers.

1:07:55 And David. What else spun out of Phillips that involves precision lasers? Ah, that would be ASML, right? Yep. So that it's funny thinking about all the incredible innovation that we have today with small semiconductors made possible by

1:08:11 something that traces its roots back to the same sort of laser innovations, but late sixties, research on A laser readable writable disc. Yeah. And it truly is Phillips and Sony working together. To create the C D format and lasers and all the technology.

1:08:28 Going into it. It's not until nineteen eighty that it's ready to be productized. So they announced the format in nineteen eighty, the CD format. They sign up. Tons of partners in all industries all over

1:08:40 the world to license it. In nineteen eighty two, Sony brings the first CD player to market. And then Lots of other manufacturers follow suit, and the great thing is Sony and Phillips are getting royalties on All the hardware and all the disks being sold out there.

1:08:55 Yeah, and let me say when you say CD player, I think everyone's probably s picturing that looks like a disc man right now. Picture a V CR. Like it's a big Box that Yes, you put a C D in it and it plays, but it is a Sizable machine.

1:09:09 So In just a few short years by nineteen eighty six. CDs become the dominant Recording format by sales passing. Records.

1:09:19 Yeah, I'm actually looking right now at the RA data on this that I conveniently had from the Taylor Swift episode. If you look at US recorded music sales by format. The CD grew really fast.

1:09:35 And I think there might have been like a handful of years in there in the mid to late eighties where cassettes were bigger than records, but CDs hadn't yet caught up yet, but the cassette wave was kind of reasonably short lived as the dominant platform between records and CDs. Interesting.

1:09:54 Well. Of course, Sony. Also Does pretty well in the Cassette.

1:10:01 industry. With What you're referring to. The lock man.

1:10:07 Uh and I this is another thing I didn't realize that the Walkman came out like pretty concurrently with the rise of CDs. But as you were saying, it's not like you could take a big honk in You know home C D player on the road. No. CDs were not portable for a long time. Yeah.

1:10:23 So on the EA episode where we interviewed Trip Hawkins sort talked about how famously Madden was Trip's folly. And uh, of course, he was vindicated and proven very right, even though it cost a lot of money and took a lot of time and ended up being an enormously powerful franchise. That is the story with the Walkman. This is Marita's folly. Yes. He single handedly thought that Hey.

1:10:44 We've got this. Cassette player. But really it's a cassette recorder. And it doesn't have speakers. It's a little chunky, but people kinda can take it out in the world and record stuff and listen to it on the speakers. I think there's a market

1:10:57 for people who want a sort of slimmer, sexier version of that. Where we throw away the recording capabilities we get that right out and stop taking up space with it. Stop taking up space with the speaker. And

1:11:10 Attach headphones. And all of the marketing people at Sony Or like No. No, there's there's no market for that. No one wants to walk around outside in their own little world listening to music and headphones.

1:11:22 And you can currently have the engineers saying But we need lots of power to produce all the sound. And so it's not really technically viable because, you know, we need to produce all this audio so that it sort of goes out into the world. And you have Marita going, No, it's going to be low power because we're going to make these amazing low power headphones. We only need to produce a little bit of sound because it's going to be right next to people's ears. This was a consumer behavior that did not exist in the world that Akiya Marita just said everybody trust me. Let's invest in this.

1:11:52 And like completely changed human history forever and the way that humans walk around out in the world. Totally. Amazing that it was Marita who did like this is the kind of stuff that Abuka usually does. Yeah. The sentiment on the board and in the company.

1:12:08 Against Marita. Marita at this point is The CEO of Sony. was so strong that he had to make a promise that If the initial thirty thousand unit production Run.

1:12:20 Didn't sell. by the end of the year that he would resign. From Sony. Whoa, I didn't realize that. Yeah, yeah. He had to sort of like literally lay his cards on the table. But

1:12:31 It is one of these things. The way Marita phrases it in the book Is this quote. That is Steve Jobs before Steve Jobs and I think

1:12:40 I'm gonna make that point eleven times in this episode because It's not that Steve Jobs is a ripoff of Acio Marita, it's that he so badly wanted to be Accio Marita. And he was Such a better marketer in his time of a lot of the concepts that a lot of us grasp on to

1:12:56 Steve's version of them. Even though a lot of the concepts are actually Akyo's version of them. And there's this one quote in particular, which is I do not believe any amount of market research could have told us that the Sony Walkman would be successful.

1:13:10 Not to say a sensational hit. that would spawn many imitators. And yet the Sony Walkman has literally changed the habits of millions of people around the world. He said this in nineteen eighty six. Steve Jobs would sort of say things like this, Apple doesn't do focus groups, you have to invent something, people can't tell you what they want, blah, blah, blah. These are all Marita ismsms.

1:13:33 I know, I know, it's so amazing. Everybody really should go. read the book Made in Japan. It's It's very, very, very good. So John Scully

1:13:43 between Steve and Steve, CEO at Apple, who uh you know, famously Steve convinced him that to come over from Pepsi so he didn't have to sell sugar water for the rest of his life. His quote about Steve is that he was a freak about Sony. and that it was nearly fetishistic. In fact, uh he even had a collection of Sony letterhead and marketing materials. And he talks a lot about how

1:14:05 The Mac factory was designed to emulate The Sony factory that sort of super crisp, pristine look. the idea that the factories were spotless, that John Skully says this made a huge impression on him. And while Apple didn't have colored uniforms, it was every bit as elegant as the early Sony factories that we saw. He goes on to say, which I thought was really interesting, Steve didn't want to be Microsoft, he didn't want to be IBM, he wanted to be Sony.

1:14:32 And I think Scully even met right around this time, Scully and Steve with Akiamarita. And he says, I remember Marita gave Steve and me one of the first Sony Walkmans. None of us had ever seen anything like it before because there had never been a product like that. This is 25 years ago and Steve was fascinated by it. The first thing he did was take it apart and look at every single part, how the fit and finish was well done, how it was built. And this whole thing comes totally full circle when Merida eventually passes away.

1:15:04 Steve Jobs in ninety nine is giving the Macworld keynote and he starts the keynote. by putting up a picture of Ayo Marita, who they used in the think different campaign. And says. And this is a quote from Steve on stage. While he was leading Sony, they invented the whole consumer electronics marketplace. Transistor radio, Trinitron Television, First Consumer VCR, Walkman Audio CD.

1:15:27 Notice he doesn't say the name of the first consumer VC on there. Right. You sent me that. video. It's we'll put it in the show notes. It's it's fun to watch. I didn't realize they used Marita in the Think different campaign.

1:15:40 Yeah. Which is interesting'cause they were Quasi competitors? Had Sony come out with the Vio yet at that point? No, probably not. Yeah.

1:15:50 I think Steve had this thing where he could have reverence for the history of a company in a way that made their current competition not matter. Yeah. But the companies that he viewed having sort of no taste and no history Like

1:16:06 going thermonuclear on Google. Or like uh his relationship with Samsung, then all bets were off. Microsoft too. Yeah. Yeah. Yeah.

1:16:17 So The first walkman. comes out. in Japan in July of nineteen seventy nine. It sells.

1:16:25 Through the thirty thousand initial production run. In one month. And then the next month it doubles. And then the next month it triples.

1:16:35 And it continues tripling for month after month after month after that. Jake Saper on the L P show said he looked for triple, triple, double, double in the the first four years of a startup. Those were years, not months. Yeah. Right. This is Double, triple, triple, triple, triple, triple months in a row. Yeah. So this data was fascinating to me. Both for how big it is and how small it is. All in Sony sells.

1:17:00 A quarter billion. Walk man's. in the life of the Product. Wow.

1:17:07 Which is what, nineteen seventy nine until Two thousandish. Yeah. Call it that. So twenty ish years. I mean that's both. Incredible. Like I don't

1:17:17 I don't know, but I ca I don't think there were any other like single products that sold quarter billion. Units. I mean the iPhone has. No no at that point in time. Oh, at that point, yeah. At that point in time. So like

1:17:28 Yes. It's so impressive on that front. But then I don't know, today a quarter billion units, that's like a Oh, it's like a year for Apple or something. Yeah, it's crazy.

1:17:38 I mean, there's just been so much consolidation. to the point where like If you go by the best Phone. Which is the top of the line iPhone from Apple. That is the best one that humans can buy. And yet there are millions and millions and millions of people buying that device.

1:17:53 Yeah. So The walk man, of course, eventually. Leads to the Disc man. Also.

1:18:00 becomes. Hugely popular. I had so many of those growing up. And Walkman's too. Did you have Walkman's? I had one Walkman and one Discman, and both of them were that sort of like light. Sony Gray. Plastic that was designed to look like metal.

1:18:16 That was classic. Yeah. I had the colored versions for Like the yellow disc man that was like meant for running, that would like had the extra skip protection on it. Extra skip protection. Yes. Yes. Uh unfortunately after the disc man, then they do the mini disc and Which I bought like a fool. Me too. Me too. I love Sony. How could you not love Sony? Oh yeah. And then Fortunately I didn't buy this. Did you buy the um The memory stick. Digital audio players, the magic gate memory stick. Fortunately not. I did have products that used

1:18:50 that Sony thing that was a competitor to SD, the memory memory stick. They also had a thing that was a competitor f on their camera's compact flash. Oh, that's right. That's right. And so I think the thing that I had that used the memory stick duo was my PSP, my PlayStation Portable. Oh, you had a PSP? I had a PSP, and that used two defunct Sony media types that never got adopted by anyone but them. The memory stick duo for the basically SD card, and the game cartridges were UMDs. It was called a universal media disc. Oh, and they were gonna sell uh movies on it too, right? In addition to games. Yeah, I remember watching Mr. and Mrs. Smith on my PSP. I don't know if I

1:19:33 bought the UMD or how it got on there, but That's amazing. I actually did a little exercise to write out all the stuff that I had that was Sony because We were an Apple family, so other than the, you know, Macintosh eighty five hundred that I had at my desk and the G three that My parents had on their desk. We had those two Apple products and I think my dad had the first iPod.

1:19:55 Which plugged into our Sony stereo, but everything else Well Sony. I had the Sony tape walkman, the disc man, the mini disc player. A PS two and the PSP. uh many, many sets of Sony headphones.

1:20:09 Our family TV was a Trinitron, multiple family camcorders of going from the VHS version. of it down to a They had some other tape, did some kind of DV tape. Digital video format tape. Yeah. Yeah.

1:20:23 We had one of those. Then of course a V CR, a DVD player Several USB flash drives, my CRT computer monitor, the living room receiver for our stereo, the radio that plugged into the stereo. Everything. Well Sony. It was just like, Well, if you were gonna go buy a piece of home electronics and it was gonna be good

1:20:42 You go by Sony. Go by the Sony, yeah. You didn't even really look at like the features or anything. You were just like, Oh, if I want the best I get the Sony version. Totally. And it's just amazing since then how Apple has combined a lot of that functionality into very few of their devices. And then the low end came in and

1:21:01 you know, ate up a lot of market share in other things like TVs. And I know I'm flashing forward and we'll get to that, but It's just incredible the Breadth of products that they used to sell that We're just the best on the market. Incredible.

