Sony Plays for the Big Stakes

All over Tokyo this month, gargantuan billboards have been announcing the arrival of a device its makers think will change the world. PlayStation 2, the Sony game machine that promises nothing less than to revolutionize the way we entertain ourselves, has generated so much attention that thousands of consumers lined up outside a convention center last month to get a sneak peak. One Sony website crashed only seconds after it started to take pre-orders. And though the company had promised to ship 1 million of the black boxes on March 4, the day they went on sale, people jammed into Akihabara, Tokyo's humming electronics district, before the stores even opened. The machines were sold out within minutes of the launch. Everybody wants PS2, says Madoka Sato, who, like a groupie chasing a rock star, dashed to a Sony showroom several weeks ago when she heard rumors of a secret PS2 demo. The news turned out to be true, and the Tokyo teenager spent hours gripping the machine's joystick, playing a karate game.Hooking game addicts like high-schooler Sato is the easy part. PS2's graphics are excellent: just watch the perspiration drip down the karate fighter's face, the palm fronds rustling in the wind, the crimson blood spurting from a shootout victim. But Sony has far bigger plans. PS2 will be more important than Beta, Trinitron and Walkman combined, says Mike Morimoto, a Sony vice president. Financially, it will be a big burden for us at first, but eventually the influence of the PS2 will be more important than that of any other product Sony has produced.
Sony is betting big--it's spending $1.2 billion just on chip development for the PS2--that the sleek black box, lighter than a laptop computer and smaller than a CD player, will become an important Internet platform and, as a result, the centerpiece of Sony's strategy in the information age. That's quite a gamble. For now, all the machine can do is play games and spin DVDs. But it's souped up with extras: a microprocessor as powerful as a supercomputer and ports for hooking up cable TV, keyboard, mouse, digital-video camera and modem card. The possibilities are huge.

First, however, a reality check. PS2 can't actually use any of those connections yet. It can't go online (that's supposed to happen next year). For now PS2 is a fancy game machine, mixed with a lot of hype. PS2 will become a basic platform for the Net, intones Ken Kutaragi, the hyberbolic Sony executive who dreamed up the idea. It will become a machine that transcends the differences of nation, race and sex.

Here's the world Kutaragi envisions: from your mobile phone, you send an e-mail telling the machine to turn up the air-conditioning at home. Welcome home, it purrs when you open the front door; it then puts your video e-mail on the TV monitor. You command the PS2 to download the movie you want and play it 30 minutes later. Mid-film, you stop to cue up a video game featuring the movie's main characters. Then you e-mail a virtual friend you met online who also likes this game; you face off against each other.

Skeptics say this is a lot to expect from a game machine. PS2's chances of evolving into a home-entertainment command center depend on Sony's ability to develop peripherals to work with it. The company has content: Sony movies and music. It has hardware: TV sets, PCs, game machines. What Sony lacks is a communications tool, and that's where PS2 might come in. But the company is playing it safe, keeping other options open. Vice president Morimoto says PS2 is one of three Internet gateway strategies, the others being Sony's Vaio PC and a set-top box for digital TV, which will soon be tested in New York.

Sony's game-machine competitors, meanwhile, have their own plans. Sega last year released Dreamcast, which similarly promises Internet connections, and Nintendo is coming out with a high-powered machine later this year. To complicate matters even further, mighty Microsoft weighed in with a game console of its own late last week. (See following story.) In a rapidly changing market, there is no shortage of skeptics who wonder if Sony can make the transition into the online world. Sony is a dinosaur, says Kimihide Takano, an analyst at Dresdner Kleinwort Benson in Tokyo. PS2 is like a bud growing out of the dinosaur, but it's not big enough to save the dinosaur.

If PS2 does rescue Sony from extinction in the digital age, the company can thank a small group of maverick engineers who have been working beneath the radar screen of their corporate honchos. They toiled with an entrepreneurial zeal that contradicts stereotypes of Japan as a country of uncreative and risk-averse drones. The main player is Kutaragi, a 53-year-old former engineer who is president of Sony Computer Entertainment, a division that functions like an independent company. Its employees delight in talking about how the unit differs from headquarters. We have a lot of freedom, says Susumu Takatsuka, 31, who heads a team creating games for PS2. Kutaragi, a brash and confident man with an infectious personality, believes Sony's future lies not with its TVs and camcorders, but with the fast-moving online world. And to get there, the company will need to ride on his dream machine, the PS2. Investors seem to like his vision. Sony's stock has doubled over the past six months, and shares in ventures making games for PlayStation have performed even better. He's different, even for Sony, says Kozo Hiramatsu, a former executive at the firm who now runs AOL Japan. In fact, he's crazy. When he has an idea, nobody can stop it.

Kutaragi scored with his last big gamble: the original PlayStation, released in 1994. Back then, it was no sure bet that video games would become the business they are today (video-game sales last year totaled $13 billion in Japan and the U.S. alone). When Kutaragi was trying to nudge Sony into the business, firms like Nintendo and Sega appeared to have the market locked up. Moreover, they weren't exactly the kind of company Sony wanted to keep. Nintendo? Didn't it start out making playing cards? And didn't Sega's arcade business seem a bit unseemly? I had a strong dream that the next level of entertainment would be 3-D and home-based, says Kutaragi. But 99% of the people couldn't understand my dream, including those at Sony.

