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Interesting Q&A From Sony’s Q2 FY09 Conference Call – New TV’s In February, And Other Tidbits

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There was some real interesting quotes Sony put out there during its Q2 FY09 Conference call, including the admission that its TV segment will struggle to be profitable for the rest of the Japanese fiscal year, that we will see new TV’s from Sony by February, the power of the Michael Jackson effect on entertainment sales, and more. We’ve chosen the most interesting conversations for your enjoyment.

South Korea LED TVs

On bringing new LED backlit LCD’s to mass production as soon as possible to compete with Samsung and the rest:

Evan Wilson – Pacific Crest: You mentioned in Japan earlier today, that there is the potential to bring some TV models that you had planned to launch next year into this year. Could you discuss that strategy and what do you think the impact would be on profitability and pricing in the TV business?

Sam Levenson: Well, the impact on the profitability is very difficult to tell you exactly how much we’re going to save. But the main reason the why that we have to introduce the new model which originally, we anticipated to introduce in the spring time next year, was that our competitors particularly like Samsung, their product feature is unfortunately superior than ours. Particularly in the LED, satellite features. They planned that technology not only with top end model, but also the mass production models too. Of course, we have the LED-backlit model in our product line, but that was only for the top line items.

So therefore, our lineup was not so strongly enough compared to the Samsung. So, our strategy is to introduce the new models, the spring models as soon as possible, probably sometime as in February this year. By doing this, yes, that we have to invest some of the additional promotional expenses for the current model, that is a negative factor, but by introducing the new competitive model, other than planned, that will generates some profit. So, overall we’ll generate some profits for us in this sense.

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Finding out if there will be a break-even or profits for Sony with their TV’s:

Daniel Ernst – Hudson Square Research: And for the second half you expect to either become break even or create profits in TV?

Nobuyuki Oneda: Well, TV will not to be a breakeven this year unfortunately. I mean the sales volume would be same as the forecasted level. But profitability wise it’s enough to breakeven, still we’ll be the raw situations unfortunately.

Thoughts on outsource manufacturing and further thoughts on restoring TV profitability:

Mark Harding – Maxim Group: If you could share your thoughts and have some targets on outsource manufacturing? And then secondly there was I guess a comment during the earlier calls regarding to moving towards profitability on the television side requiring you to look beyond the hardware. If you could just provide a little bit more color around that as well, it would be great?

Nobuyuki Oneda: Yes, currently under the digital era a little gradually difficult to make a differentiation for the television businesses. So, therefore and also the assembly areas, the final assembly areas, there is a less, the profit is expected in this area. So therefore the we would do still the engineering or the design side or see our final assembly areas, we will try to increase the percentage of the assembly to the outside EMS in operations.

Robert Wiesenthal: On the second question, it’s Robert Wiesenthal speaking. Nick mentioned in our meeting today about beyond hardware. And what he was referring to was about the use of visual services on our television set. Right now, as you know, we have the PlayStation network; the PS3 and PSP go that is migrating to the television, the Bravia, over time. Right now there are already is a service in place called the Bravia internet links that allows people to watch television shows and content from various networks. Last year, we were the first company ever to show a film directly to television owners outside cable and satellite and we have more plans in the future. So that’s really what refers to is that service stream which will generate revenues beyond the threshold of the retail store and that is something that is just beginning with IPTV and I think you will see a lot more to coming months.

Speaking about PSP sales..

Evan Wilson – Pacific Crest: So, far in the first half of this fiscal year, shipments of PSP are tracking down about 2.6 million versus the first half of last year. What gives you confidence that in you reiterated forecast to sell one more million PSPs this year than you did last year?

Nobuyuki Oneda: Some of the areas that we already introduced the PSP go, which is the new model. For some areas that we’re going to introduce in next month, right? The will increase hopefully over hardware numbers for the PSP and also at the same time, the big software program will be introduced like Gran Turismo during the coming holiday season. So that will hopefully putting the numbers over the software and hardware at the same time. So therefore at this moment we are behind compared to the original plan but we are not so pessimistic to achieve the original project.

Robert Wiesenthal: On the PSP go, we have also started as you know the networks services on only say Wi-Fi device. So there is no physical media. We have just started porting over many of the movies and television shows associated with that. That takes some time to build up and if that library expands and improves I think you are going to see a very strong take up rate for not only the device but also the revenues associated with this service.

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Factoring the split of the PSPgo and regular PSP, and how download only will effect margins..

Jed Latkin – ING: Since we have the launch for the PSPgo in October, have you guys factored in like what sort of split have you factored in between the 3000 and in the PSPgo? And given the significantly higher ASP and underlying margin how is that going to affect the margins in the games business? And is that higher ASP offset enough to mitigate the losses on the lower price PS3?