1:21:13 So The eighties were good for Sony. Bitbacks aside. Yeah. For three reasons. One

1:21:20 C D. Two. The walkman. Three. Life insurance.

1:21:27 So crazy. I remember when I started reading And was like looking into their financials. I'm like, what is this large Sony Financial Services Group. What is Sony life?

1:21:40 David, what is Sony life? Sony Life is a life insurance company. They originally start in nineteen seventy nine and as a J V with prudential. the prudential life insurance company in the US. Supposedly

1:21:55 The reason this comes about is Is that an One of Marita's trips, pretty early, I think, trips through the US. He goes to Chicago. And he notices the prudential building.

1:22:07 And The prudential building, you know, it's very, very impressive building and the skyline in Chicago and so he asks somebody, Oh, what what building is that? And they say, Ah, that's the prudential life insurance building and Marita supposedly thinks to himself Okay.

1:22:23 Life insurance is a business I want to be in. Ha ha ha ha. And so they create this JV. So the conglomeration of Sony begins. Like it's one thing to say. Oh, they do Japanese distribution of music, which largely gets played on their You know, players anyway.

1:22:40 Now they're selling life insurance. So they do in Japan, it becomes a pretty big life insurer. In Japan, they eventually add the Philippines, Taiwan, and China, and it's active in all of those places. Today. And it becomes a decent sized business, like in some years in in recent years, as other Sony businesses have stumbled. The life insurance.

1:23:00 businesses contributing like fifty percent plus of their operating cash flow. I have a stat here. So as it grew, I think in two thousand one, it was like five percent of Sony's revenue. By twenty fourteen It's financial arm, which includes Sony Life and Sony Bank and a handful of other things. They've like a direct to consumer bank. But I believe life is the big Business. Yeah.

1:23:23 In twenty fourteen, sixty three percent of Sony's total operating profit was Sony Financial Group. Amazing. It's this thing that we don't hear about it. And actually I wasn't able to learn too much about how the business works. No,'cause you go to the websites and they're all in Japanese. Sony Bank came out in two thousand and one as a web only consumer bank in Japan. So it's kind of the first neo bank.

1:23:48 Yeah. That's right. Oh man, th there's this like alternate universe where Sony is Apple and Disney and like

1:23:58 Berkshire Hathaway all in one. It's not even alternate. It happened. Yeah. But of course times got a little tougher, uh Between then and now. All right, listeners, now is a great time to tell you about a longtime friend of the show, Vanta.

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1:25:43 So you can get$1,000 off Vanta at vanta.com slash acquired. That's V-A-N-T-A.com slash acquired for a thousand dollars off. And just tell them. That Ben and David sent you. Alright, so David. Sony financial services.

1:25:58 Good business for a long time, enduringly good, even through some ups and downs. What are some ups and downs that are coming up for Sony? Well There's a big up. And then there's a

1:26:10 Down. Probably. Down to neutral in the long term. The big up Is that

1:26:17 Irony of irony is In nineteen Eighty six. CBS gets a Corporate rater.

1:26:26 Who comes in. And assumes a Large stake. in the company one Larry Tish. buys a large stake in CBS.

1:26:36 And there's this. Cash cow in the J V with Sony and the records business as a whole is a nice business. Tish wants to offload it and sell it, you know, monetize it. And so he's talking to a whole bunch of other you know, private equity and the like.

1:26:54 About selling. And the folks who are running. CBS records, uh Columbia records. They're not Too happy about this. So they go to Sony and say like

1:27:03 Hey, Tish wants to sell this thing. we think the bids are probably gonna come in somewhere around one and a quarter billion for the whole business. Would you be interested in actually Buying all of CBS. Records.

1:27:17 And to this date, they're still like a Japanese distribution partner via this J V and they're saying come buy the whole freaking record label. Yep. No, at this point. In the eighties, there are two things going on. One, Sony is Massively ascendant. The C D is already really big at this point, like Sony is a worldwide large global brand.

1:27:37 So it's not unreasonable to think Sony could buy all of CBS records. The other thing happening in the eighties is Is that Japan's currency has massively, massively appreciated. Versus.

1:27:50 A dollar. And it is much easier for Japanese companies to go. make acquisitions abroad than it would have been otherwise. Which is of course feeding many Americans' fears of Japan taking over all of American business. I mean, there's this incredible xenophobic even through the nineties.

1:28:08 very anti Japanese business mentality among Americans that You know, they're gonna come buy all of our staples. And it's honestly A little chilling to go back and watch some of these interviews that look like they're in reasonably modern times and The vilification of the Japanese is a very

1:28:27 I don't know, it just feels It's very inhumane. Didn't you actually you sent me one that was like a Donald Trump interview from this time? Where dashing Japan, yeah. Yes. Yeah.

1:28:39 Uh So much changes and yet so much stays the same. So there's a bunch of back and forth and drama with Tish and others. Tish postpones the sale for a while, comes back. Basically Marita is like

1:28:53 We're good for any price. We w we absolutely want to own this asset. We know it's a great asset. It's great for us. Here in Japan, we wanna be a hundred percent owners of this J V so we can control The cash flow at corporate. We also think. The overall record business is pretty good.

1:29:10 They end up buying it for two. billion. Dollars. And at the time, this is crazy, like headlines all over the place. Sony buys CBS records. That's news in and of itself for all the reasons you said. People also think the price is nuts. Uh two billion dollars.

1:29:28 For a record. company. Now I believe I wasn't actually able to find the full numbers, but based on what I read, I think it was only about five X earnings that they paid for this. So that says a lot about the business environment of the eighties.

1:29:42 When people thought that Five X earnings. Was a crazy price to pay. Meanwhile you and I were just texting the other day about a company that was

1:29:52 Forex earnings and uh how excited we were to be m doing a value investment in it. Right. Tech value investing. This ends up being a pretty good buy. For Sony. So

1:30:05 As of recent years. Sony music. The core of which is the CBS records business. does over two billion dollars in operating cash flow.

1:30:16 Every single year. And they've owned it for Thirty years. So it was pretty pretty good pickup. I mean and Sony has a bunch of business lines now.

1:30:26 So you know this stat almost isn't To sound as impressive as it should just because of the sheer breadth of stuff that they own, but the music segment, Sony Music, which comes from CBS Records. Did I Think?

1:30:39 eleven, twelve percent of revenue of the whole company. Yeah, this is a great deal. On the back of this they are enticed to do Another

1:30:49 Media. Content deal. And let me say this is a great deal. from a financial perspective. If you're Berkshire Hathaway and you're just gonna come in and own something

1:30:59 Great. Like this ends up being a great financial purchase. From a strategic perspective Big open question mark. Like Are they able to effectively manage a growing electronics business and a life insurance company and now a music label that's wholly owned while they again cast their eye where you're alluding to in buying a movie studio? Like it starts to

1:31:21 open this big question of Not only focus but Are there synergies here? Because I think Marita And

1:31:31 Oga are pretty convinced. That T continue being a successful growing electronics company, they need to own the content that ends up on those devices or at least have some leverage an ability to design more custom experiences using wholly owned content. And like

1:31:48 I don't know that that ever actually became true. Yeah. I think it certainly did not. So here's what's interesting in my perspective on these.

1:31:57 Going back to the CBS records deal. A, as you point out, that was just a great financial deal and a great asset to own at the price that they paid for it. Yep. I think you could argue

1:32:10 Any of this synergies, you know, thing. And obviously that's a I think in large part synergies became a bad word. Because of what companies like Sony did during this time. I think if any of that were valid, it would be valid in the music business. Just given Sony's

1:32:27 History given their ownership of the CD format. It's almost definitely not true in the movie business. Now Of course we're talking about Sony buying Columbia Pictures in nineteen eighty nine for three point two billion dollars. But that was the equity purchase price.

1:32:45 ultimately when they assume debt and a few other things, they spend about six billion dollars. To buy. Columbia pictures. Everybody at the time, I think, knew that that Truly was

1:32:57 Way more than the company was worth. Supposedly. The real driving factor behind it. was beta max. That Marita

1:33:07 Felt like That was such a defeat for the company and like A point where They realized they had no leverage in this industry and they felt that If they owned a studio, they could at least

1:33:20 be at the table against the Lou Wassermans and the like when they were negotiating. formats and licensing fees and all the strategic stuff. So I think That was like The real driving factor.

1:33:33 It sounds good on paper, but I think what ended up a happening is that there was a lot of infighting between the hardware teams and the movie teams. And so you had like misaligned incentives where We've talked about this a lot on previous episodes, but it's the vertical versus horizontal strategy issue, where the devices people wanted to make it so that they could play the widest amount of content possible. By the way, including pirated content. If you're trying to move Electronic devices. You wanna be super duper Switzerland. Like

1:34:02 Buy this thing and have as much fun and get as much value as you want out of it. Meanwhile. The music label folks and the film studio want to leverage the channel that they have with these devices to find a way to increase sales of music and movies.

1:34:17 And Unless you can figure out some way to align incentives, You have a huge problem there. Yeah. Totally, totally agree.

1:34:26 I think one Other thing that is probably a bigger issue for Sony that crops up out of this. Is You know, you mentioned

1:34:36 Hardware there. I had to do a bunch of double takes. Reading. Sony history stuff. They refer to hardware. Of course, as the consumer devices that they were making.

1:34:47 But then they talk a lot about software. And It was weird to me reading this as I'm reading about their software. I'm like, that doesn't sound like Software as I think about it. Internally and so at Sony at this time.

1:35:02 They think of content as software. Hm at least didn't. what I was reading, and maybe this is different in in Japanese, but they literally thought about, you know, the music business. The movie business.

1:35:15 And eventually the gaming business has Software that would go on their hardware. Which in some ways it I mean, gaming is definitely the most credible. The closest. Yeah. To my mind. This is where Sony the seeds are sown for

1:35:30 Sony's demise in the coming decades after this was they just totally didn't get software. They didn't get computing. Like, in their view, Consumer devices Was computing and like computers were this separate thing and consumer devices would take over people's lives. And they didn't see that computers were gonna take over people's lives. If you're watching the video version of this, we'll put up a stock chart. But if you're not, try and look at Sony's stock price over time and zoom all the way out.

1:35:58 The company had an incredible run up through the nineties. Got hit. hard in the dot com bubble crash or at least around that same time, and then it's basically been a turnaround story since then. And it's fascinating that even though

1:36:11 from an enterprise value perspective, the company really has turned it around. These seeds that you're talking about, David, of being very good at hardware and still not really getting software. still show up. Like these cameras that we're recording on.

1:36:25 I'm pretty convinced that the Sony Alpha seven C will produce the most beautiful pictures of any camera in its class. you have to do s a little bit of color stuff and whatnot, but like from a raw image off the sensor perspective, amazing. These cameras are incredible. But

1:36:43 They are not fun to shoot with. You know, it's not like shooting with a Fuji. And the menu system on these Sonies, like when you need to interact with the software on the devices, it is like, oh my God. It is truly torture. So frustrating. I think you really nailed it where it's like they can make these fantastic devices. They're like the opposite of Apple. They don't know how to build fantastic software.

