Sony's savior: Will it be a hybrid phone/video game player?

Tokyo-based Sony (SNE) is considering developing a hybrid mobile device: part mobile phone, part video game player, according to the Nikkei Business Daily. The possibility, which would clearly be a move to compete with Apple's iPhone, flies in the face of the company's dogged insistence against creating "me-too" products. But Apple (AAPL) has had enormous success in developing its iPhone and then turning it into a portable gaming device -- and these days, Sony needs as much help as it can get.

During the 1980s and 1990s, it was Sony that reigned supreme in consumer electronics. The company developed new, innovative products such as its Trinitron television sets and Walkman portable music players.

But over the past decade, those kinds of successes have been elusive. Sony was slow to develop flat-panel TV displays and it lost the portable-music market to Apple's iPod. In the video game business, its Sony PlayStation has been struggling for market share ever since Nintendo (NTDOY) launched its Wii gaming console in 2006.

It's falling behind in the video recorder business as well. A start-up called Pure Digital, which was acquired by Cisco (CSCO), now has a 17 percent market share in video recorders thanks to its nifty Flip device. And even in electronic readers, Sony was an early entrant in 2006 only to be outsold by (AMZN) and its Kindle, which came with a wireless connection for downloading books, newspapers, and magazines.

All this has hit the company's income statement hard. In May, Sony reported a weak fourth quarter, which can be partly blamed on the depreciation of the yen against the dollar, as well as the fact that consumers are spending less during these tough times.

For its 2008 fiscal year ending March 31, revenue fell 13 percent to $78.8 billion and the company reported a fiscal-year net loss of just over $1 billion, its first annual net loss in 14 years.

Sony went on to warn that it will slip even further into the red this year as it absorbs hefty restructuring costs and as its LCD televisions continue to lose money.

Howard Stringer, the company's chief executive officer, says that Sony is taking a number of steps to reduce its costs -- among them, outsourcing its television business, reorganizing the company into two core groups and hiring outside talent like George Bailey from IBM (IBM) -- now the company's chief transformation officer.

But recouping lost businesses will be an uphill battle. In its gaming division, sales of Sony's PlayStation 3 have suffered since 2006 when Nintendo launched its Wii gaming console. The company has dropped to third place in market share, partly because it's just too expensive. The PlayStation 3 sells for either $400 or $500 compared to the Wii, which sells for $250. But Sony expects unit sales of its PlayStation to rise to 33 million from 32.08 million this year.

But it may not happen. Now, its video game business could take another knock. Veteran video game executive Bobby Kotick, the chief executive of Santa Monica, California-based Activision Blizzard (ATVI) recently said that the Sony platform is just too expensive to develop games for, and with its declining market share, developing games for Sony may not be worthwhile.

While the company hopes that its new hybrid cellphone/video game player will help turn its fortunes, it isn't giving up on the console business. At the Electronic Entertainment Expo in June, Sony announced that it would be releasing a new Wii-like motion detection game player next year. If, unlike previous gaming consoles, it is priced competitively with the Wii -- perhaps it will have a chance.

But it's the mobile phone/video game device that could be its most novel idea. On the other hand, despite Apple's iPhone success, it's worth noting that it was just over one year ago that Nokia (NOK) debuted its N-Gage gaming phone and it failed miserably. Chipmaker Qualcomm (QCOM) also showed off a prototype of a phone with a screen that swiveled to reveal a joystick, that hooked up to a television set. But the player was never manufactured.

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