Unidentified Company Representative: Hi this is Mark (inaudible) our visiting CFO speaking. On the PSP®go we have only launched in major countries in Europe and the U.S. so far and some countries in Asia the Japanese launch will begin next week. So we don’t have a full grasp of how this product will evolve but very roughly speaking, for the fiscal year, we aim to do north of 2 million units. So that is the kind of numbers that we are looking at for PSP®go. Now as we have a higher ASP compared to the 3000 that will result in a higher margin for us. I don’t think it’s appropriate to compare the margins on the PSP®go with the loss on the PS3. I think you are not comparing apples-to-apples where our money is money. But I don’t think it’s appropriate to answer your question in this way.

Jed Latkin – ING: It’s more of the margins for the entire division as a whole as you change to a more download base system that should increase the margin to the business and what is the assumption for the change of the margins. Are you also the breakdown for software sales like what percent are you assuming its going to be download versus physical distribution?

Nobuyuki Oneda: This depends on what kind of tie-ratio or tax ratio, what will happen for the PSP®go. As you know the PSP®go is only download. There’s no package media that you can play on the PSPgo. So the margin structure on the PSP®go depends on tax ratio as well as the breakdown between the first party and the third party content. Obviously, the first party content will have a higher margin. So we cannot disclose in detail how these margin structures are at the moment. But in the end, we have our businesses shift towards the download side of the business, our margin will improve. That is our basic assumption.

The network model should be efficient compared to the package model because there are no physical discs to the manufactured, no inventories to be carried et cetera, et cetera. and we don’t have to worry about shelf space at the retail floor. So I am talking in very general terms. But as we progress we hope to increase the part of the download business as much as we can. But this translation will take time I guess because no fault consumers have the connectivity to neutralize the full features of the PSPgo.

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Dodging a bullet on when will the next next generation console come from Sony or its competitors (we love it when people ask this and think they will get a real answer):

David Leibowitz – Horizon Asset Management: In terms of the PlayStation how many years do we have to wait to you believe before we will have a next generation of architecture either from yourself or your two major competitors?

Robert Wiesenthal: We are not disclosing those kinds of question. I am sorry, we can’t answer that. Needless to say that the whole premise of the PlayStation 3 with this network connectivity and Intel processor is that it is something that is actually better today than it was when it first came out and it continues to grow with more and more digital services. This platform has lots of life. So that’s something that we are really not spending a lot of time talking about at this point. Right now we are just continuing building this platform.

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Recapping Sony Picture and Music releases:

David Leibowitz – Horizon Asset Management: Could you go over for calendar year 2010, your major theatrical releases and your major musical releases that you have on schedule right now?

Robert Wiesenthal: Sure. On the music side right now, its actually, we have terrific line up with albums from John Mayer, Leona Lewis, Alicia Keys, Britney Spears and then Susanne Boyle from X-Factor and then Adam Lambert from American Idol. And then with respect to films we are very excited about “2012” which is tracking incredibly strong that comes out on November 13, which is an incredible science fiction film with the John Cusack and Amanda Peet. And then during Christmas, we have romantic comedy called “Did you hear about the Morgans” with Hugh Grant and Sarah Jessica Parker.

So that’s what we are kind of looking forward to right now. And obviously, “This is it” opened up on Wednesday in 99 countries and did $20 million, which is actually a record for a Wednesday. And we are very excited about the start of that film and we will see how this weekend goes. And at the cinema scores for that film were an “A” across the board at all ages so it’s been a great week for the picture company.

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On DSLR and consumer camera marketshare:

David Leibowitz – Horizon Asset Management: Are you gaining or loosing share at the mid and high end to some of your ach rivals such as Canon and Nikon as well as all the others who are in the field right now

Nobuyuki Oneda: Yeah I think we have talked about the Canon or the Konica type, what’s for the one [lenses]. We are not losing the market share, we are the late comers. And our target was the 10% industry but now that our shares are about 11%. So we are not losing shares.

David Leibowitz – Horizon Asset Management: And what share market do you think you need to continue moving forward in this process or is there a chance if you can’t get beyond your current market share that you withhold and move onto other products that offer more promise?

Nobuyuki Oneda: We don’t know how fast and how big these categories will be expanded but at this moment that creates more than 10% market share with the additional profit is our immediate target.

Robert Wiesenthal: Just to clarify the shares I am talking about is for the DSLR market not the compact digital market.

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On the huge Michael Jackson effect for the rest of the fiscal year (I believe they are also referencing the eventual This Is It DVD/Blu-ray release, CD’s, etc.

Jed Latkin – ING: On the music business – I mean given the launch of the Michael Jackson movie, what are you budgeting in for the continued Michael Jackson effect for the remainder of the year?

Nobuyuki Oneda: Well, we are not disclosing the numbers. But let me put this way. So far the Michael Jackson CD business in United States is about 500 million units and global basis it’s about 1500 million.

Sam Levenson is the SVP of Investor Relations for Sony; Nobuyuki Oneda (pictured) is Executive Deputy President and CFO of Sony; Robert Wiesenthal is Group Executive, Corporate Development and M&A, Sony and EVP and CFO, Sony; Gen Tsuchikawa – Senior General Manager, Investor Relations Division for Sony.

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