1:37:06 and services that differentiate their hardware. They just make great hardware. Yeah. And I think this point, you know, in the late eighties, early nineties is where They set their strategy and and these were the last years of the You know, the original triumvirate of uh so Marita.

1:37:20 has a stroke in nineteen ninety three that leaves him pretty incapacitated. Ibuka dies in nineteen ninety seven. Hoga starts facing towards retirement in the late nineties. But yeah, during this time they set their strategy as Hardware meaning consumer devices.

1:37:37 And content. Which they think of as software and the marrying of those two things. And you know, look, like that's not wrong. Look at the tech companies today, like content and Tech is a big thing that they all do. But

1:37:49 Sony's just missing that True software element. Yeah, I think that's right. It is interesting, one thing that they have smartly done is in recent years, and I know I'm flashing way forward.

1:38:03 They have played the arms dealer strategy. in the streaming wars. Like we ha fortunately we have not seen Sony Plus. We are seeing Sony decide, I think

1:38:15 That they've basically done a first look deal with Netflix. So anything that comes out from Sony Pictures. Netflix, you know, has the first opportunity for, but they also have signed a licensing deal with Disney for Disney Plus and Hulu too. So they're basically Saying like look, we kinda don't care who wins here, we know the content's gonna be valuable and We're deciding our strategy is not to vertically integrate like the rest of you. You know, you look over at the morass of mess that is

1:38:41 HBO Max. producing movies with D C I P that is produced by Warner Media, that is owned by Who's Warner Media owned by at this point? A T T

1:38:55 Yeah, that sounds right. I can't keep'em all straight. Yeah. Like Sony's not playing that game, which I think is interesting. Yeah. And they also are Where I thought you were going with this. They're playing the arms dealer. roll well with image sensors.

1:39:10 Oh. Yeah. We have one more big story that we gotta tell. On history and facts. Before we

1:39:19 Move towards the present day here. This I'm so excited for this. This of course is the PlayStation story. I kind of forgot that there's another big story somehow. You're not done yet? I assume that like everybody knew the PlayStation story. No, you were blowing my mind with every text that you sent me. Oh boy.

1:39:39 And I had a PS2 and a PSP and I did not know these things. All right, how did the PlayStation come to be? So In nineteen eighty nine, at the end.

1:39:49 Of the First golden decade for Sony. There is a senior engineer. Working at the company. Named Ken.

1:39:59 Kudaragi. And he's done great work on stuff like uh the early digital cameras, the Mavica, which was Sony's First digital camera. And on uh L C D displays, which are gonna be you know, sort of part of the next generation of Televisions and consumer devices.

1:40:16 Oga. Noryoga loves him. Ido think he's a rising star in the company. And Kansas.

1:40:25 Daughter. Around this time. They get her. A Famicom

1:40:31 Which of course is the Japanese name for the Nintendo. Entertainment system, the NES. And She loves it and he just observes her.

1:40:41 Playing with this. And Everybody at the time thinks video games and Nintendo systems are toys. And Ken kind of sees his like, I think this could be really big. I think video games could be more than just toys for little kids. Like I watch how my daughter is so consumed with this thing and I think it could be big and I think Sony should get involved in this industry.

1:41:03 No, he's just an engineer. Uh uh. Company. He's not part of the management team. Somehow, and I don't know how. There's not a lot of firsthand history from Ken about this.

1:41:12 Somehow he connects with Nintendo. Personally. And He Here's the from Nintendo that they are working on the successor system to the NES.

1:41:25 Yeah. Nintendo Entertainment System. The super Nintendo. entertainment system, the S N E S. Classic, of course. Round the corners, make some purple buttons. Oh so great. Ken's really excited about this.

1:41:38 And he says, Well Can I help? Can I work on it? Uh can Sony help? And Nintendo says, Yeah, actually we're looking for a really great

1:41:49 sound chip for the device. An audio processor. sounds in video games before were just, you know. Doo doo doo doo doo. Yeah. Yeah, the Super Nintendo had super great audio, like really good stuff.

1:42:05 Yeah. And can And Sony designed that chip. That made it possible. Now he doesn't tell anybody at Sony that he's working on it, and when it comes time to like actually, you know, do the agreement and the Super Nintendo's gonna ship, management at Sony is Whoa.

1:42:21 Ken totally went around protocol here. And Essentially did this component engineering work for Nintendo, this toy company.

1:42:32 Making this sound shimm. Kunaragi nearly gets fired, but Oga Steps in and is like no like I like this guy. He's great. And who knows, maybe this video games thing could become interesting. Let's see where it goes. He allows

1:42:45 Yeah. CEO steps in, allows the project to Continue. They ship the Chip, the Super Nintendo becomes a huge success. It sells just under fifty million units worldwide, which is

1:42:59 Enormous. Enormous for I mean for today, that is a Very successful video game console. Uh Great new relationship for Sony.

1:43:10 Things go along. Now the Super Nintendo, as most folks listening will know, probably even younger folks, was a cartridge based system. literal game cartridges that you stuck into the system. Cartridges had some advantages, like there were You know, fast read times, instant load times, you didn't have any of this. Stuff you would later have with the PlayStation with loading times. But the downside to cartridges is you can't fit much.

1:43:34 Data on them. Mm. And so game developers, especially developers who work with P Cs and you know, PC based systems.

1:43:43 They're lobbying Nintendo that they want. To be able to develop them. The C D format for Nintendo as well. Nintendo's like, Oh, okay, well, we've got this relationship with Sony.

1:43:54 Let's work on a system together. This is amazing. They call up Ken. Ken's like great. We can build an add on.

1:44:02 For the Super Nintendo. Of a Sony CD drive. That developers can then make CD based games for the Super Nintendo. With our add on.

1:44:12 And also Why don't we also make a Sony branded Console. That combines the two things, like the add on and the super nintendo. So it's just one piece of hardware made by Sony.

1:44:25 That is a Super Nintendo, but also has the disk drive on it. We will put this up on the video for those of you on Spotify and YouTube. David sent me this thing and I was like, what? is this photo. It is

1:44:38 A device. That looks like A Nintendo. Super Nintendo. Kind of.

1:44:45 but it says Sony PlayStation on it. The Sony. Play. station that plays Super Nintendo games. Oh my gosh. So this is all done. They made this freaking product. Did they ship it?

1:45:01 I don't believe they actually shipped it. I think they only had like final prototypes made. So the two companies they're so excited about this, this is, you know Big partnership. In nineteen ninety one at CES. This is before E three, so CES was still the major video game. industry conference.

1:45:19 Sony announces. The partnership. And they announce The Sony Nintendo PlayStation, they show it off. The next day, at the Nintendo Keynote.

1:45:29 Nintendo. Talks about how they've partnered with one of the Original developers of the C D format, this great technology company.

1:45:39 with amazing history and legacy to bring C D. Gaming Two Nintendo for the first time

1:45:48 This secret partnership that they've been working on that they have not announced to anybody until today. Phillips. No way. Yes. What? And they just kept Sony in the dark the whole time? This is a huge thing, and I think both. gaming business history and uh like Japanese business culture, like this is the ultimate betrayal. This is like

1:46:13 Literally Nintendo like shoving like a machete in the back of Sony. Whoa. And going with their original partner, Phillips. Uh totally secretive. So there was a CD add-on for the Super Nintendo that Phillips made. No, this never actually comes to

1:46:34 fruition as intended. There is no add-on for the Super Nintendo that Phillips makes Whoa what does happen is Phillips makes a their own game console called the CDI. That comes out. Do you remember this? This is like a super obscure. did this to Sony the day after their announcement only to not actually ship the thing with Philips. They don't actually ship the thing. Nintendo does make some games for the CDI, so they have like this partnership, but it never goes anywhere and

1:47:01 Ha Nintendo as great as they are, notoriously make questionable business decisions like sticking with cartridge for the N sixty four and All sorts of stuff. Now in Nintendo's defense The reason that they do this

1:47:15 Is that Sony. was gonna retain licensing rights. Two.

1:47:23 The Super Nintendo disc based games. And that's where all the money is in the console games industry. So like Notoriously. And as we'll get into console manufacturers almost always sell the hardware

1:47:35 At a loss. And then they make all the money from The games. Licenses to the games. And you can make money from games either like for Nintendo when they sell Mario and Legend of Zelda and like games that they own and develop. They keep a hundred percent of the money. They get a hundred percent of the money.

1:47:50 But then if you're the system owner And the format owner. You get money as a license when third parties like EA or Activision or you know Bungee or whomever sell games on your system. Sony was gonna get that money, or most of that money. for the Nintendo disc stuff. So that's why Nintendo

1:48:09 Did this. I see. So they were the license holder that that or the The person who could issue licenses and make money on people using the game dev kit. And I'm sure it was some split between Sony and Nintendo, but Sony was getting enough of that economics that Nintendo was Unhappy.

1:48:26 So maybe Nintendo looked at this and said, This is gonna be bad. But If we actually proceed with this plan, it's such a bad deal for us anyway, that there's really no reason to continue it. But the way they did it. Oh my gosh. And so Nintendo, I think, thought that like all right, well so you know, Sony's not gonna get into the games industry themselves, they can't do that. Like they have no first party studios.

1:48:46 Nintendo can go make a new console. We'll put Mario Brothers on it in Zelda and like we make that stuff ourselves. Like Sony doesn't have any of that. And they don't have any relationships with developers. Uh et cetera. So Sony has three options at this point, as Nintendo expects. They can completely give up. Two they could go to Sega.

1:49:05 And try and partner with Sega, the Nintendo competitor at the time. They actually try to do that. Sega in another boneheaded move. It's like, Yeah, no, we're not that interested. They were just like a much smaller company at that point. Mm-hmm. And then the third option is to try you know, they've done all this engineering work on Making a console. Like, well We could just try and do this ourselves.

1:49:26 So the Sony board and the management team, you can tell I'm just like loving this. Totally. You're grinning ear to ear. It's like we finally get to dive into some video game history for the first time in a while. Uh no, it's been a little while. The board and the management team They vote to Just abandon. The gaming project. So yeah, like basically Really? It's just like the Walkman, like everybody's against

1:49:49 Doing this. But Kutaragi is like lobbying, yeah. questing with Insony to make this happen. And Oga is like, all right. I I see that like

1:50:01 You want to do this. This could be big. It's not gonna work within Sony the parent company. He transfers

1:50:11 Kuduragi. And the whole project. To Sony Music. To CBS records. And so was it Within electronics before.

1:50:21 Yeah, it was within like the core wow electronics business. And he moves the whole, you know, division essentially. Over into music just to like kind of protect it. So that like politically they could actually Do this within the company. And let me just like for listeners who are like does this end up being worth their while?