But Kutaragi pressed on, and PlayStation became a stunning success. Sony has sold 72 million of the machines; one in four U.S. households has one. In just five years, Sony has become the dominant player, controlling two-thirds of the game-machine market worldwide. PlayStation and its software account for about 10% of Sony's revenue--and a whopping 40% of its $2.8 billion in profits last fiscal year. It was Kutaragi who made this all possible, on the strength of his vision and an unusual partnership with Masahide Ohashi, a young engineer at rival electronics giant Toshiba.

Ohashi had returned to Japan in 1985 from post-graduate study in the U.S. Like Kutaragi, he was able to chart his own course without much input from corporate bosses. Ohashi and a Toshiba colleague, Mitsuo Saito, jointly came up with the idea of a 3-D graphics chip. The purpose wasn't game machines, says Saito. We were thinking of more serious things, like workstations or PCs. That's what was hot then. By 1988, they had their chip and a client: Steve Jobs, the Apple Computer guru who had left the company he founded and started an ultimately doomed computer systems venture, Next. When Jobs' company fizzled, along with the partnership with Toshiba, Ohashi found himself with a hip chip that nobody wanted. Toshiba figured he should just pull the plug on his project. Not that there had ever been much of a high-level commitment. One of Saito's bosses revealed his ignorance when inquiring about the project. He thought the chip itself would be 3-D, Saito recalls. I was stunned.

In 1992, Ohashi (who died in 1996) went looking for a customer. A former Toshiba engineer who had moved to Sony proposed that he meet Kutaragi. We started talking about the future, Kutaragi says. And I persuaded Ohashi to create the chip for us. Toshiba and Sony had collaborated before, on the DVD format and other ventures. But this tie-up was special, helping Sony develop a key product and boosting Toshiba's chip-making operation. Kutaragi and Ohashi initiated a partnership akin to a marriage without a license. The engineers collaborated for years before the two companies formally agreed that Toshiba would supply chips to Sony for its PlayStation.

That freedom of initiative has continued with the development of PS2. Sony president Nobuyuki Idei didn't see a solid plan for the machine until just a few weeks before its development was announced in March 1999. Nobody in top management knew what we were up to, says Kutaragi. In fact, he had started working on PS2 as soon as the first-generation PlayStations were being unpacked from their boxes. He called together a few dozen engineers from all over the world, including Toshiba's team, to a secret meeting in the city of Ito in 1996. There, Kutaragi divulged his dream of turning PlayStation into a platform for connecting an increasingly wired world.

His presentation was greeted with disbelief. The engineers laughed at him. It sounded crazy, says Toshiba's Saito. I thought it was impossible. The challenge of building and manufacturing the chip, which Toshiba and Sony call the Emotion Engine, cannot be overstated. The high-powered chip generates polygons, tiny geometric figures critical for 3-D graphics, at a rate of 66 million per second (the original PlayStation, considered fast when it was launched, generated just 360,000 per second). Once again, the engineers worked for years on the project without informing their corporate bosses about many of the details of their work. The heads of Toshiba and Sony were given the complete plans for PS2 just a few weeks before its development was announced last March.

Among Japanese companies, Sony is known for giving its engineers and designers that kind of latitude. Under Nobuyuki Idei, who took the helm five years ago, the company has been re-engineered so that its individual divisions, like Kutaragi's Sony Computer Entertainment, operate as quasi-independent units. The website that was developed specifically for PS2 is a collaboration among Sony Computer Entertainment, several retailers and 11 game-software makers. Sony couldn't make such an alliance, says Morimoto. PlayStation can. Advertisements for PS2 don't even display the Sony name or logo; the console itself has a PS logo, not Sony's. Because so much of Sony profits are riding on PlayStation's success, they've been given carte blanche, says Bob Johnstone, author of We Were Burning, a comprehensive analysis of Japan's electronics industry. It goes completely against the theory of Japan as corporate bureaucratic monolith.

Sony is trying to reinvent itself by discarding obsolete elements of the old Japan. If there's a metaphor for Sony's new architecture, it is PS2 itself. Just as the machine is envisioned as the command center for home entertainment linking the many worlds and products of Sony, Idei is setting up a corporate command center that will put him in the middle of several orbiting companies. The strategy is risky--for both Sony and PS2. There's no guarantee that PS2 will ever live up to its hype, or that Idei can coordinate the creative types he is setting loose.

This explains why Idei, the helmsman, and Kutaragi, the maverick, gave dramatically different assessments of PS2 during interviews last summer. PlayStation is only 10% of our business, Idei said, with an edge to his voice (ignoring the game's responsibility for a far higher share of Sony's profits). I don't understand why you're so excited by it. It's not just PS2. Almost all of Sony's products will be used on the Net. For Kutaragi, everything else at Sony is secondary to the dominant role he envisions for PS2. Every parent needs a child to make it stronger and succeed in the future, he says, Sony is a 52-year-old parent, and we're the young child who will save it. Try clicking on in 2001, when PS2 is supposed to live up to its promise, to find out whether youthful hubris or parental caution prevails.

With reporting by Frank Gibney/New York and Sachiko Sakamaki/Tokyo