1:50:40 Not only is the video game industry this year a 180 billion dollar industry compared to Hollywood, which is fifty billion dollars. So yes, it ended up being much, much more than a toy. If you actually look at Sony's predictions or projections for this year for twenty twenty one. They think that they will do

1:51:03 Let's see. two point nine trillion yen in their gaming segment out of nine point nine total. So they think that like Close to thirty percent of their revenue for all of Sony is going to come from gaming. I mean it's I

1:51:18 Think unquestionably the most valuable part of Sony these days. And from a profits perspective, I'm pretty sure it's close to fifty percent, at least last quarter. Well, and this is the thing about the games business and the console business, as I was saying. You make all the money. From

1:51:34 Selling. Games. And so the way the business works is you want to get the Largest

1:51:40 install base possible. on the consoles on the hardware, so that you can sell as many games as possible. And this is where Nintendo and Sega to a lesser ticker just made such a huge tactical error.

1:51:54 in letting Sony into the market. Sony had so much more financial resources than Either of them. So they could afford to take much Larger losses.

1:52:05 On Console sales. To play for the longer term. Game of getting as much software sales as possible. It's it's the ultimate venture capital bet, right?

1:52:15 It's how much can we throw into a business that we think will have really high operating leverage where we can cover all the fixed costs and then sort of pull up the rope behind us and then have amazing low marginal cost. high gross margin futures ahead of us. Where we've sort of elbowed out all the incumbents. So

1:52:35 Super Nintendo, like I said, was this amazing success, hugely successful console souls. fifty million units in its life. Worldwide. The original PlayStation sells over a hundred million units. And They

1:52:50 win over all the major Third party developers to come over. How do they do that? There are a couple of ways. It takes them a while. The early pitch is a few things.

1:53:02 One We're gonna use CDs as the medium so you can like actually make the games that you want to instead of being limited. to the cartridge format. Hm. Two.

1:53:15 We've talked about this on a few other episodes in the past. You know, Nintendo They had this relationship with Silicon Graphics. Like you needed industrial workstations to develop games for Nintendo. Oh you couldn't just use PCs. you had to have like really invest in a big like chunk of hardware to

1:53:34 Build Nintendo games. For the PlayStation, it was all based on PC. So you could develop PlayStation games on PC. That like massively opened. The market. And then also they were just like, look, we need you developers. Like Nintendo Trip talked about this, I think, a bunch on on our episode with him. Nintendo was like

1:53:51 Terrible to third party death. We have Mario, we have Zelda, like we're the biggest and best studio on the Nintendo platform, so we kinda don't need you. Where Sony came to all these third party developers and and they were like, We need you. We're gonna do everything we can to make you happy. Uh. And then once the PlayStation started getting such a large install base, then it was just a no-brainer. It's like either go exclusive on PlayStation or at least multi platform on them'cause otherwise I'm leaving out.

1:54:20 A massive part of the market. Yeah, PlayStation. Huge success. I could go through all the games on it, but I won't. Like we all everybody knows them. They're great. Crash Bandicoot. Final Fantasy Seven, Resident Evil, Metal Gear Salad, Gran Turismo, blah blah blah, on and on and on. Amazing. Yep.

1:54:36 It gets Eight. Thousand Unique games.

1:54:41 compared to the N sixty four which came out later, only gets four hundred unique games on the platform. So that's like sense of scale here. All told over one billion games are sold for the original PlayStation. Wow. So this is a massive hit. And then the PlayStation Two.

1:55:01 The most successful console of all time. Over a hundred and fifty million units sold worldwide. I mean, it's the only game console I've ever bought. Wow, yeah. I was I'm surprised that you had one. It hit the concentric circle that was me. Well, I wasn't allowed to have a game system before my bar mitzvah, and so that was my reward was that I got to I got to get a PS two. Well and the PS two, that was like

1:55:25 That was the peak of Sony strategy. Like that was that moment where it was actually working, like the DVD player being Bundled in as part of it. Mm. I mean that was a selling point. DVD players were kind of expensive, so we had one for like the main T V, but for the little TV in the basement where I was gonna plug in my PlayStation, my argument to my parents was, Well, I don't we don't need a D V D player now because this one comes with it. Whereas if we got what was the next competitor? I guess the N sixty no

1:55:50 Uh say Dreamcast I think was the And we were never gonna get a Dreamcast I guess it would have been the original Xbox, but I'm not sure that would have been out yet. Uh yeah, that didn't come out for another year or two. When would this have been? Like It was two thousand. Year two thousand was when PS two came out. Okay. So I I guess Xbox would have been the other one that I could have gotten. But yeah, the the PS two was like I think

1:56:13 A sufficient number of my friends had playstations where I was like used to the the controller. And then they all got PlayStation twos, and then it became a no brainer for me to get a two. Yeah. And the other thing that

1:56:25 the PS two had was backwards compatibility. Yeah. And that was a totally new concept in the industry. So like day one, the PS two You had eight thousand games from the PS one. that you could play. And they did like a little bit of upscaling on them. Unfortunately the PS three

1:56:44 Uh Sony got a little Carried away. It took a while to get going, but ultimately did become a pretty successful system. It did, but they really, really screwed it up. So like After the PS two.

1:56:56 I mean, Sony was the video game industry. Like Nintendo was relegated to a niche player, basically. Microsoft to come in with the Xbox, but The first Xbox. Sony, the PS two just trounced it. The PS three should have just run away with the market.

1:57:11 But this is where Sony's not understanding computers really comes in. The PS three They'd made this whole thing they had a the cell processor was like The Kita. It had Blu ray. And the cell processor. And the Blu ray made the price tag kind of expensive.

1:57:29 Both of them did. Blu ray was expensive, and they wanted to do same thing they did with the PS2, use it as the Trojan horse to get Blu-ray. Into living rooms, win the format war with H D D V D. And then this cell processor They developed with I think Toshiba and IBM. And it was like its own unique architecture.

1:57:50 And A total beast in a bad way. And the idea was Sony was gonna use the cell processor across all of their products and it was gonna become this like convergence thing and they were gonna put it in TVs and refrigerators and game developers hated this thing.

1:58:07 Mm. And so it actually like Open the door for Xbox and three sixty.

1:58:15 developers in. And then over time Sony did fix a lot of the issues with it and made it more developer friendly, but they barely won the generation war between the PS three and the Xbox three sixty, but like they should have just Totally walked away with it. And Microsoft has always struggled here because they sort of want to use every time somebody wants to use something as a Trojan horse, it's like

1:58:37 It's kinda like when you're in the division series and you're looking at the ALCS and you kind of forget that you still have a game to play. Yes. Microsoft has always seen this as the path to the living room.

1:58:49 And so until very recently the When I think their strategy has shifted pretty meaningfully The thinking was always We're not gonna go for the hardcore gamers. We're gonna go for the Ben Gilbert when he's thirteen years old idea of, Well, we need a D V D player anyway, and this thing can play games, so great. And then they can use that to cre have a computer in the living room.

1:59:09 And so it seems like they always sort of underestimate. The Fervent. hardcore console gamer market and then Sony runs away with that market and Microsoft ends up not selling enough devices and not having a compelling enough story like the Xbox One, for example.

1:59:27 Of like how this thing is really gonna make your life that much better by being the computing thing in the living room. Yeah. I think that is totally A fair characterization of Microsoft for many years. The irony is it's also Sony, right? Yeah.

1:59:40 At least with the PS three. Like they completely messed it up. Sony Loses. Five billion dollars. On The PS three.

1:59:50 In the first three years. Wow. It's bad. And again, this is like coming off. of the best selling console of all time. Like they had it won. They lose a bunch of money on this. They also, at the same time, and I know we're gonna talk about Blu-ray, but it's worth Pulling it into this story. lost a ton of money because Blu ray's lifespan was just not as long as they thought it was gonna be. So they invested all this money into R D the same way that in previous format wars they had and spinning up this, you know, big

2:00:17 industry wide group that's gonna figure out all the licensing and you know, we're gonna sell licenses to the the ability to decode the format and you know, big investment in shifting the industry toward this new format. And then streaming took off. And so I don't think they ever really recouped their investment in Blu-ray. I don't think so either. I think it became a a big albatross for them. So the early two thousands are they're just getting beat up left and right. Yeah.

2:00:43 In two thousand six, they lose the number one market share. lead in televisions for the first time. They got so expensive. I mean that's when like Samsung started making pretty good TVs and came in. Like today it's totally different. You have like the TCLs that look unbelievable for like three hundred, four hundred bucks, whatever it is, and they're gigantic. They basically pay you to take them. Yeah, it's crazy.

2:01:04 But it used to be like, you know, you'd go get the Sony Bravia or you'd go get a lesser TV and then Samsung whittle that away and then that just fell like a rock after that. Yeah. And that Sony Bravia was I mean, those things were like five thousand dollars. Crazy. In Two thousand two.

2:01:20 So for Eight straight years in the mid two thousands. The television division. Which was once, you know. One of the

2:01:30 main crown jewels of Sony. Ends up Losing. Money, like bleeding cash for eight years. Didn't they spin it out?

2:01:38 It was like so bad that they were like, We just gotta get this off our books. Yeah, they end up restructuring it and basically get out of the business in twenty eleven. Like I think you can still buy Sony TVs, but there's a bunch of J Vs. But it's like owned by private equity or something. It's not. A core part of the business anymore. Hm. The Blu ray fight.

2:01:56 It was totally a Pyrrhic victory. Like they did ultimately went against H D D V D, which was a Toshiba Format. But Not worth it.

2:02:05 Yeah. By the way, just to put some numbers around how royalties work. this like Blu ray disc association. earns about seven dollars for every Blu-ray player sold. And then I think there's maybe two dollars that they make from selling the software that goes on it to be able to read the the Blu rays. And then it's something like seven cents.

2:02:27 per disc. And so that gets cut up a bunch of ways, depending on who, you know, contributed R and D efforts originally. You know, so this consortium gets paid the, you know, nine dollars total per player plus seven cents a a disc. It takes a long, long time to be able to really recoup the costs.

2:02:47 And I guess the point of this is Even if Blu-ray went well. The point. of this isn't to have a big new revenue stream for Sony. The point is

2:02:58 So they don't have to pay someone else a big revenue stream who develops a format and now they have meaningful cogs as a The other sort of reason they do it. is Sony's whole reason for being is

2:03:12 Create brand new cool engineering things that make it so the public will have something new to buy and love. And By creating a new standard, it enabled a brand new consumer experience in a higher resolution. So it's sort of this like opportunity to create a brand new generation of device.

2:03:31 But I don't think that they ever look at the media licensing thing as or the format licensing as a meaningful revenue stream. Whether they did or didn't, they fail on both fronts with Ble Ray. Like there's no way That the Blu ray consortium got their money back in terms of

2:03:46 R and D and marketing efforts. No and Blu-ray players do not become a major. Consumer Electronics Staple. It is worth calling out before we move on fully from PlayStation here. Not being in gaming and paying a lot of attention, I don't think I understood dominance here relative to to Microsoft. I always thought like the two of them come out with

2:04:05 you know, devices and they both sell well. But If you look at the top game consoles ever sold, PlayStation has three of the top three. With The PS2 is the best selling of all time, then the PS4, then the original PlayStation.

2:04:19 They also have four of the top six could because in the number six slot is the PS three. And the four and five slots are the Nintendo Wii and the Nintendo Switch. So Microsoft by uh You know, consoles sold.

2:04:33 Measurement. doesn't hold a candle to Sony's success in the console market. But that's so far. Right. It'll be interesting to see what happens. Going forward.

2:04:43 Yeah. I don't know if it took the pandemic or Just this current generation of consoles with the series X and S X boxes and the PS five

2:04:54 But I feel like these companies have finally woken up that like Guys, video games. is the largest medium by revenue out there. And they shouldn't be strategy devices to achieve other aims. Like you should just focus on the business itself. Yeah, if you sum up all of music and all of Hollywood, and then multiply it by

2:05:15 Two, two and a half, then you get the video games market. It's ginormous. Yeah. That wouldn't have been obvious even ten years ago. It's

2:05:25 Now a sprint. And the question is who has the better strategy? And because we haven't explicitly said it, Sony's strategy is more of the same. Make the best console. Try like hell to get the supply chain in order to be able to actually fulfill them. It's gonna be a reasonably expensive console, but that thing's gonna be awesome. Microsoft's is

2:05:45 Huh. Well I Bet. we can make this a services revenue line. It's a very Tim Cook way of looking at it.

2:05:54 If you look at what Microsoft's done with Game Pass, which is brilliant, they're making it sort of financially irresponsible to buy one of their devices outright. It's like a prime membership. Yes. It's financially irresponsible as a gamer not to Subscribe to

2:06:09 Game pass. Right. And it's like would I go buy one of these multi hundred dollar devices and then have to buy games for it. Or would I rather pay I don't know, how what is it per month? Game Pass itself is fifteen bucks a month and then if you

2:06:24 Get a console with it, you add on Certain amount. Whatever it is, the way it sort of hits you as a consumer is like oh complete no brainer to subscribe. And so when you look at it. Microsoft is now up to eighteen million subscribers to Game Pass, which to your point, I think there's like a cheap version at 10 and then a more expensive version at 15. So every year as an annuity is generating two to three billion dollars.

2:06:47 on Game Pass. And it's just such a completely different strategy than what Sony's doing. It reminds me of what you Pointed out on the Taylor Swift episode about Spotify. There are gamers out there who will buy

2:07:01 Ten, twenty. games a year. They'll go pay sixty bucks for either a disc or download to buy the game. Mm-hmm.

2:07:10 I am not one of those gamers. And I think there are a lot of gamers out there like me that In an ordinary year I would maybe buy a couple games. But it's a no-brainer for me to subscribe to Game Pass for fifteen bucks a month. In which case I end up spending a lot more money on games.

2:07:27 And Microsoft makes more revenue than if I were off of me than if I were just buying games and I feel happier because I get access to so much more than I would otherwise. Right. That's such a good point. You know, Sony is interesting. So

2:07:40 As of yet, Sony has not released subscription service. For games. Oh yeah, but isn't there something like some thing that's supposed to come out in like late Q two this year? Have you right about this? I've not read anything specifically, but most people assume that they're.

2:07:58 Working on One. But the interesting thing is that Sony is really doubled down on Exclusivity. on games. So they have both

2:08:08 In house studios. And then exclusive agreements with third parties of like if you want to play I don't know, God of War or uh the latest Dark Souls game or something like that. Like you're Gonna have to do that on.

2:08:22 PlayStation. Oh, interesting. Which is different than Microsoft, you know, people are worried about with the Activision deal about whether Microsoft would make Activisions.

2:08:33 games exclusive on Xbox, I don't think they will. No way. The incentives are so genius for what Microsoft has Set up with that because Yes, they want you to Subscribe and they wanna have the

2:08:47 most number of subscribers at the lowest turn rate. 'Cause it's the best business model ever. And also Will they take your revenue if like let's say this activation blizzard thing goes through. Do they want your revenue if if you go play that game elsewhere? Totally.

2:09:03 Like their incentives are totally aligned to say, Hey, we we love it either way. Whereas Sony's in a little bit of a tougher place. Yeah. 'Cause they have to sell you the game. Yep.

2:09:16 Project Spartacus, by the way, is the rumored. Game Pass alternative, which is kind of a mess because they already have the PlayStation network and then they have PlayStation like there's all these different names for the ways that you can This is classic Sony. Like the PlayStation is such an amazing story and entrepreneurial journey. And yet It's got all of the Sony Unfortunate quirks all over it too. Yes.

2:09:40 Well What else haven't we discussed about Sony today. I think it's important to talk about the image sensor market. Yes. Well, a couple things. We've Briefly mentioned the Vio PC division.

2:09:51 That never works. They end up selling it in twenty fourteen. Uh and then mobile and smartphones are just a unmitigated disaster for Sony. The whole Xperia thing was just a colossal failure. In fact. If you look back at the annual report.

2:10:07 In twenty eighteen They decided for their electronic products and solutions segment. to break down to sub segments in this annual report. So you can see that It's all mobile's fault.

2:10:21 They could have shown, hey, we basically made zero profit in all of electronic products and solutions, which, by the way, is like the core Sony thing. Like originally Sony was an electronics products company. That's recently been like a breakeven business for them. They they generate a lot of revenue from it. They generate basically zero operating income a little bit recently. But in twenty eighteen in particular, they were showing like Yeah, the it would be profitable, but we lost a ton of money on our mobile communications segment.

2:10:52 As I think more about like why did Sony fail so bad at PCs? Why did F Sony feel so bad at mobile? Why do they eventually lose TVs? I think Sony doesn't know how to make computers.

2:11:07 And as things become computers, they lose. I one hundred percent agree with that. Phones became computers. Computers matured. to be the modern PC that we know today.

2:11:20 You gotta worry about them against Microsoft. Yeah. Yeah. Microsoft's twenty year vision of the computer in your living room. actually becomes a meaningful useful computer in your living room that you spend a lot of time with. Smart TVs would kind of tell us that that is coming true.

2:11:38 Oh. Yeah, but I think like we were just talking about with um Game Pass. I think Microsoft has uh Finally.

2:11:46 Abandoned that. computer in your living room vision for Xbox and realize like no no This is a good business. We're just gonna make this a good business. Yeah, that's true. That's very true. But I think you're spot on that Sony

2:11:59 Didn't see and wasn't equipped for A world where A computer became your phone. And a computer became Your

2:12:08 content consumption to your T V, you know, your Your phone became your TV. Yeah. And I think instead they thought the world was gonna be that your living room device became

2:12:20 Your computer. And that's what the PS two and then really the PS three was all about, and the cell processor, et cetera. And that just Never happened. Yeah. One of the things that

2:12:32 If you Look at bear and bull cases on on Sony out there, and we're gonna do our own in a minute here. One thing that you know they came out at CES last year, I think, with a Sony electric car. And I think that's something that people are very scared about. Like

2:12:48 No no no. You are not gonna do that as well as Tesla. It's a bad sign for the company that they announced that. It's kinda like how when I saw Wonder Woman eighty four I wasn't just like, Oh, this is a terrible movie. I was like The fact that this thing got out the door Makes me

2:13:06 seriously doubt every decision that the creative leadership at Warner's does. So It's kinda the same thing with Sony where I'm like Yikes.

2:13:17 Yeah, you should not be making a car right now. If this is like a concept thing, the way that like, hey, let's have a fun thing to do at CES, that's one thing, but like if you're really putting energy behind this, it's a very scary sign for the company. Which there hasn't been any indication since that they really are putting energy behind it. But let's talk about image sensing,'cause that I think is a really good story. That's a amazing story. So continuing their arms dealer strategy. I think

2:13:44 As they realize how bad they were gonna be at making cell phones. there was a thing that was happening that started fifteen, twenty years before, which was innovating on sensors, in particular camera sensors, and this was really beneficial for their power shot line. This was really beneficial for all of their pro end cameras. They kind of invented the mirrorless segment. I mean the Sony Alpha.

2:14:06 I hate this word, but it's so applicable here, the pro Sumer concept of like, hey, people want a reasonably compact thing with interchangeable lenses that they can take out that isn't a Big gigantic SLR. And all of that work led them to have like Tons of breakthroughs, tons of patents.

2:14:24 on how to get the smallest, most effective Image sensor. And They I think are now the sole supplier to the iPhone.

2:14:33 for the little sensor that enables all the cool computational photography stuff that's going on. They have something like fifty percent market share in the image sensor market. Broadly. They are able to put sensors in lots and lots of other phones too. It's not just the iPhone. And

2:14:51 When you think back to I think the announcement was the iPhone. But You know when cell phone cameras Turned from camera phones to like

2:15:02 Whoa, these are actually becoming pretty good. Camera's Like that was Sony. And there's a ton of engineering and software that's been done on top of that now, especially uh as you know people like Apple design their own silicon and have a a really tight image processing pipeline, the initial breakthroughs

2:15:19 came from I think 2009 Sony was the first to create this commercially viable back illuminated CMOS sensor. And that enabled things like Low light photography. And there's a lot of rumors around the next generation that'll be in the iPhone and 15. That are like

2:15:37 Totally unbelievable. Like gigantic step function changes in the number of megapixels and the image you're able to get per size of pixel. Uh, and so there's like supposedly really, really great stuff to come over the next couple of years purely on Sony's innovations in the sensors. That's such a good success story, right? Of like Making

2:15:58 Kind of back to the original Sony, like here's something that people want that is like this is gonna work in the market, and then you learn and grow from that. Yes. Absolutely. And it's also it's kind of the same approach that they're taking with Sony Pictures of being this like Switzerland arms dealer type thing. Where like

2:16:16 we're not gonna be effective at marketing our creating and marketing our own phones and operating system and all that, but like Damned if we're not gonna make the absolute best. sensors in the world for this thing and similar to the way that they're thinking about You know, we're not gonna compete with Netflix, but we'll sell'em content. Sony's just kinda like

2:16:32 It's this collection of all these vignettes. You know? That stitched together into Sony? It's not quite a linear narrative in the same way as a lot of other companies we cover.

2:16:42 That's actually a huge playbook theme of mine is it's actually a diversified business. Every business we cover is kind of one hit product that then they were able to really lean into had perfect product market fit and a gigantic market and ruthless execution. And this one's kinda like There's a lot of stuff going on here and uh they're pretty good at managing it usually. Sometimes not, sometimes not, but there's definitely a lot of stuff. Definitely a lot of stuff. Okay, so all the stuff, where does this leave us? Yes.

2:17:11 What's the picture of Sony today? Well it's interesting, when you look at it from a revenue perspective. They're a gaming and electronics company. There's like thirty percent of revenue that's coming from games and twenty three percent that's coming from electronics. Electronics are

2:17:27 Consumer electronic devices. Yeah. That includes cameras and you know the classic stuff Sony makes. I don't know, Walkman, and it's not totally clear what What else is uh Necessarily a part of that.

2:17:39 But when you look over at their operating income. The games also thirty percent ish. May make a little bit more. Electronics has gotten a lot more profitable recently. They actually think that that is gonna be a material part of the business. It's like eighteen percent of profits this year are coming from Electronics.

2:17:57 That in the past was zero. Or negative, right? Or negative, yeah, for many, many years. That was basically nothing. So there's been a pretty successful turnaround inside of electronics. The emergent story, which is really interesting, is this imaging and sensors, which is now eleven percent of revenue and fourteen percent of profits. Again, none of these numbers are that big because it's super diversified, but

2:18:21 That's a pretty big market. you know, they have half of it. So I think that's sort of the big story. If you had asked me twenty eleven to twenty fourteen, then the answer would have been Everything's failing and the financial services and is enormously profitable and is like half of their profits. And that's just like not

2:18:39 really the case anymore. Maybe that's actually the best way to have business insurance. Besides vouch, you should definitely do that to start. But the next thing you should do is start your own insurance company. Within the company. To keep you afloat even when everything else fails. Yep. It's quite the hedge.

2:18:54 So here's a way to explain how diversified Sony is. Out of all of their segments, games, music, pictures, electronics, images or imaging and sensors. And financial services. There are zero single digit percent business lines in revenue or profit. Hm.

2:19:11 What a collection of stuff. Yeah. That to me is like I was like, I should compute these things, so I'm not just looking at them in yen. And as I computed the percentages, I was like. Huh. It is Very, very diversified. Yeah.

2:19:26 Like there there used to be all these great blog posts that you could do. about how it's really an insurance business under the hood or You know, how the core business that used to be Consumer electronics totally died and That's just not the case anymore.

2:19:41 An interesting thing to point out is within Gaming Most of the sales are actually coming from digital software and add ons. which is related to the PlayStation Network. Only like ten ish percent is selling hardware and in the same way that

2:19:56 Microsoft has reoriented their business model around we gotta keep selling people who like Xbox's digital stuff. Sony's realized that too. They just haven't changed their business model yet. Okay, so here's an interesting little aside that I want to take you down. So

2:20:13 This year Sony will do about eighty six billion dollars in revenue. Remember that number, eighty six billion, writing it down here. Over the last

2:20:26 Let's see. Twenty two years. Sony has had an asset. that has generated about seven and a half billion in revenue that we have not talked about on this episode yet. Do you know what that is? I don't.

2:20:44 That seven and a half billion. would be the box office gross receipts for the Spider Man franchise. Ah yes. Not even including home video, not even including, you know, other other licensing things around that.

2:20:59 There is an insane story about Why? We're talking about Spider Man and Sony. When we've done so much wonderful discussion on this show on Marvel and the Marvel Cinematic Universe and

2:21:14 Disney and I mean I there's been close to ten episodes dedicated to that world. And so while we were doing the Sony story, I thought We gotta link it in. Somehow. Yes. Alright, what's going on? Why does Sony have Spider Man?

2:21:29 Okay. So uh first of all, there's a great Planet Money on this linked in the show notes. You should go check that out if you want the real deep dive. Sony As you know, has done a mix of good deals and and bad deals corporately in their history.

2:21:43 Marvel Before their most recent stint. Mostly did bad deals. as we talked about on the Marvel episode. And this may have been the worst one that they ever did.

2:21:54 So Starting around two thousand. Sony approaches Marvel and says, We'd like to pay you ten million dollars. for the film rights to Spider Man. Now Marvel had never done

2:22:06 The MCU wasn't a thing, Marvel Studios wasn't a thing. They didn't do the deal with Merrill Lynch to go take on a bunch of debt to start Marvel's studio. You know, nothing of that so they look at this and they're like Free money. Okay. Free money. We'll get

2:22:19 Ten million, that's great. I think they also were gonna get five percent of the movie revenue. So Marvel's like we get a licensing fee, we get some ongoing revenue, and I think Sony said, and we'll split the money that comes from Spider Man toys that are sold specifically to the movie. And they look at that and they're like, that's probably all incremental. So great. Let's do it. In some ways that was a really boneheaded decision. In other ways You know, maybe they wouldn't have known to start.

2:22:45 Marvel Studios absent the gigantic success of the Toby Baguire Spider Man. But David. Ten million dollars. And five percent of the revenue is what Marvel gets out of this.

2:22:57 So here's the insane thing. This is the deal that they signed that somebody Like, getting fired isn't enough for the criminality of this deal. Sony has the right. To produce Spiderman movies forever. Forever?

2:23:12 Yes, in perpetuity, as long as they release one every five years and nine months. Yeah. So we can guarantee that there is gonna be One Spider Man movie at least every five years and nine months. Forever. Yes.

2:23:27 Four. Every yeah. And so this is why we got those weird Andrew Garfield movies right after the three Toby McGuire ones where they told the same story again and you were I like I never even bothered with those. It's like why is this happening? Right. produce and release them in order to retain the rights.

2:23:45 Oh my god. You might say, like, Okay, well how does it work now? Because We've got a new Spider Man who you know, is the same in the Spider Man movies And

2:23:57 in the Marvel movies, like somehow he's back in the Marvel Cinemat Universe. So What happened there? Well Obviously Marvel really wants

2:24:08 to have Spider-Man included in the Avengers. And they also decide that, well, can we make it so that the Spider Man movies that are coming out are good. And like kinda tie in, like that's maybe the same actor. It really should be kinda cohesive and The people over at Marvel, you know, they're artists. This isn't some we're producing a movie just to keep a deal alive.

2:24:29 They're not like Sony pictures. kind of bad deal. This is really interesting to to pay attention to where the leverage is. They are saying we will make the movies. Like we will make the independent Spider Man movies. Mostly.

2:24:47 Like it's gonna be technically Sony's creative control, but we're basically doing the whole production. Let's keep the same deal where we only make five percent. But we're gonna basically make the movies, and in return You have to let us

2:25:03 Put That Spider Man. into the MCU. Wow. And so they cut that deal.

2:25:10 right before Captain America's Civil War, which is where they introduced Spider Man. So all these recent Spiderman's No Way Home and It's actually this weird joint ownership where Sony's making the money, but Marvel's making the movie.

2:25:28 And they're just doing it in order to like Get To use the Spider Man in the MCU. And on top of all of this, you might say, like, Wait, how's this work?'Cause some of them Spider Man movies are

2:25:40 Spider Man movies. Other ones are Marvel movies. If Spider Man is the main character, It's a Sony movie with the ninety five five split. And it doesn't Go on Disney Plus.

2:25:51 Sony gets to license out the movie wherever they please. Yeah. Spider Man is not the main character. It is a Marvel movie. And it's just all the same.

2:26:02 normal stuff that Marvel always owns. Wow. I'm so glad you researched that. That is So fun. It's wild. And if you look at the performance of Spider Man No Way Home, the one that just came out, that already gross worldwide one point seven billion in revenue, remember Sony is keeping Ninety five percent of that.

2:26:23 The costs are high. You know, these movies cost hundreds of millions to make now. But Sony Pict itself only made ten point two billion this year. So one point One, two, I don't know what the there's a big marketing budget, but like

2:26:37 Whatever their cut of the one point seven billion dollar grossing movie is, the bottom line of that is pretty impactful. to this ten billion dollar Total revenue line. So Marvel now has an incentive to make the Cost of the movies. As high as possible, right?

2:26:55 It's a good question. I don't I assume there's a lot more. There must be. Caveats in that deal. But it is I think like the first time in history that a big piece of IP like this. And this they point this out on the Planet Money episode. There's a lot more drama to it, by the way, involving the Sony hack and executives who are, you know, at war with each other.

2:27:15 But the long and the short of it is I think It's the first time that two studios that are rivals like this have I mean because this is two of the big five. Shared.

2:27:26 really important IP and actually created successful product out of it. That is so cool. And the the movies have been incredibly successful, right? Totally. And really good. That's the thing. Sony almost tried to do like an MCU type thing with all the IP that they owned, but it was like Spider Man and Ghostbusters and a bunch of like very odd things that didn't belong together. Again, this is all in the Sony hack. emails, but then they started bringing Spider Man into PlayStation marketing in kind of a weird way. Like do you remember the PlayStation Three font? was the same like on that was printed on the outside as the Spider Man Toby McGuire series. Now it makes sense why

2:28:03 The Spider Man games are PlayStation exclusives. I always wondered that. I was like what? Why is this not on Xbox. Pretty crazy. There's even something more nutty, like for another ten million.

2:28:16 I think Sony could have licensed All the Marvel characters. But somebody was like eh. They're all kind of bad except Spider Man. No one cares about any of the others, which was like kind of true at the time.

2:28:29 Like no one really cared about Iron Man. They sort of like invented the M C U out of you know, second tier characters. And the so Sony was like, Uh no, let's just go get Spider Man. Let's do that. This is like a confederacy of dunces here. Like who is more stupid than the other? Totally. But it just goes to show you can't forecast these things. You don't know.

2:28:50 Don't know. Alright, let's do bear And bull. And we'll do some powers. Give me give me your bulk case on Sony. Alright, ball case.

2:28:59 The console wars continue as they've been. No massive strategic or business model shift. Sony continues to execute really well. uh they actually get the supply chain in order so that I can get a PS5 if I want one. There's way more demand than supply right now. That's my bull case on gaming.

2:29:17 Based on what I'm seeing that's like you know, rumors about uh one and two years out. I think they're gonna continue to have unbelievable gains above anyone else in the mobile imaging space. And I think that's gonna only get more and more important. Yeah. There's something interesting about

2:29:31 music labels, which is that they have wholesale transfer pricing. Like If you like Spotify you should really like record labels in terms of their attraction as an investment. So

2:29:43 I don't know. It's Sony Music. I think both revenue and operating profit is growing. at like fifty percent a year. And You know, uh if a lot more people start streaming then all of the benefit of all those people starting to stream and pay Spotify and Apple Music accrues to Sony Music and UMG and you know, it's a pretty predictable

2:30:05 defensible business. I think even after doing the Taylor Swift episode. It kinda made me think. the labels are an even better business than I thought. Like I was going into it thinking Taylor Swift is showing us that artists are going to go direct and I kinda came out of it saying

2:30:20 Unless you're Taylor Swift, it seems like record labels are gonna continue making a lot of money. Yeah. And so I think the fact that they own that and that's growing and seems to be run pretty well is impressive. And I think their diversity is a play to their strength thing here. If you're gonna play the conglomerate game, go play it well, and they're playing it well.

2:30:41 It really is a turnaround story. And I haven't looked I think the stock price is near where it was when at their all time high. twenty plus years ago. So the the turnaround of uh undoing all the damage uh in in the late nineties and early two thousands is almost complete.

2:30:57 The irony of it all is that The dot com. Bust was when Sony went bust. But they were like the opposite of a dot com. Right. Yeah. It's interesting that it was in the dot com era, but uh was a completely different set of mismanagement.

2:31:13 the activities. Yeah. Okay, so that's the bull case, what's the bear case? My bear is that Microsoft's right in their strategy with Game Pass and gaming will move to the Netflix of video games style thing.

2:31:29 and that it's not about having the most beastly console and keeping the business model the same. And maybe the Xbox they have finally segmented the market right where they can sell an expensive beastly console. to the people that want that and sell a pretty good console to everyone else and make a ton of money on, you know, two to three billion a year right now on the subscription revenue. Yeah, I think that's the bare case is that thirty percent of both revenue and profit right now come from gaming for Sony and that's at risk.

2:31:56 Is there any risk to the image sensing business that Apple in particular. in house is this at some point. Maybe, but I think the like super specialized C Moss sensing stuff is pretty different than

2:32:10 all the in house silicon stuff Apple is doing. I think Apple beats Sony up on price pretty hard as they do with all their component suppliers. And so I think unless Apple feels like There's a twenty year bet to make there. Happy to keep

2:32:23 You know, continue letting it play out as is. Yeah. And maybe they do. Maybe the all the work they're doing in the image processing pipeline, they're like, Nope, we need to own the sensor too, but I haven't seen anything to that effect so far. Cool. The other bear case is like

2:32:38 Sony is fully out of the business that they used to be in. where you go buy a bunch of Sony gadgets and put'em around your house. Now they're they're alike. We sell you a gaming system. And then we sell specialized stuff or we're an OEM.

2:32:51 And the OEM is either on the content side. Or on the you know, components side selling the image sensors to Apple and others. But it is.

2:33:02 I a little sad to watch the original Sony kind of be Done. Maybe their camera line is probably the closest thing. to what they were originally. It's just kinda hard to get like super excited about anything.

2:33:17 In the future for Sony right now. Obviously the PlayStation has been this incredible success and I don't think Microsoft is gonna like completely take the market from them. Now or possibly ever. But yeah, the imaging sensing business

2:33:32 Also incredibly Impressive, but they're a component. Now. Like what would Ibuka and Marita be thinking about the current state of the company? I bet Ebuka would be excited about the PSVR too.

2:33:44 Yeah. I think right now, this current generation, the Oculus Quest two is like It's much newer than the PS VR, but I think it's like massively outselling it. And so if you were gonna get excited about something, I w think it would be uh, dare I say a metaverse bet. on them producing a good

2:34:01 VR. system. And I suspect what that means is that you would have to believe the long term future of VR is actually in gaming, not in lifestyle, which if Apple comes out with something, it's gonna be for all over the place. At least all over your house. That's a good point. And with you know

2:34:18 sentiment about uh Meta and uh Oculus. Yeah, there's a r there's a real opportunity for Sony there. Yeah.

2:34:27 That said. I think Meta is investing. Just gobs and gobs of money and talent and everything into the next five versions of the

2:34:38 you know, MetaQuest and everything that's gonna come after that and I don't know, at this point, I'm not sure there's a balance sheet deep enough to challenge. All the investment they're putting in. Other than apples. It'll be interesting to watch that play out. Like I

2:34:53 I don't know. I'm sure we'll talk about that on the show a lot in years to come, but like The Facebook portal, right? Is by all accounts a great device and using it as a webcam is awesome, but I just like Just have a hard time about having a

2:35:06 Facebook. Device. With a camera in my house all the time. Yeah, I don't think That's gonna be an issue for a lot of people. I think they're gonna do a good enough job distancing

2:35:16 There's no MetaQuest five or whatever is gonna be the real consumer hit from Any ickiness that people feel about what was once called Facebook. Yeah. Okay, let's talk about power.

2:35:28 This one's hard to do because It's a conglomerate. So the question is do we talk about each business having their own power or lack thereof? Or Maybe let's first ask.

2:35:39 Does the conglomerate itself have an overarching power where it actually effectively leverages the ownership of multiple business to help those businesses versus competitors. I would say today the answer is no. I do think in the past there was a brand power. Oh yes.

2:35:59 That went across much of the conglomerate. Maybe not all of it. For sure. This is great. I actually thought you were gonna take it there, and so I pulled this quote. In the New York Times in nineteen eighty three, there was an article that said the technological leader, Sony, was able to command a premium for its wares in the marketplace and refrain from price cutting, allowing it to keep its profit margins up. Now the irony was that this

2:36:24 right around the time that betamax was not catching on. And so they were starting to cut prices showing for the first time. that they didn't have the Brand cachet. But it's actually the the analyst who's i writing that article says it's over for Sony.

2:36:39 The company's best days are behind it. And The stock would go up a lot after nineteen eighty three, but the spirit of what they were saying was right, because I think like the very thing that was alluring to Steve Jobs that this company makes stuff of the highest quality always has this superior brand and therefore can Command. higher prices.

2:36:59 was kind of going away. Yeah. David For the rest of the seven powers. Rather than going through each of their individual businesses, is there one or two powers that apply to one or two businesses that jump out to you in particular?

2:37:14 today. Where you're like, Oh my gosh, this segment totally has this power. Well It's a you say today. I do think

2:37:24 The PlayStation Story. is an incredible story of network economies. in the developers and the consumers of it of a two sided network economy. Where

2:37:38 The more Install base. PlayStation. The more attractive. the platform came to developers.

2:37:46 And the more Developers on the platform making Better games. The more attractive it was to consumers. And just like going through those numbers and doing the research.

2:37:55 Like I anecdotally felt this as a consumer at the time, but like eight thousand games on the PlayStation versus four hundred on the N sixty four. And I had both systems and I love them both. But that's just like such a difference in the amount of quality content available to consumers. And likewise for developers. You know

2:38:16 Sony had such a uphill Battle to start. in winning developers over to the platform. But then by even before the end of the life cycle of the first PlayStation. It was just like

2:38:28 the gravity was so much with that platform that Squaresoft and Capcom and Konami and Activity, like they had to come. to the PlayStation. I think that's a good point. It's funny, as I look down, I because the question is

2:38:43 Why are each of these businesses able to have outsized Prophets. versus competitors. And if I look at Going down the list today, music.

2:38:52 Versus competitors? I don't think so. I think There's an oligopoly in that business and that's why they're able to be really profitable. Movies. Hm. They're one of the big five studios, but I don't I should look at the numbers at the other studios to confirm this, but I don't think they're like

2:39:08 more profitable than the other ones, or they have a real Edge the way that Disney does with all their in house IP. Except for the Spider Man deal. That's a cornered resource. I think they're largely competing in the marketplace with pictures. Uh with electronics, products and solutions, I kinda feel the same way.

2:39:27 I know I'm over indexing on cameras'cause it's what I know, and there's a lot of other stuff in here, headphones and Uh lots of stuff I'm missing. But I feel like they have a superior product. a lot of the time, but they're really not able to communicate that in a way that'll enables them to price meaningfully higher.

2:39:44 Like I think if the Sony camera was twice as expensive as a comparably good You know, Canon. I definitely would get the canon. I I don't think there's anything any any reason why they're able to be extra profitable there and they historically haven't been.

2:40:01 Financial services are just generally good businesses, so no surprise that that's a profitable one for them. And then it just comes down to gaming, which is You know? close to a third of the company in revenue and profit. And uh

2:40:15 I don't know what their power is today there. I think I worry that there really isn't one. There's not a lot of players. It's a big investment to do business with them as a game developer. It's expensive as a consumer. It has meaningful switching costs as a consumer to switch from one ecosystem to the other and buy a new box and learn all the new controllers and It's interesting though, like With Game Pass.

2:40:40 And if the If the industry moves Much more to subscription dynamics. I do think a lot of this power goes away. Switching costs.

2:40:49 Become a lot lower. Network economies. become a lot less powerful. Well, that doesn't leave us with a super rosy outlook for the company other than it seems well run right now. I would say it has operational efficiency. They're effective at identifying markets and going into them.

2:41:06 But I don't think they have a particular power that we're excited about in the way where we analyze some other companies and think. Oh, this is a fifty year defensible organization. No, the only one that jumps out You know, from the story and the history is

2:41:20 The previous Incredible power of the brand. Yep. Well before we move toward grading here. And I think instead of value creation, value capture today. I want to

2:41:32 Pose one question to you. And This is something that I found myself thinking about a lot in reading Made in Japan, and of course it's why it's titled Made in Japan. Which is Let's pick three points in time.

2:41:44 The day that Sony started. the heyday of the early nineties and today. What does made in Japan mean? Mm.

2:41:55 'Cause famously Akio Marita's goal. With Sony. Was to Transform made in Japan on a product from, oh, this is of low quality.

2:42:06 to oh this is of high quality. I'll tell you my and you can pile onto this. My view of it is It absolutely worked in the nineties. Yep. And

2:42:16 I think when I was buying a lot of Japanese electronics in the nineties To me it's like buying a Japanese car today. Like I own a Honda because I'm certain that's very high quality. and durable. And I felt that way about Sony. a lot. So sort of mission accomplished for Marita and and friends.

2:42:33 Today. I don't think that it's any lower quality. But the totally dynamic nature of global supply chains and brands has changed things.

2:42:46 Where I buy so much from American companies that work with design partners overseas, as we've learned from Jeremy at Italic and the uh LP show, where the manufacturers are deeply involved in the design, that it feels like I buy more from American companies that are manufactured elsewhere. And I don't feel like I buy as many things from Japanese companies.

2:43:11 And I don't think that I would say my brand perception of something that is made in Japan is any lower. Then I would have thought in Sony's heyday, but it hasn't continued its ascendancy. It's interesting. Th that's what I was struggling with when you asked the question is how do I feel today?

2:43:26 I a hundred percent agree. when Sony was started made in Japan for most people in the West. Probably meant low quality. Signified low quality and

2:43:38 Ten. Sony's heyday it. Signified. High quality. The interesting thing about today

2:43:44 Also on the same page with everything you said. It's also Interesting that that same Playbook? has been run in so many places now so successfully. Like

2:43:55 Same thing in Korea. You know, after it came, you know, right on the heels of the journey of made in Japan from low quality to high quality, same thing in Korea. And then the same thing in China in like an even bigger way. And so Just as a consumer, having had that played out a bunch of times now, I'm just much less like, Oh, okay, like

2:44:16 If something is low quality or high quality now, like that means nothing to me. It means very little to me about whether it might be that way in the future. And I just assume that Any location that's coming up the learning curve of product production. Is going to get to a High quality place.

2:44:33 Yeah, I think that's right. I also just expect that everything is made outside the United States and so if I'm buying from any brand anywhere, I expect that it's actually made in a lower labor cost location. And so I I guess I don't even really think about anything where it's made nearly to the extent that people were when companies were headquartered and in the same place that they were designing and manufacturing and marketing products. Like that era is kind of past us. It's kind of past. Yeah.

2:45:00 Exactly. A lot of people don't want it to be uh when they're marketing made in America goods,'cause they want that to be a big selling point. And I think there's a lot of people who do really care about that. But this notion of like where the sticker on the bottom says it was made is Consumers just don't pay attention the way that they did, especially when we were recently at war with a lot of those countries. Exactly what you said.

2:45:21 It used to mean a lot. Where something was made. And I Think it just means a lot less now. That's a good point. Actually, yeah, so this answer is a two axis thing where it's like

2:45:32 Well, it went from meaning something was low quality to high quality, and then the magnitude of how much it mattered just went away. All right listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team, and deploying them is uh no longer the hard part. Yeah. The hard part is knowing what permissions they have, what employees are using them for, or what decisions AI is making.

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2:47:16 Who's managing them all? So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale. Go check out service now.com slash acquired and tell'em that Ben and David sent you. Okay. So grading.

2:47:30 You can choose to have another way to grade this one. Um but I wanted to draw a fun comparison. So In 2004, there were two consumer electronics companies that both had a market cap of about thirty billion dollars. So this is after. That big Sony crash.

2:47:47 They both had pretty thin net income margins of around two or three percent. So neither's really making a lot of money. Sony's obviously one of them. Sony grew to an impressive market cap.

2:47:59 of a hundred and fifty billion dollars. And uh that's about where they sit today. And they grew that Paidly net income margin to uh thirteen percent today. So they're

2:48:09 Generating income. Now Unfortunately for our comparison, the company that started right at that same starting line as them. is Apple. I figured. Apple is now worth

2:48:19 two point eight trillion dollars. or about nineteen times what Sony is worth. And they generate twice the net income margin percentage at nearly twenty six percent. And to add insult to injury, Apple is also growing their revenue twice as fast, even with the crazy high numbers that they have today.

2:48:39 at thirty percent per year versus Sony's fifteen percent per year. So Sony's strategy coming out of that terrible era for them was good. Apples was the greatest in history. Yes.

2:48:56 Uh thank you as always to Berkshire Hathaway for keeping me invested in Apple. So it's like okay, well You both kind of had the same opportunity. And Sony, you get an F. To the extent that this was the opportunity.

2:49:11 And it was for both of them. I mean, you look at they were both starting to make MP3 players. They both had a line of computers. Sony didn't have an operating system. So they looked in many ways. Sort of like Apple in the nineties in their diversity of products, you know, cameras and headphones and all this stuff. PDAs, all that. But without

2:49:30 Good software. And Apple by shifting down to just a few product lines. and focusing on the integration of hardware, software, and services.

2:49:42 Not to mention pseudo monopolistic distribution channels like the App Store. Like the greatest business in history. And Sony sort of continued as a reasonably undifferentiated

2:49:56 manufacturer of electronics and now other stuff. It is amazing. Put the Mac business aside for a second. You know, all of Apples. businesses. MP three players with the iPod, all their great successes.

2:50:11 The iPhone, the iPad. The watch. I'm certain Sony at one point made a digital watch. I may have even had one. A tablet PC, a PC, like This is all their s the stuff they do. These were all markets for Sony. You know, to lose. Headphones. And they lost every single one of them. Headphones. Right. Headphones. How big a business is AirPods? Enormous. Probably

2:50:38 Well I haven't done the math. But There are all those articles about how the AirPods business alone is like, you know, a Fortune fifty company. It's probably as big as Sony. That's a great point. Maybe that's a follow up tweet for us at some point in the future, our listeners, if you want to help with the math. AirPods versus Sony, what's a bigger business? So why is it that

2:50:56 these things happen. I mean we've talked about a lot of reasons. A big one is Apple every time they released a product figure it out Better reasons for you to get

2:51:07 Product N plus one if you had product N, and they all work together really well. And like I have a lot of grapes. I wish my AirPods switched you know, between my computer and my phone more cleanly. I have a lot of stuff like that. But like at the end of the day There exists our true ecosystem.

2:51:24 Uh getting iMessage on my computer and my phone, amazing. Game changing. I don't think I've ever owned a Sony product. That worked with another Sony product in a meaningful way.

2:51:36 At all. They For a long time wanted you to think. That they did. And that was part of the brand halo, I think.

2:51:44 I certainly felt that way. You know, when I was younger and when I was a kid, I know my family felt that way. Having Everything Sony. Yep. Well, A, it meant you were getting the best, but like

2:51:54 Also having it all together. I was like, Oh, it's all gonna work together, but At the end of the day. You were just wiring up boxes with You know. coaxial cables between them. Like there was nothing

2:52:06 There was no computing magic. There was no software magic there. So in some ways this like recent era, and I think we should grade the other eras of Sony too, but this recent era where they grew their market cap from thirty billion to a hundred and fifty million. It's like It's kind of a bummer to call that an F, but given the opportunity that was in front of them, and we kind of have the counterfactual with Apple of like what the other opportunity looks like from a company that was modeled after Sony. It's a pure F. There's just no way

2:52:33 Your net. two point eight trillion less of value. I mean, I guess an F would be like Nokia or something like that. Yeah, that's right. I guess that was positive. It didn't go to business, so sure. Maybe it's a D. It they're still alive, right? Yeah. Oh, they only five Xed their really big business over it's it'd probably harsh to call it an F, but I'll say I'll say F is extreme. We don't do enough uh

2:52:58 You know, Cs and D's. I'll go D. How do you think about other eras? I'm hard pressed to think of anything except uh you know, A maybe an A plus for the initial era through the heyday. Like

2:53:10 Coming. out of World War Two. With every card in the deck stacked against the company and the country.

2:53:20 one of the most respected brands for quality around the whole world. And a true Innovation for decades. Abuka's founding prospectus, you know, to create a a place for engineers to

2:53:34 work in the joy of their pursuit of technology and You know. benefit to society. That I think was probably Sony for decades. Yep.

2:53:44 An incredible story. It's hard not to call it an A plus coming out of World War Two in Japan, the whole run all the way up to the mid nineties. Just astonishing execution. You know, this may have been a timing coincidence, but Really, you know, the run was over when

2:54:00 Oga finally stepped aside, and he was He was the last link to The original days. Yeah. The original founders.

2:54:08 It's weird, right? Because it's very un-Japanese. But It is not a multi generational company. Yeah.

2:54:16 Is Unlikely to be a fifteen generation four hundred year dynasty. And maybe it will, but it just won't be meaningful in those latter. really after the first generation of founders. It's a company in the world. I mean, frankly, it's the second largest company by market cap in Japan. So it's a big, it's an important company in the world. They're one of the three majors. Like everything I said at the top of the show. their dominance across or at least top three in

2:54:39 Many important categories. is still true. And yet I don't think anyone's really looking at them and saying They're the innovators of tomorrow. No.

2:54:48 It's like somehow both of those can be true at once. Yeah. I feel strange coming to the end of this episode, you know. We could just make it never end. Right. That's a that's an acquired theme. But it's not often, you know, on this show where we get to the End of a story and we're like

2:55:05 Yeah. That's Mediocre at best, you know, in terms of where we are right now. Yeah, well we just don't tell the stories very often where the brightest days were behind them. Yeah.

2:55:17 Well, who knows, maybe folks at Sony will listen to this and There's plenty of other criticism in the marketplace on them too. Emotionally, I do feel like their best days are behind them. rationally, they'll probably make more money in the last 10 than in any other 10 before it. But the way that we're sort of trained to analyze these companies is

2:55:36 Are you gonna continue growing at three hundred Percent a year for the you know, or or like Like even Apple only grows at what, thirty percent a year. Only thirty percent. Microsoft's only accelerating in their

2:55:50 forty fifth or fiftieth year of business, whatever this is. Right. Amazon, any of these companies. We do have faith that those companies are gonna come out with the next innovative platforms. And You know.

2:56:03 we're excited about those. I the the way that we're talking about the Apple headset. We are not talking about the Sony headset that way. Yeah, yeah. All right, we've beat the horse. Should we do some quick carve outs? Yes.

2:56:14 Let's do carvats. Right. I read an awesome, awesome Article. called How All This Happened by Morgan Hausel. Ooh and

2:56:25 I cannot recommend it enough. It is A fascinating look. Is another story that starts In World War. Yeah.

2:56:34 And it's basically a look at the plight of Uh economics that consumers experience in America. And it talks about everything from You know

2:56:45 housing booms to the people's debt load over time, to uh the rise in Uh, people buying stuff, like hardcore consumerism and the national tenor of people's feelings toward all these things throughout different decades and it winds this wonderful story sort of explaining how we got to where we are today. As a society economically.

2:57:07 That sounds Like right up. The acquired family's alley. Yes. And it's shorter than you think. It's a long piece, but it's shorter than you think, based on the way I just described it. Uh. That's so great. And Morgan's just such a stellar, stellar writer. I mean, you can't go wrong reading any of his stuff.

2:57:23 Alright, I have Very apt carve out for this episode. I'm very excited about it. I've been waiting a long Long time for You know what it's gonna be, don't you?

2:57:36 Uh I don't. It feels gaming related. No, no, no, no, no. Well, maybe in in tangentially. Finally. Took delivery.

2:57:48 Of the model tree that I ordered. Months ago. It's awesome. It's so Great. It's just like

2:57:57 Uh. You know, we test drove the um The pole star. Volvo's uh Electric model three competitor.

2:58:04 And we looked at a few other things and At the end of the day though, like Gosh. It's just so great. I feel like the Tesla brand and the experience and all about it is just like Sony back in the nineties. We haven't noticed any panel gaps or anything on on our model three. It's

2:58:22 You know, seems to be all fine. But like The experience is so amazingly integrated. Like from the Buying process to the delivery process to like picking it up. I got a Text on my phone with the notification to go in the Tesla app, finish up my paperwork.

2:58:39 And then they're not For whatever reason in San Francisco they're not doing driveway Deliveries. So I went to the dealership in Marin. And they're like

2:58:47 Your car is in parking stall E. Go to it, you know. Look around, see if it looks right to you and then click accept in the app. And then I just Except. I get in.

2:58:57 The car is basically a computer on wheels, which I know is trade everybody says that, but like experience it, I'm like, holy shit, it really is that. And then I just drive off, you know? And like the app is amazing. You get the live century cam view, I can pull up right now. Live cameras on the car. in the app, I can do everything. From the app remotely in the car. It's it's pretty cool. I'm delighted, you're delighted.

2:59:20 You hear these things, but it's nice to hear it from like someone who is actually going like you're glowing right now, you know? Uh All right listeners. Now is a great time to talk about one of our favorite companies, StatSig. Yes, there is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI powered experiences at scale. Yeah.

2:59:48 In the crazy speed of today's AI world. Shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers and how fast you can use that signal to guide what you ship next. This is where StatSIG comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed. to how users actually behaved.

3:00:20 So if you want to make learning your competitive advantage, whether you're building new AI experiences or just evolving your existing core product, go to statsig.com slash acquired to get started. All right, well listeners. Think that about does it. If you're like, man, I I wish more people would talk about this topic with me, I have a feeling at acquire.fm slash slack there will be plenty of people talking about this. So come join us. Talk about the news of the day. We'll talk about

3:00:46 acquisitions like Microsoft buying Activision Blizzard and Sony buying Bungie? We also have our limited partner show and our latest episode is with repeat guests from NZS Capital talking about what on earth is going on in the markets right now and their view.

3:01:03 If you were a paying LP, you have access to those episodes two weeks before they hit the public feed. Which in market choppiness like this is helpful to the extent where you're learning things that you think of course aren't investment advice, but may help the way that you think. You'll also if you join the LP program you'll get

3:01:21 access to our LP only Zoom calls. So if you want to access the public version of that feed. or become an acquired limited partner, both of those are linked in the show notes. Lastly, we've got a great job board. If you're looking for what's next, David and I personally have curated some jobs at acquired.fm slash jobs with some friends of the show. And um

3:01:43 If you like this, share it with a friend. We love one on one recommendations, so pick someone. that you work with or a close friend and uh if you you would personally endorse it and say they should check it out, please do that. With that. Listeners. We will see you next time.

3:01:59 See you next time. Who got the truth? Is it you, is it you, is it you Who got the truth now

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